On-chain Metrics(Part-3)- Steemit Crypto Academy- S4W5- Homework Post for @sapwood
Good day everyone. Thanks to @sapwood for such a wonderful lecture on On-chain Metrics(Part-3). I will be doing the homework from the lecture, so sit back and look for somewhere quite quiet and comfortable as you read through this amazing article I created just for you(😉). Let's get started!!!
Question 1: How do you calculate Relative Unrealized Profit/Loss & SOPR? Examples? How are they different from MVRV Ratio.
How Do You Calculate Relative Unrealized Profit/Loss?
For us to be able to know how to calculate Relative Unrealized Profit/Loss, we first need to know how to calculate Unrealized Profit/Loss(UP/L) and for us to know how to calculate UP/L, we need to know what Realized Cap(RC) means.
Realized Cap provides us with a more realistic value of an asset, as it calculates only the price of an asset based on when it was bought or it last moved, rather than it's current value.
Unrealized Profit/Loss is the amount of profit or loss realized from purchase of token. Unrealized Profit/Loss is what you get from buying a token, as the profit or Loss realized, is from the price which the coin was bought minus the current market price of the coin. The formula for getting Unrealized Profit/Loss is;
When you subtract your Realized Value from Market Value and you get a positive result, that's means you made a profit, but when you get a negative result, that's means you made a loss, because your Realized Value of the coin is more than the current value of the coin, meaning, the price of the coin fell. To make you understand this better, let me give you an illustration.
Illustration
On October 1st, 2021, you bought 10 STEEM at $1. On October 5th, you bought 10 STEEM at $1.5 and on October 7th, you bought 10 Steem at $2. What is your Unrealized Profit/Loss, if the current Price of STEEM is $1.8 as at 10th October.
NOTE: STEEM is not a UTXO based coin, this is just an illustration for better understanding, as many of us are very much familiar with STEEM token
Unrealized Profit/Loss = TS x CP - TS x LBP
Where;
TS = Total STEEM (30)
CP = Current Price ($1.8)
LBP = Last Bought Price ($2)
Unrealized Profit/Loss = (30x1.8) - (30x2)
i.e 54 - 60 = -6 (Negative Result, hence, Loss)
Unrealized Loss = -$6
That solution is 100% percent wrong, although, it seems right but it totally wrong.
When calculating Unrealized Profit/Loss, you take great note of the time you bought the coin and when you sold it individually and for this illustration we didn't sell we were just acquiring and acquiring, so the time you bought the coin and it's current price, should be calculated individually.
1st Oct = (10x1.8) - (10x1)
i.e 18 - 10 = 8 (Positive Result, hence, Profit)
Unrealized Profit = $8
5th Oct = (10x1.8) - (10x1.5)
i.e 18 - 15 = 3 (Positive Result, hence, Profit)
Unrealized Profit = $3
7th Oct = (10x1.8) - (10x2)
i.e 18 - 20 = -2 (Negative Result, hence, Loss)
Unrealized Loss = -$2
Therefore the Unrealized Profit/Loss for the period will be;
i.e $8 + $3 - $2 = $9
Unrealized Profit = $9
The formula for Relative Unrealized Profit/Loss is;
From the illustration, what will be the Relative Unrealized Profit/Loss?
Oct. 1st Unrealized Profit = $8
Market Cap(Current Price) = $18
i.e 8 / 18 = 0.44
Relative Unrealized Profit = 44%
Oct. 5th Unrealized Profit = $3
Market Cap(Current Price) = $18
i.e 3 / 18 = 0.167
Relative Unrealized Profit = 16.7%
Oct. 5th Unrealized Loss = -$2
Market Cap(Current Price) = $18
i.e -2 / 18 = -0.11
Relative Unrealized Loss = -11%
Therefore the Relative Unrealized Profit/Loss for the period will be;
i.e 44 + 16.7 - 11
Relative Unrealized Profit = 48.7%
How Do You Calculate Relative Unrealized SOPR?
SOPR in full is, Spent Out Profit Ratio. This on-chain metrics ratio helps to provide traders with some useful information on the average of profits or losses of a token within a certain period of time. The SOPR helps to determine the swing points on the trading chart, hence, it helps traders know the local tops and bottoms. It's formula is;
Whenever the result is greater than 1, it indicates Profit. Whenever the result is less than 1, it indicates Loss. And whenever the result is 1, it indicates net neutral, profits cancels the losses made i.e breakeven.
Illustration
On October 7th, you bought 10 Steem at $2. What is your SOPR, if you sold your 10 STEEM at $1.8?
Purchase Price = 10x2 = $20
Sale Price = 10x1.8 = $18
SOPR = 18 / 20
SOPR = 0.9 (Loss because result is < 1)
How are they different from MVRV Ratio.
Relative Unrealized Profit/Loss(RUPL) focuses on the difference between Market Cap and Realized Cap over the overall Market Cap of the period.
Spent Out Profit Ratio(SOPR) focuses on the aggregate Profit or Loss realized over a certain period of time.
While the Market Value to Realized Value Ratio(MVRV) focuses on the Market Cap to Realized Cap, in order to know the when the price of a token is above or below it's fair price.
Question 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?
Fundamental Analysis On RUPL Ratio
From the image above, the line with Black color, indicates the BTC Price and the line with Red Color indicates RUPL. This is a long term analysis of BTC, as we look at making our analysis from 23rd Sept, 2010 till 6th Oct, 2021, an eleven years time period.
RUPL ratio tends to show investors sentiment and this is a very good way to analyze a trading chart, because humans sentiment will never change, it will always remain constant. Most traders trade will their emotions, a little pump in price, there's hope. Your coin has gotten 5x, you still hold because of the greed of wanting more and as soon as the price direction changes, traders begin to sell, in order to take their profit. I will be using this to analyze the chart above.
We have gotten 4 market top cycles and 1 local top cycles in BTC history based on RUPL, because RUPL went over 75% 4 times. The first market top cycle was back in June of 2011, when BTC reaches it's ATH at $29 and also RUPL ratio was over the 75%, indicating historical cycle top. After a historical cycle top comes a bearish period and since the RUPL ratio shows us investor sentiments, you can see the way and manner investors panic and sold their holdings after the historical top in 2011.
We got our first and only significant local top in BTC history was in June of 2019, when BTC rose to about $13k. Why do I call it a local top? What is actually the difference between local tops and cycle tops. Local tops are below 75% RUPL whereas top cycle goes above the 75% RUPL and also Local tops are not the end of the uptrend price movement, they are just rest period, while cycle are most times the end of uptrend price movement and the beginning of the Bearish market, thus, making the top cycle areas, a period of time for investors to take profit.
We could also see cycle bottom, which are accumulation period for investors. Based of RUPL ratio, there have been 4 cycle bottoms in the history of BTC. Whenever RUPL is below 0%, it is regarded as a historical cycle bottom and it occurred four times, (2011, 2015, 2019 and 2020). These periods are known as accumulation period. After these period, there is always an increase in price.
Prediction
Based on my analysis, I can confidently say that, the road to 100k BTC is coming quite soon, because BTC reached it's ATH high at $63k and the uptrend movement doesn't seem to be changed, meaning, we are yet to reach a market cycle and the $63k ATH is a local top.
Fundamental Analysis On SOPR
SOPR tends to show the profits and loss that is taking place in the market i.e are investors taking profits or selling their coins below the value which they bought them. When SOPR is greater than 1, profits have been realized by investors, when SOPR is less than 1, losses have been realized by investors and when SOPR is 1, it means the market is net neutral i.e the profits cancels out the losses that are made in the market.
From the image above, you will notice that whenever price is rising, SOPR is greater than 1. Reason for this, is that, investors are taking their profits as the price is increasing. It becomes realized profits only when trading activities occurs by the investors.
Also whenever a price reaches it's peak and starts falling, we notice that SOPR is less than 1. This is because, some investors bought at the peak, and are panic selling below the amount which they bought the coin, resulting to them realizing losses.
During 2018 - 2019, we noticed long period of time, where SOPR was less than 1. This is because, some investors who bought when BTC reached it ATH back in late 2017 and early 2018, where holding initially, but when it got to 2019, and the price started falling even further, they panic and sold their holdings because they don't know how further it will fall, hence, more losses were realized during that period.
At top cycles and even local tops, we noticed that SOPR is greater than 1 and at bottom cycles and local bottoms, the SOPR is less than 1. The reason for this, is regardless of which bottom, be it cycle or local, as soon as price starts falling, investors always panic and sell their BTC below the price they bought it, because they don't want to incur further loss.
Prediction
As we can see from the chart, from July 2021, when the price of BTC started recovering, SOPR has been greater than, meaning, investors bought during the month of June when BTC touched $29k and some are selling and taking their profits as the price is increasing, while others are hodling, because you notice that SOPR didn't spike up enough, which would have indicted that lots of investors are realizing profit. Since, investors are hodling, I predict BTC will break it's current ATH of $64k soon, i.e I'm Bullish.
Question 3: Write down the specific use of Relative Unrealized Profit/Loss(RUPL), SOPR, and MVRV in the context of identifying top & bottom?
RUPL: It can be used to identify historical cycle tops and bottoms, because whenever RUPL is above 75%, it signifies a historical cycle tops and whenever RUPL is below 0%, it signifies a historical cycle bottom.
SOPR: It can be used to identify local tops and bottoms, because whenever the SOPR is above 1, it signifies a bullish trend and whenever SOPR is below 1, it signifies a bearish trend as investors are panic selling.
MVRV: It can be used to identify historical tops and bottoms, because whenever price is at 300% and above which is a reliable upper threshold, it signifies a historical cycle top and whenever price is at 100% and below, which is a lower threshold, it signifies a historical bottom.
Special thanks to you, @sapwood, for organizing this amazing class and giving this excellent assignment, as it has helped me in the understanding Relative Unrealized Profit/Loss(RUPL) and Spent Out Profit Ratio(SOPR).