On-chain Metrics(Part-3)- Steemit Crypto Academy- S4W5- Homework Post for @sapwood

Hello Professor @sapwood. One more new class where we realize the relationship that each of the On-chain Metrics has and how they work in relation to each other. It is always good to know several that can work together and help us make better decisions.

Let's get started.

_{Image edited by me in Powerpoint}

1. How do you calculate Relative Unrealized Profit/Loss & SOPR? Examples? How are they different from MVRV Ratio?

Relative Unrealized Profit/Loss

This indicator shows the relative gain/loss value that all the coins in circulation would have if they were sold at this precise moment. This is why it is called Unrealized, because in reality, even if the coins are not sold, it shows whether the entire network is currently in a profit or loss situation.

Let's imagine that the 100 BTC (TOTAL SUPPLY) are distributed in 5 UTXO's which have the following data: (Price data is REAL)

UTXO	Close Price	Quantity of Units
5 years ago	611 USD	20
1 year ago	10800 USD	30
6 Months ago	59100 USD	25
1 Months ago	51700 USD	20
1 week ago	44000 USD	5

While the Market Cap is: 100x50000 USD= 5000000 USD.

Realized cap is: (20x611)+(30x10800)+(25x59100)+(20x51700)+(5x44000)=3067720 USD.

Therefore, according to the RUPL formula, the result would be as follows:

RUPL= (Market Cap−Realized Cap)/Market Cap

RUPL= (5000000-3067720)/5000000

RUPL= 0.38

For this example the RUPL gives a value of 0.38 or (38%) which places it in the Optimism- Denial zone, depending on whether the price is in an uptrend (Optimism) or downtrend (denial).

SOPR

To begin with, the SOPR indicates the average of the gains or losses of the currencies that moved in a certain period, for this its formula compares the price in dollars at which they were bought with the price at which they were sold.

SOPR= Selling price (USD) all output spent/ Buying price (USD) all output spent.

To make an example let's go to Blockchain Explorer and take some real Bitcoin block data:

_{Image taken from: ^Source}

From this block (687459) we will take two outputs from June 13, 2021, corresponding in total to 6,805 BTC. The price of BTC at that time was 39017.37USD, so the purchase price of these spent outputs was 265513.203 USD.

Based on the assumption that these coins were sold TODAY, the SORP calculation would be as follows:

Price Sold= (6.757+0.048)* 50000=340250 USD

Price Paid= (6.757+0.048)*39017.37= 265513.203 USD

SOPR=340250/265513.203 = 1.28

Obviously, this result greater than 1 corresponds to the fact that the coins were sold at a much higher price than the purchase price, therefore it is a sign that the holders are making a profit. This value of SORP = 1.28 indicates a local top within an uptrend.

DIFFERENCES

In the case of MVRV the differences are obvious. So we will start from their formula, which is:

MVRV= Market Cap/Realized Cap

As we can see MVRV has similarities with RUPL in that both use the same data for its construction (Market cap and realized cap), however, while MVRV is only the ratio of market cap divided by the realized cap, RUPL is the ratio of the difference between market cap minus realized cap and then divided by market cap.

RUPL= (Market Cap−Realized Cap)/Market Cap

Put another way, MVRV indicates whether the current price is below or above the fair value of an asset, while RUPL by the difference of subtracting the realized cap from the market cap we calculate the unrealized (floating) gain or loss, it just provides a hypothetical framework of what would happen if all the holdover coins were sold. This is why this indicator shows a broader view of cycles, as it takes into account the holdover currencies.

The RUPL also indicates what the market sentiment is.

On the other hand, the SORP presents another type of data different from the MVRV, Selling price (USD) all the output spent and Buying price (USD) all the output spent. Through the division between these two factors, we obtain an indicator of the gains or losses of the currencies that are currently moving (selling).

For this reason, the SOPR is a local signal indicator, which only takes into account the spent currencies changing UTXO and indicates whether the currently active sellers are making profits or losses.

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?

Relative Unrealized Profit/Loss

Due to Glassnode and Santiment restrictions regarding current RUPL data I will use for the indicator analysis alone the Look into Bitcoin page.

I have chosen Bitcoin (BTC). For my fundamental analysis, I will take into account 3 years.

_{Image taken from: ^Source}

The first thing I notice are the two dips below 0. The first one was around June 2019 presented a value of -44% and a price of 3236 USD, which according to this indicator represents a perfect accumulation area for buying.

The second dip was in mid-March 2020, which the indicator presented a value of -12% and a price of 5032 USD, which also represented an accumulation area for the bullish Rally to come.

The third reading we can make of this period was in mid-February 2021 when an indicator reached a level of between 73% and 75%, very close to entering the euphoria zone. And although this was not the case this indicates a good selling zone, when the BTC price was at 60000 USD.

After this Top cycle came to the price correction, in which RUPL showed two local bottoms (35% / 30000 USD & 36%/40000 USD), indicating an accumulation zone to resume the uptrend of the price.

Currently, the price is in a slight bullish phase, with a price between 49000 and 50000 USD. The RUPL indicator shows a value of 49% which places the market in an Optimistic sentiment. If this trend continues we could see in the coming months an even higher growth of BTC and present a RUPL of around 60% which would place it in greed sentiment.

RUPL & MVRV

As we saw in class the RUPL indicator can work in conjunction with the MVRV indicator to detect cycle tops. This time I will use the Glassnode platform.

Through this platform, I can join in a single chart the BTC price together with the two indicators RUPL and MVRV.

Bitcoin (BTC) 3 years analisys.

_{Image taken from: ^Source}

The first thing I notice is that definitely both RUPL and MVRV show the three most striking signs of historical highs and lows. First, the January 2019 historical low is shown by the RUPL as a button cycle and by the MVRV as a lower threshold, indicating a perfect oversold zone to take a long position.

The second signal is a historical high in July 2019 shown by the RUPL as a top cycle and by the MVRV as an upper threshold, after which the price pulls back. Then a new historical low appears in March 2020 (bottom cycle and lower threshold), after which the price starts to move up.

From what you can see both indicators send almost the same signals, however, remember that the MVRV is not so reliable on Upper threshold signals, therefore the RUPL serves as confirmation as it happens in September 2020, where the MVRV indicates several upper thresholds which in theory show an overbought zone.

However we see that at no time does the RUPL exceed the 75% line, so it is not a Top cycle. In other words, the uptrend still continues.

SOPR

In this case I will again use the data from Glassnode platform.

Bitcoin (BTC) 3 years analisys.

_{Image taken from: ^Source}

First of all, I should highlight that although in reality, the SOPR indicator is not good at detecting cycle highs and cycle lows, in this case, it matched a local bottom with a cycle bottom shown in March 2020.

After this starts a bullish cycle and right around September 2020 the SOPR indicator starts to move around 1 which indicates a buy signal. This is then verified by the price action which continues to rise.

In January 2021 another local top is formed, after which there is a small pullback in price until continuing to 60000 USD. At this point, we all know that there is a cycle top, which is not detected by this indicator. What does happen is that after reaching the historical maximum the BTC price drops and starts a corrective bearish phase, and just in June 2021 the indicator again moves around 1, which gives us a sell signal.

At the end of July, another local bottom is formed, and then the price rises again forming another local top.

Finally, we can see that the Bitcoin price keeps rising but the SOPR moves around 1, which can be interpreted as a buy signal and the continuation of the bullish phase where the BTC price can reach new historical highs.

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

1-The RUPL Indicator estimates the total amount of profit or loss of the network as a function of the market cap, this gives you a more general overview with which the RUPL through signals of Tops and bottoms shows us cycle tops and cycle bottoms.

The interpretation of this indicator is very pointed. When the peak forms above 75% it means that the price is forming a historical high, which can then trigger a price correction, therefore it is a sell signal.

On the other hand if the peak forms below the 0% level it means that the price is forming a cycle bottom, which can trigger a new bullish cycle. For such reason, these Cycle bottoms are perfect buy signals.

2-The SOPR Indicator Indicates the gains or losses of currencies that moved e certain period, therefore it helps us to visualize and establish buy and sell zones (temporary) based on the price of the asset during bullish or bearish phases, In other words, the tops and bottoms of the SOPR indicator are local (swing points) and are a function of the current trend, not the total history of the asset.

When the indicator shows a peak away from the level of 1 upwards, this is a sign of a local high where holders sell and take profits so a pullback in the price is expected before continuing its upward movement. On the other hand, when a spike away from the 1 down level is seen, this is a sign of a local low where holders sell at a loss.

In fact, the SOPR indicator does not serve to detect cycle or historical tops or bottoms. For this reason, the local highs and lows shown by this indicator do not function as buy or sell signals as they do in the RUPL indicator.

If you want a buy or sell signal on this indicator you should pay attention to when the line moves around 1 and the price is in a marked uptrend (buy signal) or downtrend (sell signal).

3-Finally the MVRV indicator as seen in past classes through its upper thresholds and lower thresholds identifies market highs and lows, or in other words overbought and oversold zones. Although both signals serve in theory to identify cycle tops and bottoms, in practice both signals do not have the same reliability.

For example, historical lower thresholds have shown great reliability in identifying oversold areas at historical lows. On the other hand, the upper thresholds are less reliable signals as it does not always represent a cycle top but a price correction, especially if the upper threshold MVRV is below 200% and 300%.

This effect is entirely psychological, since when an upper threshold occurs a certain group of traders sells their assets mistakenly believing that the uptrend came to an end. This naturally causes the price to correct, which can be taken by other traders as a buy signal... which in turn causes the main uptrend to resume. > Source

For an upper threshold to indicate a true cycle top it is recommended that it be above 300%.

Conclusion

We have seen how several indicators that are apparently similar can give very different and complementary signals to each other, as is the case with the RUPL, SOPR, and MVRV indicators.

Again Realized cap si as UTXOs and the price that was paid at the time of the creation of those UTXOs play an important role, since through them we can see fully the relative value of the currency and its development over time.

It is these tools that not only tell us how the asset has been, but how it is currently doing, whether it is profitable, and what the future holds for it.