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

Hello everyone, I welcome you to this week 5 lesson series. The lesson taught by professor @sapwood explained On-chain Metrics (Part-3). In this post, I will be answering the homework tasks that were given at the end of the lesson.

Question One

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

1- Relative Unrealized Profit/Loss

This refers to a type of on-chain metrics that account for an asset unrealized value in either profit or loss by evaluating the difference between market capitalization and the realized cap while acknowledging the total supply of the asset at a given period.

The market cap sorts for the overall value of the network, and on the other hand, the realized cap sorts for the exact value of the network when it (UTXO) was last moved. The obvious difference between these two on-chain metrics (market and realized caps) yields an unrealized approximation value of the network in profit or loss.

Relative Unrealized Profit/Loss Calculation (RUPL)

To determine the unrealized profit or loss value of an asset's UTXO balances with regard to the circulating supply demands subtraction of the realized price (actual price paid/traded when the UTXO was last moved) from the Market Cap (current price), such that:
A positive value from (Market Cap - Realized price) yields the unrealized profit and a negative value from (Market Cap - Realized price) yields the unrealized loss.
Therefore,

Example:
Consider an asset Crypto X with a market cap of $50,000,000 and a realized cap of $20,000,000. The unrealized profit/loss and relative unrealized profit/loss is computed as follows:

a)- The unrealized profit/ loss

Unrealized profit/loss = $50,000,000 - $20,000,000
Unrealized profit = $30,000,000
Since it's a positive value, Crypto X network unrealized profit is $30,000,000.

b)- Relative unrealized profit/loss

To determine Crypto X relative unrealized profit:
Relative unrealized profit = ** ($50,000,000- $20,000,000) / 50,000,000**
Relative unrealized profit/loss = 0.6

Observation

With the above relative unrealized profit of 0.6, the crypto X market is observed to be within the greed zone, and if the relative unrealized profit value keeps increasing and approach above **0.75 (euphoria zone) **, this, therefore, helps the traders to position themselves accordingly as they anticipate a historical top in the near term.

2- Spent Output Price Ratio (SOPR)

The spent output price ratio determines the local tops and bottoms in a cycle. While RUPL is fully fit for cycle tops and bottoms. It's, therefore, a ratio of the current price at which the UTXO can be traded to the last price at which the UTXO was sold.

Spent Output Price Ratio Calculation

This is calculated by diving the spent output price by the originally created price so that:

Example:
Considering an asset Crypto X has a spent UTXO of 15 X at the current market price of $150. The 15 A was created at the initial price of $90. The SOPR will be calculated thus:

where the:
Initial created price = 15 × $90 = $1,350
Spent output price = 15 × $150 = $2,250
from the above formular;
SOPR = $2250 / $1350
SOPR = **1. 6666.. ** which can be approximated to 1.67 to 2sf.

Observation

The spent-out price ratio is over 1, it is believed that the investor (owner of crypto X) is in profit. Which is about 66.6667%.

RUPL, SOPR and MVRV Ratio

The RUPL ratio focuses on the ratio of unrealized profit or loss to the current price, indicating the overall unrealized profit or loss with reverence to the market cap.

The Spent Output Price Ratio (SOPR) concentrates on the net profit or loss ratio of consuming a UTXO balance in line with the current market price.

While the MVRV ratio focuses on the average fair value ratio of an asset indicating the valuation of the network in a profit or loss with consideration to market capitalization and the realized capitalization. MVRV ratio also describes the overall network value in terms of undervalued and exaggerated, while flagging possible moves.

Question Two

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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? ![seperator.png](

Relative Unrealized Profit/Loss

As earlier described, the relative unrealized profit/loss on-chain metrics sort to determine the unrealized with respect to the market cap and time is in profit or loss, where a relative unrealized value between 0 - 0.25 followed by a negative reading is considered a historical cycle low and a relative unrealized value above 0.75 is considered **historical cycle top. **
To prove this, a thorough analysis is of the relative unrealized profit/loss was performed here

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1- Long-term (5 years)

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Part A -Historical Cycle Tops

Figure 1: Screenshot was taken from Studio.glassnode.com

Seeing the relative unrealized profit/loss Bitcoin image above, on the 08th of December 2017, the relative unrealized profit/loss reading of BTC was 0.77, where the market psychology cycle is euphoria as BTC was valued at $16.2k. As earlier seen any RUPL reading above 0.75 is recognised within a historical cycle top, wherever the price tends to reach strong bearish resistance making a price decline. Price twirled to a historical low which decreased the price to around capitulation zones, before entering the historical cycle top on the 26th of June 2019, in which the RUPL was in the Greed Zone with a reading of 0.61, and BTC was valued at $13k.

Part B- Historical Cycle Low

Figure 2: Screenshot was taken from Studio.glassnode.com

From the image above, we can see the relative unrealized profit/loss readings below the 0.25 mark have served as historical cycle lows where the value of BTC reached a strong support level, which is accompanied by price accumulation, hence a bullish reversal of price. As observed, on the 09th of Dec 2018 the RUPL reading recorded a -0.29 while the price of BTC was at $3k from the previous historical high of $16.2k with a RUPL reading of 0.77.

The historical top at $13k with a relative unrealized profit/loss reading of 0.61 meets a strong bearish resistance that led the price to capitulate zones with a relative unrealized profit/loss reading of -0.13 and the value of BTC fell to $4.8k.

Spent Output Price Ratio (SOPR)

As earlier described, the Spent output price ratio sorts the ratio of a spent UTXO price to the initial price of the UTXO at conception. The SOPR metrics computation is used to ascertain the swing points (tops and bottoms) within a cycle, where a SOPR reading significantly over 1 shows the price is nearing a swing high while a SOPR reading significantly under 1 shows that the piece is nearing a swing low. I will illustrate below:

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1- Long-term (2 years)

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Part A- Swing Highs

Figure 3: Screenshot was taken from Studio.glassnode.com

From the SOPR image above, the swing high that formed on the 7th of May 2020, was accompanied by a SOPR reading of 1.03 while the price of BTC was at $9.9k. As previously explained, a SOPR reading above 1 signals correction in the Bullish trend. On the 19th of February 2021, the Spent Output Price Ratio reading was 1.04, which flagged a swing high (top), while the price was $55k, this was followed by a drop in price leading to a drop in price; $46k as the SOPR reads 0.99.

Part B- Swing Lows

Figure 4: Screenshot was taken from Studio.glassnode.com

From the SOPR image above, the swing low that formed on the 13th of March 2020, was accompanied by a SOPR reading of 0.90 and the price of BTC was at $5.5k. A bullish moment was encountered as the low SOPR reading showed swing lows in line with the overall trend. The bullish drive saw the price of BTC reach $9.9k with a Spent Output Price Ratio reading of 1.03. On the 25th of June 2021, the Spent Output Price Ratio reading recorded low reading of 0.95 with the price of BTC at $31k, the swing low result from the pullback of the $56k swing highs. With the 0.95 low SOPR reading. A bullish momentum was encountered, with BTC price peaking at $52.6k on the 6th of Sept 2021 while the SOPR reading recorded was 1.00.

Question Three

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

Relative unrealized profit/loss (RUPL), Spent Output Price Ratio (SOPR) and MVRV are on-chain metrics best suited for long-term analysis of UTXO assets. All these three utilize the recognized values of UTXO assets to produce indications.
RUPL can be applied to recognize cycle tops and bottoms. SOPR can be utilized to distinguish local tops from bottoms. MVRV is coupled with any of the two to optimize their signals.

Conclusion

On-chain metrics analysis is a very powerful analysis for UTXO assets. It informs you of the exact activity, void of any sentiment, happening in the asset's markets.

Relative Unrealized Profit/Loss (RUPL) is one such metric and can be used to identify a historic high point or cycle high as well as a historic low point or cycle low. SOPR is another on-chain metrics that can be employed to identify local tops and bottoms.

Thank you for your time and stay tuned for the week's post