The SOPR (Spent Output Profit Ratio) indicator provides insight into macro market sentiment, profitability and losses taken over a particular time-frame. It reflects the degree of realised profit for all coins moved on-chain.
SOPR is measured by considering only coins moved the timescale considered (daily, hourly etc), and taking the ratio between the fiat value at the time of UTXO creation, and the fiat value when the UTXO is spent.
The SOPR indicator can be considered within the following framework:
SOPR values greater than 1 implies that the coins moved that day are, on average, selling at a profit (price sold is greater than the price paid).
SOPR value less than 1 implies that the coins moved that day are, on average, selling at a loss (price sold is less than the price paid).
SOPR value of exactly 1 implies that the coins moved that day are, on average, selling coins at break even.
SOPR trending higher implies profits are being realised with potential for previously illiquid supply being returned to liquid circulation
SOPR trending lower implies losses are being realised and/or profitable coins are not being spent.
SOPR is calculated by dividing the realized value of a spent output (in USD) by the value at creation of the original UTXO (in USD).
SOPR is a useful tool in all market conditions as it captures the aggregate profit and loss realised on a particular day This can often be considered a reflection of market sentiment. Both the absolute value of the indicator and the prevailing trend provides insight market spending behaviour.
In general, higher the SOPR values indicate that the more profit was realised that day. Successive peaks of high SOPR (creating an indicator uptrend) suggest continual distribution, usually during a bullish price rallies. As more coins are spent back into liquid circulation, the probability of a local or macro market top increases.
Conversely, lower SOPR values indicate one, or both of the following scenarios:
Investors holding profitable coins have reduced their spending indicating a return of conviction and a belief that current prices are not expensive. In bull markets this can signal that a correction has exhausted sellers and that accumulation may be underway.
Investors holding coins at a loss are spending their coins. When the proportion of realised losses exceed realised profit, SOPR will fall below 1.0. This is generally indicative of panic selling, capitulation or bearish market conditions.
As prices rally in bull markets, a larger proportion of the coin supply will be in profit. Additionally, as the bull market carries on, the magnitude of profit held by long term holders will grow. As this volume of unrealised profit grows, so too does the incentive for investors to sell and realise gains, releasing previously illiquid supply back into liquid circulation.
A typical sequence and SOPR interpretation during bull market rallies is as follows:
SOPR Reset (A): Following a price correction where sentiment is low, smart money accumulators step in to buy the dip and demand begins to exceed supply. SOPR is low (near or below 1) indicating profitable coins are dormant and most spending was by panic sellers.
Distribution into Strength (B): As price rallies higher the incentive for profitable coins to realise gains increases, leading to distribution. SOPR increases, often in successive peaks as more and more supply is spent back into circulation at higher profit margins.
Local/Macro Top Established (C): Eventually, newly distributed supply overwhelms incoming demand and a local or macro market top is established. SOPR is usually high indicating large volumes of profit were realised.
In general, newer and inexperienced market participants are more likely to have 'bought the top' and subsequently panic sell their coins at a loss during corrections. Conversely, long term holders and experienced investors are more likely to own coins purchased at cheaper levels and be willing to deploy capital to buy the dip.
Following from the sequence above, typical SOPR interpretation during corrections is as follows:
Local/Macro Top Established (C): Distributed supply establishes a local or macro market top.
Price Correction (D): Profitable coins are distributed into the correction, however often at a slowing rate. Long term investors are less likely to panic sell profitable coins at the bottom, whilst newer investors are more likely to realise net losses throughout the correction. This drives the SOPR into a downtrend and to lower values.
SOPR Reset (A): Finally, capitulation by new investors results in low SOPR values (near or below 1), whilst profitable coins remain dormant, indicating conviction to hold and/or accumulate by smart money investors.
Bull markets eventually establish a macro top which is followed by an extended period of bearish considerations. The overall trend and peak levels of the SOPR indicator can provide insight into the relative magnitude of profit that has been realised, and then supply may be beginning to overwhelm demand.
A typical sequence for identifying macro bull market tops using the SOPR indicator is as follows:
Progressively Higher SOPR peaks around local tops and corrections indicates the magnitude of profit being realised is increasing with each rally. This also means that larger volumes of demand inflow capital is required to absorb coins sold at increasingly higher prices.
Sustained periods of High SOPR indicates that spending of profitable coins is not slowing down during price dips and thus may suggest a growing sentiment that coins are becoming expensive.
Significantly Low SOPR values during a price correction may indicate a wider market panic as investors realise large losses. Deep SOPR dips below 1 indicate a large portion of the market are underwater and may become overhead supply leading to bearish market conditions.
In bearish markets, SOPR generally adheres to the same logic as bull markets, however in reverse. During bearish markets, general interest and demand for the asset wanes over time, and high volatility shake-out investors in both sell-offs and bear market rallies. Bear markets eventually establish a final price floor, where smart money buyers of last resort accumulate coins from holders capitulating at deep losses.
A typical sequence and SOPR interpretation during bear markets is as follows:
Macro Top (A): Macro market top is established as distributed supply eventually overwhelms demand. Both long and short term investors have distributed expensive coins at high realised profits leading to high SOPR values.
Local Capitulation (B): With the prevailing price trending lower, investors who are underwater capitulate and sell their coins at a loss during local lows. This leads to very low SOPR values, generally less than 1. These local capitulations also present opportunities for counter-trend traders to go long for bear market rallies.
Return to Profitability (C): When price rallies in a bear market, counter-trend traders or long term holders from the previous bull cycle return to profitability. As these coins are spent and sold, SOPR trends above 1 as profits are realised. As liquid supply from these spent coins again overwhelms the reduced bear market demand, market price may roll over, repeating phase B.
D, Sustained Capitulation: As the bear market reaches final capitulation, the maximum cross section of coin holders are at a net loss, and SOPR may persist below 1 for an extended period of time. This reflects a time where remaining profitable coins from the previous cycle are dormant, smart money begin accumulation and coins begin to move from a liquid to a relatively illiquid state, eventually creating a bullish supply squeeze.
Adjusted SOPR (aSOPR) filters out all UTXOs with a lifespan of less than an hour, providing a more accurate signal of actual sale/purchase transactions.
Short Term Holder SOPR (STH-SOPR) is SOPR that takes into account only spent outputs younger than 155 days and serves as an indicator to assess the behaviour of short-term investors.
Long Term Holder SOPR (LTH-SOPR) is SOPR that takes into account only spent outputs older than 155 days and serves as an indicator to assess the behaviour of long-term investors.
Renato Shirakashi (April 2019)
Renato Shirakashi - Introducing SOPR