Realized Profit shows the total USD profits realized of coins being spent on-chain.
Realized Profit denotes the total value of profits realized (USD value) for all coins spent that day. A coin is considered to have realized a profit when the price at which the UTXO was created (last coin movement) was lower than the current price at which it is spent.
The realized profit metric is one component of the Net Realized Profit/Loss metric and provides insight into capital inflows, demand strength and profitability of the network. Higher values indicate larger USD denominated profits are being realized by coins spent. Realized profits can generally be applied in the following framework:
- Bull Markets: Where investors take profits, usually at an increasing rate as the bull proceeds. Where profits are realised and price continues trending higher, it signals capital inflows.
- Local/Macro Tops: Where profits realised creates supply that overwhelms demand. Extreme , or progressively higher values of realized profits can increase the probability of a local or global market top.
- Bear Market Resistance: Where the availability of profits during macro downtrends creates an incentive for investors to exit swing trades, or recover capital near their cost basis. This creates resistance in bearish trends until the trend is convincingly broken and reversed.
Realized Profit is calculated by subtracting the price when coins were previously moved from the price at the time of the current spent output creation (for all spent outputs where the price when moved is greater than the price when the coins were previously moved), and summing these totals for all coins moved within the given time period.
The realized profit metric can be used to gauge when significant profits are being realised over a period of time. Generally speaking, this indicates two mechanisms are in play:
- 1.Investors with Profitable Coins are Selling: potentially signalling a change in market sentiment,and a view that current prices are overbought or expensive.
- 2.Increase of liquid supply as profitable coins that have been held in an illiquid state in investor wallets is released back into liquid circulation.
To filter out daily noise, it is useful to apply a moving average, moving median or sum values over a particular period of time
As more illiquid coins are spent at a profit and brought into liquid circulation, it increases the probability of local/global market tops. A 30-day moving median (and log scale) has been applied to the following charts to identify lengthy periods of time where elevated profit realization has taken place.
In a bull market, we can see that peaks in realized profits often correlate with the estalishment of a local or global market top. The magnitude of the metric indicates the typical daily capital inflows that are required to sustain the current market trend and thus provides an indicator for relative demand.
Similarly, in a bearish market, peaks in realized profits usually suggests that swing traders and investors waiting for an exit are taking the opportunity in rallies to de-risk and take profits. This creates an oversupply and thus price resistance.