NUPL ratio shows why long-term holders are better market top indicators

Entity-adjusted Bitcoin metrics provide a refined view of market sentiment by filtering out non-economic transactions. This is especially important when analyzing net unrealized profit and loss, such as the LTH-NUPL and STH-NUPL.

Non-entity-adjusted metrics can show skewed, unclear, or incorrect data because they include all transactions, even internal transfers within the same entity. These “in-house” transactions do not represent real economic activity but can artificially inflate or deflate the apparent level of unrealized profit or loss.

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For instance, large internal transfers might create the illusion of increased market activity or profit-taking, resulting in false interpretations of market tops or bottoms and ultimately causing inaccurate market predictions.

Entity-adjusted LTH-NUPL is an advanced metric that considers the actual economic activity of long-term holders by excluding these “in-house” transactions. This helps filter out activity from large institutional players that have become ubiquitous in the industry since the launch of spot Bitcoin ETFs.

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Historically, LTH-NUPL has been a reliable indicator of market sentiment, particularly in identifying market tops and bottoms. When the LTH-NUPL crosses above 0.7, it typically signals the beginning of a euphoria or greed phase in the market. This phase often correlates with market tops as long-term holders realize significant unrealized profits. Conversely, values between 0.5 and 0.7 indicate a belief or denial phase, depending on the price direction.

In 2024, LTH-NUPL has consistently remained above 0.5, suggesting a strong belief in the market’s upward trend among long-term holders. The metric briefly crossed into the greed phase from May 11 to May 13, showing a short-lived euphoria as Bitcoin reached its new all-time high.

Since July, LTH-NUPL has been trending upwards with significant volatility, reaching 0.70 on July 27 before slightly decreasing to 0.66 by July 31.

This upward trend in LTH-NUPL reflects the confidence of long-term holders in the ongoing market rally despite the occasional volatility. The metric’s resilience above 0.5 throughout the year shows the cohort’s sustained belief.

Entity-adjusted STH-NUPL, on the other hand, measures the net unrealized profit or loss of short-term holders, defined as entities holding Bitcoin for less than 155 days. Historically, STH-NUPL has been less effective in predicting market tops and bottoms than LTH-NUPL.

During Bitcoin’s bull run in December 2017, STH-NUPL briefly entered the belief/denial phase. However, it has mostly ranged between 0 and 0.24, indicating a state of hope or fear among short-term holders, with extreme volatility corresponding to price movements.

This year, STH-NUPL saw as much volatility as its LTH counterpart. The ratio entered the optimism category above 0.24 in March, only to drop into capitulation territory below 0 in late June and mid-July. This drop reflects the market’s severe correction and the ensuing panic among short-term holders.

Since July 7, STH-NUPL has been trending upwards, breaking above 0 and entering the hope category on July 15. As of July 31, the metric stands at 0.033, a slight decrease from a recent high of 0.081 on July 27. This upward trend indicates a gradual recovery in market sentiment among short-term holders, though it remains cautious and uncertain.

The disparity between LTH-NUPL and STH-NUPL highlights long-term and short-term holders’ contrasting behaviors and sentiments. LTH-NUPL’s higher and more stable values suggest a stronger and more consistent belief in the market’s long-term potential. Having held their assets through various market cycles, long-term holders exhibit greater resilience and confidence, contributing to the metric’s effectiveness in predicting market tops and bottoms.

In contrast, STH-NUPL’s lower values and higher volatility reflect the short-term holders’ sensitivity to market fluctuations. Short-term holders are more likely to react to immediate price movements, leading to frequent shifts between hope, fear, and capitulation phases. This reactive behavior makes STH-NUPL a less reliable indicator of long-term market trends.

LTH-NUPL’s ability to signal market tops is rooted in the behavior of long-term holders during euphoric phases. When LTH-NUPL exceeds 0.7, it indicates that long-term holders are sitting on substantial unrealized profits. Historically, this has led to profit-taking activities, subsequently triggering market corrections or tops.

The post NUPL ratio shows why long-term holders are better market top indicators appeared first on CryptoSlate.

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