Net Realized Profit/Loss
Net Realized Profit/Loss metric presenting the net magnitude of profit, or loss realized by all holders spending coins. Realized Profit/Loss is assessed relative to the price when a coin last moved.
When coins are spent on-chain, their value is reassessed relative to the value when they were last moved. This technique can be used to establish the magnitude of profit, or loss that was realized between the assumed coin acquisition and disposal events.
Net Realized Profit/Loss is a metric that calculates the net profit or loss (USD value) for all coins spent over the time-frame considered. This provides a reflection of aggregate market sentiment, capital inflows or outflows, and trends in network profitability.
A typical interpretation framework is as follows:
- Positive values indicate profits are being realized on-chain. Where price continues to trend higher, this indicates capital inflows occurring to absorb that sell-side. Progressively rising peaks can also suggest increasing probabilities of a local high being established if demand wanes as larger magnitude profits are taken.
- Negative values indicate losses are being realized on-chain. Where price continues to trend lower, this indicates capital outflows are occurring. Deep lows values can signal investor capitulation events which increases the probabilities of an upside reversion.
- Neutral values near zero indicate spent coins transacted near their cost basis. This can signal that highly profitable or loss holding coins remain dormant. In bull market corrections, this can signal renewed positive sentiment and probability for a price bounce. In bear markets it can indicate investors exiting at their cost basis, creating overhead resistance.
Net Realized Profit/Loss provides insight into:
- Absolute value of profits (+ve) and losses (-ve) incurred by coins spent that day. This by proxy acts as a measure of capital inflow and outflow when coupled with an assessment of price action.
- Momentum in market sentiment and spending behaviour by considering the magnitude of, and length of time that successive peaks and troughs in the oscillator are sustained in bull and bear trends.
Understanding of the above allows onlookers to cut through noise and access a unique glance at the aggregate spending behaviour and psychology of a large cross-section of market participants.
There are three general frameworks to consider for interpretation of Net Realized Profit/Loss:
- Extreme Values where the oscillator signals a large magnitude of profit or loss are realized. This usually suggests an overwhelming supply (profits) or market capitulation (losses) establishing a local, or global market reversal.
- Trend Support (neutral values) where the oscillator returns to a relatively neutral value indicating highly profitable or loss holding coins remain dormant, and thus conviction to hold, or exit at cost basis has returned. Similar to SOPR, this usually signals a 'buy the dip' or a 'sell the rally' moment in an established trend.
- Trend Reversal (large values opposing the macro trend) where the oscillator signals heavy losses in a bull, or large profits in a bear. This can suggest a short or longer term reversal of trend such as the end of a correction, end of a macro trend, or a local swing high/low.
Net Realized Profit/Loss is best used in tandem with SOPR and shares many similar characteristics and interpretation properties.
The chart below demonstrates a high level example for many possible applicable angles (September 2020 - September 2021):
- Red Circles: Extreme profits realized indicating local market tops.
- Blue Circles: Trend support (in bull) where market conviction returns (correction lows).
- Green Circles: Extreme losses realized indicating capitulation events and local lows.
- Orange Circles: Trend support (in bear) where market exits near cost basis creating resistance.
September 2020 to May 2021 (shown above) was a period defined by upwards/bullish price action and consistently positive Net Realized Profit/Loss prints. The realisation of profits is a typical spending behaviour in bull markets as more coins become profitable with appreciation, and the incentive to liquidate increases accordingly.
- Bull Market Rallies: While coins are consistently moved in profit, there are moments of over-exuberance in price action that are met with a strong inflow of large profit-taking prints (see red circles). The magnitude of these prints can be difficult to gauge at times, and thus would be best paired with the SOPR metric to assess relative scale. New or equal all time highs in Net Realized Profits is always worth an extra bit of attention and caution.
- Dip Buying: Identifying correction lows in a bull market is often characterised by reduced profit taking, and more losses realized. this demonstrates smart money investors are not willing to sell at these prices (fewer profits taken) and new local top buyers are capitulating at the correction lows. Blue circles in the chart above present these events There's a market saying that "bottoms are put in when sellers stop selling", and these break even prints for Net Realized Profit/Loss show just that.
- Bearish Reversal: May 2021 signalled a trend change in BTC spending behaviour with on-chain transactions being dominated by holders realizing significant losses, counter to the bull market trend and sentiment. This reversal is evident in (1) the break even line being convincingly pierced by bears, and (2) the consistent Net Realized Loss prints that occurred in the ~2 month period that followed. In this trend change the burden of proof shifts from bears back to bulls.
- Bear Markets: This phase is defined by underwater holders changing their game plan and offloading risk at a loss. The market attempts to absorb these coins and particularly so in moments of maximum pain (Capitulation). This can be seen in deeply negative Net Realized Loss prints (see green circles). Note that in the May to July 2021 example, significant losses were realized, however price continued to find support at $29k to $30k, suggesting supply absorption.
- Selling Resistance: Breaking even is a psychological goal for many investors during bearish conditions. Thus, every time spending reaches any sort of profitability the chart shows prudent players offloading into these mini rallies (orange circles), further enforcing the bearish trend.
- Bullish Reversals: August 2021 signalled a trend change in BTC spends with flows being dominated by in-profit holders. Similar to the bearish reversal scenario, this is evident when (1) the break even line is convincingly pierced by bulls and (2) the consistent Net Realized Profit prints that occurred in the period after. In this trend change the burden of proof shifts from bulls back to bears.
Extreme oscillator values indicate large sums of in-profit/loss coins being moved on-chain, which can be used to gauge over-extension to the upside or downside. This can provide signal for short-term / local reversals such as local/global market tops, or capitulation bottoms.
As an example, let's review the transition from the 2017 bull into the 2018 bear market.
- The 2017 bull was characterised by an accelerating trend of profits being realized, indicating supply coming back into the market, and ultimately peaking at an extreme positive value at the global top in December 2017.
- This was followed by a deep reversal into net losses which indicated that a very large volume of coins were purchased in the final bullish impulse, and were being spent at a loss (likely panic sellers).
- Deep negative oscillator prints signalled mini-capitulations as coin holders were shaken out around the $6k price floor that often coincided with local bear market bottoms, and long swing trade opportunities.
- Finally, in December 2018, the market experienced a deep capitulation event where sustained losses were realized for around four months. This signified that the majority of coin volume that was being spent was at a loss, however was contrasted by sideways to positive price action. This ultimately indicated a heightened probability that buy side support was absorbing coins spent at a loss.