It was noted that traditional indicators such as funding rates and MVRV Z-Score may not reach the extreme levels seen in previous cycles, due to institutional investors predominantly buying from the spot market and some funds using delta-neutral strategies for arbitrage purposes. According to Sun, the key factor determining the peak of the new cycle may be institutional capital’s difficulty in following the rise in Bitcoin, rather than widespread over-optimism among individual investors.
Sun stated that it uses an indicator called the “Institutional Liquidity Index” (ILI) to track this situation. The index takes into account overall US dollar liquidity, Strategy’s mNAV indicator, and net capital flows to spot Bitcoin ETFs, attempting to measure whether institutional funds are following the market as Bitcoin reaches new highs.
Accordingly, a “yellow divergence” signal occurs when Bitcoin reaches a new 30-day high while the ILI indicator does not rise in the same direction. Conversely, a “red divergence” occurs when Bitcoin surpasses its all-time high but the ILI indicator shows negative divergence and falls below 50.
Benson Sun stated that he uses the frequency of yellow divergences as a reference point when evaluating which phase of the market cycle the market is in. Sun explained that with each yellow divergence signal, he gradually reduces his altcoin positions and leverage, and in the later stages of the cycle, he increases the weight of Bitcoin in his portfolio, eventually opting to hold only spot $BTC.
*This is not investment advice.
