SOPR Indicator: Tracking Bitcoin’s Price Lows and Highs

An on-chain indicator called the Spent Output Profit Ratio (SOPR) is utilized in the process of analyzing the cycles of the Bitcoin market.

The SOPR is an oscillator that helps identify moments when long-term investors sell Bitcoin at a loss or, on the other hand, fix positions at profitable prices.

The local lows and highs of the price of the first cryptocurrency can be determined with the help of this on-chain analysis tool. The developer of SOPR has the belief that the indicator is ahead of the curve.

How the SOPR Indicator is Used in Practice

Renato Shirakashi, a researcher, first suggested using the SOPR indicator in 2019, and he detailed the methodology behind it on his blog.

Shirakashi proposed, similarly to what was done with the MVRV on-chain indicator, that every bitcoin transaction indicates either buying or selling the initial cryptocurrency. However, the ratio of the purchase price to the sale price of bitcoin is what is used for the SOPR calculation rather than realized capitalization.

The purchase price of bitcoin is determined by SOPR based on the dollar value of the penultimate movement of coins, and the sale price of bitcoin is determined by the dollar equivalent of the most recent transaction.

SOPR makes use of data on the so-called unspent transaction outputs in order to arrive at these figures (Unspent Transaction Outputs, UTXO). The term “buy price” refers to an incoming transfer with a conditional size of 10 BTC, whereas the term “sell price” refers to the subsequent movement of these 10 BTC.

As an illustration, a UTXO of 10 BTC was generated as the purchase price when 1 Bitcoin was sold for a price of $20,000 USD. At a time when the price of one bitcoin is $40,000, transferring those 10 BTC would entail selling. As a result, the SOPR coefficient for these coins will be equal to 2, which is the ratio of the dollar value of two transactions involving certain BTC coins that went in opposite directions. Depending on the SOPR modification, the calculation may be performed for each individual UTXO or for the category that was chosen.

On top of the chart showing the price of bitcoin is some data representing SOPR in the shape of a curve. The price of bitcoin at which the SOPR ratio is greater than one is regarded as the point at which a break-even sell level has been reached.

Changes to the Bitcoin Supply and Demand Balance can be monitored in real time on websites like Decentrader and Glassnode. TradingView provides access to the chart generated by the most recent platform as well. Additionally, Glassnode has developed analogous versions of the indicator for the cryptocurrencies Ethereum and Litecoin.

The utilization of the SOPR indication

The SOPR indicator is one of the most straightforward methods available for studying the cycles of the Bitcoin market. The values of the oscillator can only be interpreted in a limited number of ways, including the following:

• If the value is 1, it indicates that investors are selling bitcoin at the point when they have broken even on their investment. The price of buying Bitcoins is the same as the price of selling them.
• A figure that is more than 1 shows that there is an increasing trend in price, and investors are selling bitcoin at a profit. This is because the price has been rising.
• A figure that is less than 1 indicates that prices are heading in the wrong direction, and investors are either holding losing positions or trying to cut their losses.

Alterations to the structure of the SOPR indication

A number of different variants of this oscillator that have more granularly adjustable parameters have been developed by analysts in addition to the standard form of the SOPR indicator. Take a look at the most well-known choices:

• The Spend to Output Profit Ratio After Adjustment (Adjusted SOPR, aSOPR). Received the highest distribution compared to the other variants of SOPR as a result of excluding UTXO with an age of less than an hour from the computations. By taking this method, the impact of certain speculators and arbitrage traders, who utilize Bitcoin as a means of transit in the process of exchanging or trading goods and services, is removed.
• Ratio of profitability of the wasted exit in comparison to short-term holders (Short Term Holder SOPR, STH-SOPR). STH-SOPR takes into consideration a UTXO’s age that is larger than one hour but less than 155 days, however its sensitivity is lower than that of aSOPR.
• The profitability ratio of the wasted exit in comparison to long-term holders of the asset (Long Term Holder SOPR, LTH-SOPR). A variation of the indicator developed specifically to investigate the medium- to long-term tendencies of bitcoin investors. Only UTXOs older than 155 days are taken into consideration for this calculation.

The Dangers Involved in Use of the SOPR Indication

When it comes to trading bitcoin, the ease of usage and widespread adoption of the indicator do not absolve users of the risks associated with employing SOPR. These tools, together with other on-chain indicators, are an experimental method for gauging the sentiment of the market.

Interpretation. The fundamental premise upon which SOPR is founded is that each and every bitcoin transaction represents either the acquisition or sale of an asset. This interpretation is not based on fact, and it could cause the trader to lose money. Nobody can know the exact price at which all bitcoins were acquired or sold or when that took place.

Trade. The SOPR indicator was developed to analyse and assess long-term trends as well as the behavior of investors in response to certain market conditions. The description of the functionality of the indicator does not mention it being possible to make trading decisions based on the SOPR values. The behavior of the Bitcoin price can be very different from the data on transactions.

Large BTC holders. The logic of the SOPR indicator can be “spoiled” and the data can be distorted by any significant investor or cryptocurrency exchange that possesses sufficient BTC. For instance, Microstrategy, which as of September 2021 owned nearly 130,000 BTC, will wish to modify the way the initial cryptocurrency is stored and move the cash to other BTC addresses. This is because the current storage method is insecure. Even though this is just a typical Bitcoin transaction, SOPR will be able to “see” movements of Bitcoin on the network, which will indicate that investors are locking up positions.