Analysis

Bitcoin On-Chain Analysis: Reserve Risk Indicator Flashes Buy Signal

CoinCu will review the on-chain reserve risk indicator and its components to determine if Bitcoin (BTC) is oversold.

What is reserve risk?

Reserve risk is a cyclical indicator that tracks risk/reward versus long-term holder confidence. Therefore, if the price is low relative to the reliability, it offers a good risk-reward opportunity.

Values below 0.002 are considered oversold (green), while values above 0.02 are considered overbought (red).

Historically, it has moved into both overbought territory when Bitcoin peaked and oversold territory when BTC bottomed.

On Jan. 24, Bitcoin’s reserve risk hit a low of 0.0022 — its lowest since October 2020.

Although reserve risk has fallen into oversold territory, it is worth noting that it stayed at this level for a long time before bouncing back up.

The source: glass node

The components

Every day that a coin goes unused, a “coin day” accumulates. These accumulated “coin days” are then “destroyed” when the coins are spent. This value correlates with the Coin Days Destroyed (CDD) indicator. As prices rise, so does the incentive to sell. So if the CDD is not going up even though the price is going up, it means the holders have strong confidence in the market.

A slight variation of the CDD indicator is the Mean Coin Days Destroyed (MVOCDD). It multiplies the average value of CDD by the price of BTC (grey line). So if there is a difference between the price and MVOCDD, it means that the majority of holders are not selling.

The gap between price and actual spend can be viewed as a type of opportunity cost if a sale is not made. This cumulative opportunity cost is called the HODL bank (green line). The HODL bank is the denominator of the reserve risk indicator.

HODL Bank decreases when MVOCDD moves above BTC price (black circle) but increases when the gap between MVOCDD and BTC price widens.

The source: glass node

When we combine all of these components with the reserve risk indicator, it becomes clear that the indicator has reached overbought levels as the MVOCDD moves above the BTC price. Conversely, it reaches the oversold zone when there is a significant gap between the MVOCDD and the price.

The source: glass node

Disclaimer: This article is for informational purposes only, not investment advice. Investors should research carefully before making a decision. We are not responsible for your investment decisions

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Annie

Championing positive change through finance, I've dedicated over eight years to sustainability and environmental journalism. My passion lies in uncovering companies that make a real difference in the world and guiding investors towards them. My expertise lies in navigating the world of sustainable investing, analyzing ESG (Environmental, Social, and Governance) criteria, and exploring the exciting field of impact investing. "Invest in a better future," I often say. That's the driving force behind my work at Coincu – to empower readers with knowledge and insights to make investment decisions that create a positive impact.