Conversation with Trader Murphy: On-chain data is not like carving a boat to seek a sword; what four dimensions tell you where you are in the cycle now?

Guest this issue: Murphy, on-chain data researcher

*All text is for sharing purposes only and does not constitute any investment advice.

About trader Murphy

The core of trading is "people"; an individual's experiences, background, personality, and capital attributes determine the development of their trading strategy.

What is Murphy's trading strategy?

1. Capital volume and allocation ratio: own funds, 90% allocated to mainstream coins (BTC, ETH, BNB), 10% allocated to altcoins.

2. Expected returns: 200%-300%

3. Tolerable Drawdown:

• For mainstream coins (BTC, ETH, BNB), focus only on the cycle, do not set stop-losses, a 20%-30% pullback is normal.
• For altcoins, stop loss if it falls below 20%

4. Trading Logic:

• Long-term timing, which means buying at relatively low price ranges during a large cycle and selling at relatively high price ranges, without engaging in swing trading, contracts, or high-frequency trading.
• Use on-chain data analysis, which derives highly certain conclusions from various data indicators, to guide trading.

Why did Murphy form such a trading strategy?

1. Trading Experience: Murphy did not have a stable trading strategy in the last cycle. When the market first rose to 63,000, he gradually started selling his chips. Later, when the price broke through to a new high of 69,000, he felt very regretful and anxious due to the various FOMO emotions in the market. Therefore, in 2022, he decided to find a trading strategy that was within his understanding, based on evidence, which could be effectively executed, replicated, and closed-looped, in order to avoid being disturbed by emotions.

2. Professional Background: Before entering the cryptocurrency space, Murphy spent many years in marketing within the traditional finance industry, where he needed to use data to track and adjust various marketing campaigns. This experience allowed Murphy to develop a sensitivity to data, so when he was looking for a "data-driven" trading strategy, he naturally chose data as the basis.

3. Personal Character: Murphy's personality is very cautious, pursuing high certainty, while hoping that his trading strategy can be effectively executed, replicated, and closed-loop. Therefore, he chose "long-term timing" and "using data analysis to guide trading."

4. Capital Attributes: The attributes of capital determine the capital cycle, and the capital cycle in turn determines the investment method. Murphy's capital is self-owned, with no leverage, and comes from profits from the previous cycle, resulting in lower costs.

What kind of person is Murphy's trading strategy suitable for?

Meet two characteristics:

1. Conservative type, pursuing high certainty, can hold assets for a relatively long term.

2. Trend traders, the majority of their positions are in mainstream coins.

Murphy's trading story

The knowledge gained through practical verification is true knowledge, and reviewing and reflecting on specific transactions allows for a more intuitive understanding and learning of the application of trading strategies.

What indicators/data does Murphy use to determine the timing for bottom-fishing during this cycle?

There are mainly 5 data points as follows:

1. CVDD, Cumulative Value-Days Destroyed, CVDD (USD) = ∑(CDD × price) / (days × 6,000,000)

When BTC is transferred from one investor to another, the transaction not only has a dollar value but also destroys the time value associated with the original investor's holding period of the tokens. The CVDD index is a value calculated by a mathematical model, where the numerator is the Coin Days Destroyed (CDD) index. For example, if you hold two BTC for three days and then move them, the Coin Days Destroyed value resets to zero once moved. The most notable feature of the CVDD index is that it never retraces, meaning that the CVDD value each day will always be higher than the previous day. Since BTC's price has never effectively dropped below the CVDD value historically, the CVDD can be used to effectively assess the market's bottom price.

In October 2022, the price of BTC was around $19,000, while the CVDD was roughly $14,800. Murphy estimated that if one were to buy at that time, the cost of BTC would be around $20,000, with a conservative expectation for the peak price during a bull market at $50,000, which falls within the expected increase, thus deciding to buy the dip.

2. RP( Realized Price ) and BP( Balance Price )

RP is the average cost of trading on-chain without exchanges; BP is the BTC cost excluding the time value of funds (such as the returns from using funds for other purposes like deposits), reflecting the fair price of the market. During a bear market, when the price of BTC falls below RP, and it consolidates in the channel between BP and RP, it is a very good buying point.

3. PSIP (Person Supply in Profit)

The essence of PSIP is the ratio of BTC profit chips among circulating chips. When it is less than 50%, it indicates that more than half of the people are at a loss, and most of the time it represents an extremely bearish market bottom.

4. LTH( Long Time Holder )'s NUPL and MVPV

• NUPL uses different colors to indicate the levels of losses/profits on the Bitcoin on-chain. When it turns red, it indicates that long-term holders have surrendered (i.e., sold their holdings at a loss), at which point it is a market low and a buying opportunity.

• MVRV considers the ratio of BTC's circulating market value to its realized market value. The calculation of the realized market value is the sum of the prices of all previously moved BTC. The difference between the circulating market value and the realized market value is the unrealized market value. A larger ratio indicates a greater market bubble, which makes it easier to trigger profit-taking sell-offs, while a smaller ratio indicates severe undervaluation. The commonly referenced numbers are an MVRV greater than 3 for selling, and less than 1 for buying. Meanwhile, during a bullish upward trend, look at the MVRV of short-term holders during pullbacks, while in a bear market, look for the bottom by examining the MVRV of long-term holders. The logic here is that in a bull market, the price of BTC is determined by short-term holders, whereas in a bear market, it is the long-term holders.

5. From the miner's perspective, taking two data points as an example.

• Mining cost: The mining cost for miners can be estimated through different models. The closer the market price is to the cost, the more it indicates that a phase bottom has been reached, making it a good time to buy.

• Mining Pulse Index: The deviation of the average block time interval over 14 days from the target (the reason for 14 days is that it is a difficulty adjustment period). If the deviation is positive, it indicates that miners have shut down, which is also a good buying opportunity.

How did Murphy accumulate these metrics?

Three steps:

First step, find a teacher. Learn from the content shared by on-chain data analysts in the market, clarify the logic and then experiment and calculate according to their algorithms. If you find any issues, adjust the parameters yourself.

Step 2: Accumulate and categorize your own index library. Record and track indexes in an Excel spreadsheet according to columns such as name, source, algorithm, function, category (sentiment, trend, top judgment, bottom judgment, etc.), continuously optimizing and iterating, and then you can use different indexes based on different scenarios.

Step three, backtesting. Continuously refine through backtesting to improve the effectiveness of the indicators.

Murphy has a classic summary: macro drives expectations, expectations change emotions, and emotions affect supply and demand, which ultimately determines the price of BTC. By observing and analyzing on-chain data, we can identify the factors and logic behind the data that affect the supply and demand relationship, thus judging the trends that may form next or the potential changes in cycles. Combining this with other methods, such as technical analysis of candlestick charts, we can draw more certain conclusions to guide trading decisions. However, it is important to note that no indicator, no matter how perfect, can provide precise buy points; it can only give signals within a certain price range. When the signal appears, one should act decisively and firmly based on their risk tolerance and proper position management, executing the pre-established strategy.

How will Murphy determine the timing of the "peak" in this round of bull market?

1. From a logical perspective:

In the entire cycle of BTC, the supply side consists of long-term holders (LTH), while the demand side consists of short-term holders (STH). From the bear market to the bull market, it is a process where long-term holders continuously distribute their chips to short-term holders. After that, during the period from the peak of the bull market to the bear market, short-term holders continuously cut losses, returning the chips. When we have not yet seen LTH taking profits or exiting the market during this cycle, it can be considered that this cycle is not yet complete. Conversely, when long-term holders have started selling, or are almost done selling, it is time to 'escape the peak.'

During each cycle of bull and bear market transitions, short-term holders will experience two major accumulations. The first often occurs before the halving, mainly due to three reasons: first, expectations of halving; second, the long-standing bear market has accumulated emotions that need to be released; third, as the market begins to recover, some medium- to long-term holders will distribute their positions to STH.

The first support in this cycle occurred when BTC surpassed 70,000. The main reason for the different timing compared to the previous two cycles is that the approval of the ETF changed the rhythm of the entire cycle. However, from a data perspective, the chips accumulated during the first support are not much, so there will be a larger-scale support coming next. The support coincides with long-term holders distributing their chips, and these two points in time represent the relative top range of the bull market cycle. However, this top range may form a double top or even a triple top, but in terms of price, it does not necessarily mean that the next peak will be higher than the previous one.

2. In terms of indicators, the main ones to refer to are the following 2:

• MVRV

When MVRV is greater than 3, you can set a trading strategy to start selling. You can complete the sale using an inverted smile curve during the process of the MVRV value gradually increasing from 3 and then falling back to 3.

• URPD

URPD is data that reflects the on-chain chip structure, which can tell us how many chips have changed hands within a certain price range. The more chips accumulate, the stronger the consensus becomes, and this price range will form a consensus zone, leading to resistance and stickiness effects. Resistance refers to when breaking through from below, selling will make it harder for the price to break through this range, while stickiness means that when breaking down from above, even if the price temporarily falls below the range, without forming a large amount of price consensus and turnover, the price will quickly rise back up. However, URPD alone cannot be used to judge a top; when other multiple data show signals of hitting a top, URPD can be used to validate the effectiveness of the data.

Therefore, the conclusion is: determining the top will be more complex than determining the bottom, requiring a comprehensive analysis of multiple data points (rather than a single indicator). However, based on the "three-line integration" indicator, this relative top zone is expected to occur roughly between March and April of 2025, but there is no objective logical support for this, and it needs to be assessed step by step in conjunction with macro data. Referring to the previous three cycles, there is a phenomenon that occurs in the peak area, which is that the MVRV is above 3.

When will Murphy's indicator become ineffective? What is the Stop Doing List that I set for myself?

First of all, it is not an "accurate" indicator, and it cannot determine the bullish or bearish trend in a very short time or the specific price of the rise or fall.

Secondly, it cannot be used to analyze altcoins. This is because BTC's characteristic is the UTXO structure, which has the functionality of timestamps, allowing it to record the time point when unspent transaction outputs are created, as well as the corresponding USD value of BTC at that time point. With these two pieces of data, many indicators can be derived, but for altcoins that do not have a UTXO structure, much on-chain data cannot be accounted for.

The Stop Doing List consists of 5 points:

1. Stop the mentality of taking chances. You can envy others' wealth, but do not entertain the thought of "if they can do it, so can I" and recklessly try others' paths.

2. Stop being emotional. There are many opinions and a lot of noise in the crypto space, so it is important to think calmly and face the data objectively.