Net Unrealized Profit/Loss Understanding and Strategies

Net Unrealized Profit/Loss (NUPL) is a popular on-chain metric used to gauge the potential profit or loss of investors holding Bitcoin based on the price at which they acquired their coins.

As a derivative of the Unspent Transaction Output (UTXO) data on the Bitcoin blockchain, NUPL provides valuable insights into the sentiment and behavior of long-term holders and can serve as a significant indicator for market trends. We will delve into the concept of NUPL, its calculation, interpretation, and how it can be used to make informed investment decisions.

Understanding NUPL

NUPL measures the difference between the market value of Bitcoin holdings (unspent outputs) and the cost basis (purchase price) of those holdings. In simpler terms, it tells us whether long-term Bitcoin holders are sitting on unrealized profits or losses based on the current market price. This metric is particularly relevant for investors who have been holding Bitcoin for an extended period, as it provides insights into the overall profitability of their investment.

Calculating NUPL

To calculate NUPL, we follow these steps:

Determine the Cost Basis: For each unspent Bitcoin transaction output (UTXO), we need to know the price at which it was acquired. This information can be obtained by analyzing the transaction history associated with each UTXO.

Calculate the Market Value: The market value of each UTXO is determined by multiplying the number of Bitcoins in the output by the current market price of Bitcoin.

Calculate Unrealized Profit/Loss: The NUPL for a specific time period is the sum of all unrealized profits and losses of individual UTXOs, expressed as a percentage of the total cost basis.

Interpreting NUPL

NUPL Above 0%: When NUPL is above 0%, it indicates that the average investor holding Bitcoin is in a state of profit. In other words, the current market price of Bitcoin is higher than the average price at which these investors acquired their coins.

NUPL Below 0%: Conversely, when NUPL is below 0%, it suggests that the average investor is holding Bitcoin at a loss. The current market price is lower than the average price at which they acquired their coins.

NUPL at 0%: NUPL at exactly 0% indicates that the average investor’s holdings are at a breakeven point. The current market price equals the average acquisition price.

NUPL and Market Trends

Market Tops and Bottoms: NUPL has been found to be a valuable indicator for identifying market tops and bottoms. Historically, when NUPL reaches high positive values (above 0.8), it often signals a potential market top, and when it hits low negative values (below -0.8), it may indicate a market bottom.

Investor Sentiment: NUPL can provide insights into the sentiment of long-term investors. A high NUPL suggests strong confidence among long-term holders, while a low NUPL might indicate fear or uncertainty.

Bullish or Bearish Bias: Traders and analysts often use NUPL as a tool to assess the overall bullish or bearish bias of the market. A positive NUPL might suggest a bullish trend, while a negative NUPL could indicate a bearish trend.

Strategies Using NUPL

NUPL-Based Market Timing: Some traders use NUPL as a timing indicator to enter or exit the market. Buying when NUPL is below a certain threshold (e.g., -0.8) and selling when NUPL is above a specific level (e.g., 0.8) can be part of a trading strategy.

Confirming Trend Reversals: NUPL can be used in conjunction with other technical indicators to confirm potential trend reversals. For example, if other indicators signal a possible trend reversal and NUPL is in alignment, it can strengthen the conviction of a trader’s decision.

Risk Management: NUPL can also be used in risk management. For instance, if NUPL reaches high positive values and suggests a potential market top, investors may consider reducing their exposure to Bitcoin to protect profits.

NUPL Bitcoin

Net Unrealized Profit and Loss (NUPL) for bitcoin is the difference between market cap and realized cap divided by market cap.

Assuming that the latest coin movement is the result of a purchase, NUPL indicates the total amount of profit/loss in all the coins represented as a ratio.

It could be interpreted as the ratio of investors who are in profit.

In the following chart, we can observe the situation in real time for bitcoin, on the NUPL

Therefore it is important to analyze your situation, and more so for those people who want to enter bitcoin for the first time.

Remember that as I always explain, it is not a purchase recommendation and each person must carry out their own research (DYOR) or consult with a financial advisor they trust.

Good Monday everyone and I wish you a good week.

Jesús Sánchez-Bermejo