On-Chain Metrics [Part 3] - Crypto Academy - S4W5 - Homework Post for professor @sapwood

Hi guys,
Welcome again to my blog. This week I will be taken part in week 5 task after attending the lecture by professor @sapwood on the topic On-Chain Metrics [Part 3]. In week 1 and 3 we discussed Part 1and 2 of this course so this is just continuation of the course.

(1) How do you calculate Relative Unrealized Profit/Loss & SOPR? Examples? How are they different from MVRV Ratio(For MVRV, please refer to this POST)?

Relative Unrealized Profit/Loss (RUPL)

Relative Unrealized Profit/Loss (RUPL) is the gain or loss that a UTXO may have incurred based on the current price if it has been moved at that point in time.

To calculate the Relative Unrealized Profit/Loss (RUPL), we will be considering the positive and the negative value.

For positive value (current price - realized price) gives us the unrealized profit. This means that the current price is above the realized price.

For negative value (current price - realized price) gives us the unrealized loss. This means that the current price is below the realized price.

When calculating Relative Unrealized Profit/Loss (RUPL) with respect to market cap we will have the relation to be.

Relative Unrealized Profit/Loss (RUPL) = (Market cap - Realized cap) / Market Cap.

Let's consider the example. If the market cap of BTC is given to be $750B and the realized cap is given to be $537B, then to calculate the relatively unrealized profit/loss we will be having this;

Relative Unrealized Profit/Loss (RUPL) = (Market cap - Realized cap) / Market Cap

Relative Unrealized Profit/Loss (RUPL) = ($750B - $537B) / $750B

Relative Unrealized Profit/Loss (RUPL) = $213B /$750B

Relative Unrealized Profit/Loss (RUPL) = 0.284

Readings

0.75 and above signify top
0.00 below signify bottom
within 0.00 - 0.75 signifies cycle
My result been 0.284 indicate optimism denial

Spent Output Price Ratio (SOPR)

This can be define as the ratio of the spent value and the created value of UTXOs. It function is to identify tops and bottom in a given cycle be it bullish or bearish. So therefore the ratio of of sold price and paid price of an asset is what is known as Spent Output Price Ratio (SOPR).

To calculate SOPR, we can use the relation.

SOPR = Price of Coin Sold / Price of coin bought

If the SOPR is greater than 1, it is a clear indication that the trader or holder of the said asset is in profit whereas if the outcome is less than 1, it indicate that the trader or holder is having a loss.

Let's consider the example. If the creation value of 15 BTC is $25,500 and then the we're sold for $75,000. Calculate the SOPR.

Using the relationship

SOPR = Price of Coin Sold / Price of coin bought

Where

Bought price = 15 * $25,500

Sold price = 15 * $75,000

SOPR = 15 * $75,000 / 15 * $25,500

SOPR = $1,125,000 / $382, 500

SOPR = 2.9412

The result above is greater than 1 and that implies profit in the side of the trader or holder.

Difference between RUPL, SOPR and MVRV ratio

RUPL which stands for Relative Unrealized Profit/Loss takes into consideration the profit and loss which is related to the market cap that a trader will incur. This helps traders to know the profit or loss they will incur when the perform any transaction.

SOPR which stands for Spent Output Price Ratio takes into consideration the profit and loss which is incurred already as a result of UTXOs spending that has occurred in connection with the current market price.

MVRV which stands for Market Value to Realized Value takes into consideration the difference between market cap and realized cap. It also gives information about market top and bottom where an asset is overvalued or undervalued.

(2) Consider the on-chain metrics-- Relative Unrealized Profit/Loss & SOPR, from any reliable source(Santiment, Glassnode, LookintoBitcoin, Coinmetrics, etc), and create a fundamental analysis model for any UTXO based crypto, e.g. BTC, LTC [create a model to identify the cycle top & bottom and/or local top & bottom] and determine the price trend/predict the market (or correlate the data with the price trend)w.r.t. the on-chain metrics? Examples/Analysis/Screenshot?

RUPL which stands for Relative Unrealized Profit/Loss is one of the onchain metric which is use to show the unrealized profit or loss which will be incurred by traders. It shows the cycle top and cycle bottom.

Bitcoin Analysis (8 years)

Looking carefully at the chart above, you will notice different levels namely Euphoria, Greed, Capitulation, Hope/Fear, Optimism/Denial, Greed. This are different level of behaviour of traders.

On 09 April 2013 the RUPL line move to 83% indicating a top and found on the axis of Euphoria. The price at that point is found above $10,000. Similarly, on the 18 - Nov - 13 the RUPL moved higher to 86% and still found in the region of Euphoria and the price is still found above $10,000.

On 14 - Jan - 15, the RUPL dropped to -59% and it is found in the region of Capitulation and the price was seen at $10, In the same way on 15 - Dec - 18, the RUPL went a bit high to -44% and it is still found in the region of the Capitulation and the price was seen above $10, On 16 - Mar - 20, the RUPL went a bit higher to -12% and the price was seen above $100, it is still found on the Capitulation region.

Observation

From the analysis made in this chart above, you will notice that the RUPL has a very good correlation with price movement. As the line of the RUPL moves higher the price also moves and as the RUPL line moves lower the price also drops. The RUPL line can be use a trading signal since we now understand that as it moves upward price moves up and as it goes downward price also goes downward.

SOPR which stands for Spent Output Profit Ratio is one of the onchain metric which is use to show ratio of the spent value and the created value of UTXOs.

Bitcoin Analysis (8 years)

From the screenshot above, on December 03 2018, the SOPR was found below 0.875 and the price was $3,996.75. In the same way on the 14 March 2020, the SOPR was found slightly above 0.9 and the price is $5,195.86. On 23 June 2021, the SOPR is 0.9999 and the price is $33,652.92

On December 28 2020, the SOPR was found at 1.075 and the price was at $27,098.95 and on the 28 July 2021, the SOPR was found at 1.011 and the price was at $40,021.27

Observation

In the case of SOPR, the prices the are found closer to 1 is higher compare to prices that are a bit away from the 1. Now consider the last scenario where we discussed uptrend when the SOPR is at 1.075 the price was $27,098.95 but when SOPR was at 1.011 the price became larger I.e $40,021.27. In conclusion the price is more favourable when it is close to the 1 value.

(3) Write down the specific use of Relative Unrealized Profit/Loss(RUPL), SOPR, and MVRV in the contextt of identifying top & bottom?

The RUPL is an on chain metric which is use considers the profit and loss that maybe incurred if the transaction is carried out within the said time. It is calculated by dividing unrealized profit/loss and the market cap. Now when this arithmetic is carried out and the answer is found to be above 0.75 it indicates profit but if it is found below 0.00 it indicates loss.

The SOPR is an on chain metric that is use to identify tops and bottom in a given cycle be it bullish or bearish. So therefore the ratio of of sold price and paid price of an asset is what is known as Spent Output Price Ratio (SOPR). If the price is found above 1 it means top whereas if it is below 1 it is consider as bottom.

The MVRV is an on chain metric that is use to show top and bottom by means of indicating the overvalued asset or undervalued asset. When the MVRV reads above 300% it is seen as overvalued of an asset whereas if the MVRV is seen below 100% it is concise as devalued of the asset.

Conclusion

Both the RUPL and the SOPR are no doubt a very good indicator used in the on chain metric to spot price of an asset. This two indicator if we'll understood can help traders make meaningful profit at the course of their trading affair. I want to sincerely appreciate the professor @sapwood for such an educative lecture and I do hope to learn more from you shortly.