New Bitcoin Risk Model Aims to Decode Market Cycles Through Liquidity and Behavior

A new Bitcoin market framework has just been released by Jamie Coutts, CMT, marking a significant step forward in understanding the cyclical nature of the cryptocurrency market.

A new Bitcoin market framework has been completed by Jamie Coutts, CMT, after years of conceptual development and recent weeks of technical challenges, including LLM crashes and token constraints.

The first version of Coutts’ “Bitcoin Cycle Risk Framework” has now been finalized.

As Coutts explains, the framework does not attempt to predict tops or bottoms in Bitcoin’s price, but rather to identify critical phases of risk across the cycle—whether risk is rising, receding, or reaching extremes.

The model is designed to highlight key market variables such as liquidity, leverage, and behavioral patterns to offer a clearer picture of where BTC stands in its macro cycle.

“Bitcoin is cyclical, and this model tracks why it moves,” Coutts stated.

The chart he shared combines three core indicators—GRS (Growth Risk Score), DRS (Drawdown Risk Score), and NPRS (Net Position Risk Score)—to provide a visual overview of market conditions over time. The historical overlay of Bitcoin’s price next to these risk indicators offers powerful context for interpreting potential shifts in sentiment and risk appetite.

The strength of the framework lies in observing how these risk indicators interrelate and diverge at pivotal moments.

For instance, a divergence in the GRS and DRS around mid-2023 suggests a shift in market dynamics. After a period of rapid price growth and decreasing risk with rising GRS and low DRS, the market transitioned into a phase of slower growth but increasing risk, indicated by declining GRS and rising DRS. This shift may have implications for traders adapting their strategies.

Moreover, Coutts explains that extreme levels of either Growth Risk or Drawdown Risk tend to coincide with market reversals. When GRS becomes excessively high, it indicates that traders are chasing gains aggressively, and the market is pricing in optimistic future returns. Conversely, when DRS reaches extreme lows, it implies an absence of fear in the market, and traders are not concerned with potential drawdowns. Both scenarios suggest a market that may be overextended and due for a correction.

In contrast, when GRS becomes very low, it signifies a market characterized by pessimism and fear, with traders focused on minimizing losses. At the same time, high levels of Drawdown Risk suggest that traders are anticipating significant price declines. Such a scenario usually occurs during bear markets or periods of heightened volatility.

Furthermore, Coutts' framework highlights the importance of liquidity in determining the pace of Bitcoin’s price cycles.

During periods of high liquidity, such as 2020-2021, we observe a steeper incline in the Bitcoin price chart, indicating swift price movements. Conversely, during periods of low liquidity, like 2019 or 2023, the price chart flattens, signifying slower price changes.

This correlation between liquidity and the steepness of Bitcoin’s price trends is crucial for traders adapting their timeframes and expectations for market activity.

Overall, this new framework from Jamie Coutts offers a unique perspective on assessing risk across Bitcoin’s cycles, considering key market variables and behavior to offer a deeper understanding of the cryptocurrency market.