SOPR and Bitcoin Market Price Sentiment

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The following is taken from a recent edition of Deep Dive, Bitcoin Magazine’s premium market newsletter. To be among the first to receive this and other on-chain bitcoin market analysis straight to your inbox, subscribe now.

A key indicator for tracking on-chain spending behavior and current market sentiment is the Spent Output Profit Ratio (SOPR). The SOPR is calculated by dividing the realized value of a production spent (in USD) by the creation value of the original. Simply put, it calculates the price sold over the price paid for each UTXO that moves on the chain. The best place to learn more about SOPR is here.

SOPR values ​​greater than 1 indicate that on average more profits are made while SOPR values ​​less than 1 indicate that on average more losses are made. At a value of 1, the market is net neutral. We can analyze the behavior of the SOPR at the total market level and between long term holders (LTH) and short term holders (STH).

What to look for in the SOPR metric is the reaction of the metric around 1. During continued bullish rallies, we consistently see more profit-taking behavior below 5% with those intervening periods where the market is neutral or in equilibrium. You can see when SOPR bounces off 1 and returns to a state of profit taking during bull markets. When it drops below 1 and does not recover that level, the market signals the formation of a bullish market reversal as investors take more losses, expecting the price to fall. Here we use the adjusted SOPR which ignores all outputs with a lifespan of less than one hour.

Source: Glassnode

As we approach the highs of bull cycles, there are usually high and sustained levels of profit taking just ahead of the higher highs. Eventually, the exhausted supply overwhelms the new demand, and therefore a peak is formed. Currently, we are seeing an increase in profit taking, but not at a peak or a cycle peak.

In previous cycles, there is an upward trend of long term holders realizing increased profits as prices are raised by new entrants into the market. Using a 30 day moving average to get a more macro view of the market, we seem to have just started this uptrend in LTH profit taking. Profit taking is a sign of good health indicating that the second stage of the bull market, the distribution over accumulation, has begun.

Source: Glassnode

For short-term holders, there is a constant pattern of behavior during corrections to bullish cycles. As the price corrects, weaker hands surrender and take losses, increasing selling pressure in the market. We usually see the STH SOPR number regaining a position above 1 after this event, as new buyers are shaken. Failure to recover 1 would signal that the larger market for short-term holders is unwilling to hold coins and instead wishes to sell them at a loss. For the bull market cycles to continue, we are looking to see the latest STH SOPR pick up more than 1 when using the 24 hour MA chart. He is already showing signs of this:

Source: Glassnode

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