THE on-chain indicators For Bitcoin are indicators that derive from data collected by observing the activity of its blockchain. They can be very useful in analyzing the general market sentimentthrough the behavior of bitcoin holders.
In this article, we will focus on the NUPL : THE Net Unrealized Profit/Loss.
What is NUPL on Bitcoin?
This indicator is derived from two values that we must first explain: the Market Value and the Realized Value.
Market Value and Realized Value
There Market Value is the equivalent of the Market Cap (the capitalization of a market), well known in traditional finance. To obtain the Market Value, you must multiply the current price of a bitcoin by the number of units in circulation.
Market Value = Price of one BTC * Number of BTC in circulation
There Realized Value does not take into account the price of BTC at time t, but the price of each unit when they “moved” for the last time. The price of each BTC, when it is last transfer from one address to another, is thus taken into account. These prices are added together to obtain an average. Then, this average is multiplied by the number of bitcoins in circulation.
Realized Value = Average price of each BTC during their last transfer * Number of BTC in circulation
L’Unrealized Profit/Loss is then calculated by subtracting the Realized Value from the Market Value:
UPL (Unrealized Profit/Loss) = Market Value – Realized Value
This value gives us a profit estimation (or some losses) garnered by investors. It is obviously a value theoreticalhence the adjective “unrealized” (unrealized).
Calculation of NUPL
To obtain the NUPL (Net Unrealized Profit/Loss), you must divide the Unrealized Profit/Loss by the Market Cap of Bitcoin. This allows you to visualize variations in unrealized profits/losses over time:
NUPL (Net Unrealized Profit/Loss) = (Market Cap – Realized Cap) / Market Cap
This indicator can also be called “Relative Unrealized Profit/Loss”. It was created in February 2019 by Tuur Demester (analyst), Tamas Blummer (Bitcoin developer) and Michiel Lescrauwaet (investor).
How useful is NUPL on Bitcoin?
NUPL is an indicator that provides information on general market sentiment. When he is positivethis means that investors are generally profitable. When he is negativethese last are losers. The more its value drifts from zero, the closer the market theoretically approaches a high (top) or a lower (bottom).
For example, a NUPL of 0.5 means that the market cap is twice the realized cap. For a NUPL of 0.75, the market cap represents 4 times the realized cap. The higher its value highand the more this differential will increase the bearish pressure on the market. Conversely, a NUPL strongly negative means that the expected on-chain value is much lower than the value exchanged on the market. Such a differential is synonymous withbuying opportunity.
It is therefore an indicator which allows us tohelp with the decision to sell (take profit), of re-enter on the market.
Her Graphic Representation can be enhanced with colors, like Glassnode Studio, for better reading.
The different colors correspond to the phases of a market cycle.
The different phases of a market cycle
These phases concern both bullish and bearish cycles, and their names are easy to understand.
- Capitulation (in red): during the capitulation phase, nothing goes right. The market panics, investors sell en masse, and the price of bitcoin collapses. Capitulation phases are a very good entry point, because the price is close to its lowest point (bottom).
- Hope Or fear (orange): the fear phase precedes capitulation, while the hope phase follows it. The market is in a fear phase when the price has already fallen drastically and continues to decline. The hope phase follows capitulation; the price then begins to rise, giving the feeling of a bullish recovery.
- Optimism Or anxiety (yellow): optimism arises when the price of bitcoin confirms its bullish recovery. Investors are confident that the market is returning bullish. Conversely, when prices have fallen noticeably, anxiety arises. Investors are starting to realize that the bull cycle is likely ending.
- Conviction Or denial (green): During the last flights of a bull market, investors are still convinced that the price will not stop reaching new highs. During the denial phase, the market has already reached its peak, but investors are convinced that the correction is only temporary.
- Euphoria Or avarice : the euphoria phase is the last stage of a bullish cycle. Investors are convinced that the price will continue to rise exponentially. They bet their last funds, thinking of maximizing their profit. The greed phase occurs just after a market high: investors do not want to take profits, and stay in the market, waiting for a new high.
Relevance for Bitcoin
THE NUPL is an indicator among many otherswhich must be used in correlation with different analysis tools. However, it allows us to give an idea of the phase in which the market is, during a bullish or bearish cycle. Seasoned investors know that it is impossible to buy exactly at a market low or sell right at a market high. They will therefore use this type of indicator to stagger their profit takingOr determine their entry points.
Historical data indicates that when the NUPL is greater than 0.7the price of bitcoin is approaching its highest (top). Conversely, a NUPL lower than 0.2 is a sign of a market low (bottom) imminent.
Where to find this indicator?
There are several sites, free or paid, allowing you to view the NUPL on Bitcoin. We took as an example Glassnode Studio in this article, but the site Lookintobitcoin also offers a free visualization tool.
Many other sources are also available. The bitcoin trader will thus be able to use this on-chain indicator to refine his entry and exit strategy on the market.
To go further, do not hesitate to consult the articles dedicated to others on-chain indicators useful: