Using NUPL to Analyze Bitcoin Market Cycles—Do Realized Profits Suggest BTC Is Approaching Its Top?
NUPL And the Bitcoin Market Cycle | Credit: Hameem Sarwar
Key Takeaways
- The Net Unrealized Profit Loss Indicator (NUPL) shows strong belief.
- The indicator reached euphoria levels in the previous market cycles.
- What does NUPL say about the state of the current Bitcoin (BTC) market cycle?
Previous Bitcoin market cycles have often shared common features. A memorable one is that realized profits outweigh realized losses by nearly 70% near market cycle tops. This was apparent in both 2017 and 2021 and visualized by the NUPL indicator.
With these points in mind, what traits are visible in the current bull run, and how can we use the NUPL indicator to forecast when the Bitcoin market cycle will end?
What is the Net Unrealized Profit/Loss Indicator?
NUPL is an on-chain metric that indicates whether the market experiences profit or loss. It is calculated by the ratio of relative unrealized profits to relative unrealized losses.
A negative NUPL value shows a market in loss, while a positive one is a sign of market profitability.
A state of loss means that the difference in the value of all BTC bought at a higher price than the current one is greater than those that were bought at a lower price. Hence, unrealized losses exceed unrealized profits.
A simpler explanation would be that the indicator answers the question of how much of Bitcoin’s circulating supply it at a profit or loss at any given time.
Historically, market cycle tops have occurred at or above 0.75 (blue), while bottoms are formed below 0 (red). This indicator helps assess market sentiment, giving insights into potential overbought or oversold conditions in the market.
The NUPL chart features five horizontal bands, corresponding to different market psychology stages: red indicates capitulation while blue euphoria and greed.
The middle bends can be seen as both bullish and bearish depending if they are crossed during a bull or a bear market.
The NUPL can be split into the long-term holder (LTH) and short-term holder (STH) NUPL, by taking the threshold of the UTXO lifespan of above and below 155 days.
NUPL in the Previous Market Cycle
To better understand the NUPL indicator , we look at the two previous Bitcoin market cycle charts.
In both the January 2015 and December 2018 bottoms, the NUPL fell into negative territory (red) with values of -0.70 and -0.42, respectively. A value of -0.42 means that Bitcoin is 42% lower than its realized price, meaning the time it last moved.
The rest of the market cycle did not share similar traits, especially during periods of increases. After the December 2o18 low, the BTC price quickly rallied from $3,000 to above $10,000, taking the NUPL indicator above 0.50 and into the belief (green) stage.
Then, it briefly fell into negative territory during the March 2020 crash before starting its bullish cycle.
To the contrary, the NUPL indicator did not return to negative territory in the crypto market cycle beginning in 2015.
Another different characteristic is that the NUPL indicator reached the Euphoria category (blue) in the January 2017 all-time high, while it did not do so in 2020, rather topping at 0.748.
A common feature in both market cycles is that the NUPL fell below 50 into the anxiety stage (yellow), returned above 50 and then fell again, confirming the bearish trend.
Predicting the Current Bitcoin Market Cycle
In the current Bitcoin market cycle, the NUPL declined to -0.28 during the market bottom and has increased since. The NUPL subsequently rose to a high of 0.64 into the belief stage (green), then briefly fell below 50 before recovering. The high is lower than both previous ones.
So far, the indicator movement has been similar to that after the 2020 bottom. The NUPL increased above 0.25 and 0.25 without much issue, but briefly fell below 50 (yellow) and then moved above it again.
If previous history is followed, the NUPL indicator will reach a high above 70 and then decline below 50 to confirm the bearish trend. So, the indicator suggests that the crypto market cycle top is not in yet, but it is very close, and likely to be reached in the next high.
The LTH-NUPL supports this assessment. It climbed well into the Euphoria stage (blue) above 0.82 in both previous market cycles, while it has yet to even cross 0.75 in the current one.
According to the LTH-NUPL, the market cycle top is expected within 3 to 6 months, given that the indicator crosses above 0.75 soon.
In 2017, the Bitcoin market cycle top was reached six months after the indicator first crossed (blue arrow), while it was reached three months after in 2021 (black arrow).
No Euphoria in NUPL, Year-End Surge Likely
The NUPL indicator does not yet show readings similar to those surrounding the previous Bitcoin market cycle tops in 2017 and 2021. The lack of extreme readings is indicative of more potential for growth. We may see another upward movement before the end of the year, which could mark the Bitcoin market cycle top.
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