The SOPR (Spent Output Profit Ratio) indicator acts as a proxy for overall market profit and loss. It represents the profit ratio of coins moved on-chain, measured through the variation between purchase price and sale price.
A SOPR value of greater than 1 implies that people are, on average, selling at a profit (because the price sold is greater than the price paid). Likewise when SOPR is below 1, this implies that people would be selling at a loss.
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 can be used to identify interesting patterns and predict price movements during bull and bear markets.
In times of bullish sentiment, the market quickly corrects prices which drive the SOPR value below 1 (i.e. prices which mean people are selling at a loss). This is likely due to increased confidence that prices will continue to rise during a bull market, so it would be irrational to sell at a loss when gains are imminent.
Conversely, in bear markets, the market quickly corrects prices which push the SOPR value above 1 (i.e. prices at which profits are being made). This is likely due to fear that prices will continue going down, so selling at break-even point is seen as a good result.
SOPR can be used not only to predict rapid price movements in both bull and bear markets, but also to determine whether the market as a whole is bullish or bearish, and to indicate imminent trend reversals.
In general, the wisdom can be distilled to: SOPR doesn't stay above 1 for long in a bear market, and doesn't stay below 1 for long in a bull market.
In order to predict trend reversals, we can look at the relationship between SOPR and price movements; if SOPR breaks above 1 without triggering a sell-off, this may indicate a shift towards more bullish sentiment. Conversely, if SOPR is generally settled above 1 and then dips below 1 without triggering a price increase, this may indicate a trend reversal to a more bearish market.
Many UTXOs created do not represent a sale or purchase of a given coin (these include relay transactions and change - for more details learn more about how UTXOs work). However, the original SOPR metric treats these as sale/purchase transactions between parties, adding noise to the metric. As such, 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.
Renato Shirakashi - Introducing SOPR