Bitcoin has generated a buzz among people since its launch, not only for the disruption it caused but also for the complexity of its market dynamics. Traders and investors are continuously looking for ways to overcome the market’s volatility, leading to the SOPR metric becoming a trending topic lately.
What is SOPR?
The Spent Output Profit Ratio is a fairly simple measure that compares the selling price of a bitcoin when it is realized to the buying price of a bitcoin when it was created.
In the crudest terms, it is the ratio of the selling price to the buying price of the coin.
SOPR = Selling Price/ Buying Price
Interpreting SOPR Values:
Since SOPR is a ratio, we can categorize its values into three cases, each providing valuable insights into the dynamics of the Bitcoin market:
Case 1:
SOPR > 1: This shows that there is a trend that people are generally gaining profit by selling bitcoins. When SOPR is greater than 1, this indicates that the selling price of Bitcoin surpasses the purchasing price, resulting in a positive profit margin for the sellers. Instances of this kind are frequently experienced during an upward-trending bull market, which is generally accompanied by heightened investor sentiment and continuous price advancement.
Case 2:
SOPR = 1: In this scenario, the SOPR is 1. Hence, this suggests that investors break even on their sales, neither winning nor losing. This kind of scenario can be observed both at a point of market equilibrium and at a market transition where the buying and selling pressures are in balance.
Case 3:
When the SOPR goes below 1, it means that holders are selling bitcoins at an average loss. A SOPR value below 1 signifies that the selling price of Bitcoin is lower than its buy price; therefore, sellers make a negative profit, if any. This can be seen during a bear market or correction, where the prices of many stocks and cryptocurrencies decline and investors become more worried about their investments.
Analyzing a SOPR Chart:
Now that we have a solid understanding of the fundamentals of SOPR, let us analyze a ten-year chart to understand practically how you can utilize this metric to predict or analyze the market.
In the above chart,
🔴 = Represents, a period where profits are decreasing while losses are increasing. This indicates a negative trend in profitability, possibly signalling financial challenges or diminishing returns. You can also notice that in this zone, SOPR is greater than 1.
🟢 = Indicates SOPR is less than 1. This is the phase of decreasing losses, suggesting a positive shift. This could signify improved financial performance or a reduction in expenditure.
🔵 = Represents SOPR = 0, a state where there are no profits or losses, indicating a neutral position in terms of financial gains or losses. It suggests a balance between income and expenses without any significant impact on overall profitability.
🟣 =This intermediary signals the relative stability of the price, as there is neither pronounced growth nor pronounced fall.
Predicting Market Movements with SOPR
By analyzing SOPR trends, you can gain insights into investor behavior and potential price movements:
- Bull Market Corrections: Resilience can be seen at the correction stage of SOPR. Newer, panic-selling investors could indeed trigger this downward trend, but seasoned holders might see this as a buying opportunity, thus preventing the value from dropping excessively.
- Market Tops: If SOPR distribution is higher than 1 for a long time, it can be a sign of a market peak. With more coins being bought up and sold for a profit, the chance of a supply decrease and an ensuing price peak will become more likely.
- Corrections: An inverted SOPR trend during a correction indicates coins that are being sold at a profit are coming into the market. This will weaken the incentive for mining and, as a result, eventually reach the bottom level.
- Capitulation and Potential Reversal: Very low SOPR (around or below 1) could signal dumping by newcomers. Nevertheless, if coins with good profitability are idle, it signals a possible buying opportunity as panic selling calms down.
Limitations of SOPR
However, despite being a valuable tool, limitations do exist:
- SOPR doesn’t take all transactions: The metric only accounts for on-chain transactions and ignores every other transaction happening off-exchange. It makes SOPR a bit biased.
- The timeframe: Depending on which time frame you choose, one can get a different interpretation.
- It’s not self-sufficient: Surely a powerful tool, it should not be used as the only instrument for measuring bitcoin’s bullishness or bearishness. Instead, consider using it with a combination of other technical and fundamental analyses. This way, one can achieve more precise results.
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