“Simple indicators with magical effects” – Spent Output Profit Ratio (SOPR)

In the use of on-chain data, we often encounter some indicators with relatively simple algorithms and functions. But simple functions do not mean simple effects. On the contrary, if we can deeply understand the logic behind the indicators and combine them with the adjustment of some parameters, we can produce unexpected results. For these basic data, I plan to try to write a series. Of course, this series will not be updated every day. If the market enters a relatively stable period (garbage room), I will take the time to improve the writing of the subsequent series. It also provides references from different angles for many friends who want to learn on-chain data.

In this issue, we will introduce the first one: Spent Output Profit Rate, or SOPR

SOPR is a very simple indicator. It is calculated as: sales price/payment price, which measures whether it is profitable when selling. When SOPR>1, it means that the owner of the spent output makes a profit when selling; when SOPR<1, it means that the owner of the spent output makes a loss when selling; if we remove all spent outputs with a lifespan of less than 1 hour (excluding noise interference), the data obtained is aSOPR.

🎈Use 1: Moving average

If we set the SMA parameter of aSOPR to 180D, it can be used as an effective auxiliary means to judge the transition between bull and bear cycles.

From the above figure, we can see that whenever aSOPR continues to fall from a high level and falls below 1 (the middle black line), it means that the market has completely entered the bear market stage (section A); whenever aSOPR continues to rise from a low level and breaks through 1, it means that the market has entered a bull market cycle (section B); there was only one exception in 2020, namely the 312 black swan event.

Since it is the 180D average, it is a large-scale cycle judgment. At this time, the indicators that appear are all post-signals. In other words, entering the A segment is definitely a bear market; as long as the indicator does not show a head, we should be cautious in participating in transactions. Consider "selling" as much as possible and reduce "buying". Entering the B segment is definitely a bull market, and we should actively consider "buying" and firmly "holding".

🎈Use 2: Divergence

Set the SMA parameter of aSOPR to 7D to see the changes in small-scale trends.

Since aSOPR is the profit rate when selling, it should normally rise with rising prices (the higher the price, the higher the profit when selling), and fall with falling prices (the lower the price, the lower the profit when selling). However, there must be something wrong when things are abnormal. Once a "divergence phenomenon" occurs, it is a warning signal that needs attention. Let's look at a few cases:

1. 2017.12 - 2017.12 Bull market peak stage

As shown in the above figure, on December 7, 2017, the price of BTC was $17,100, and aSOPR reached the "highest point A (green dot)" for the first time; on December 12, the price of BTC was $17,220, and aSOPR began to drop to the "second highest point B (yellow dot)"; on December 17, the price of BTC was $19,170, and aSOPR continued to drop to the "lowest point C (red dot)". We can see that at this stage, although the price of BTC is getting higher and higher, aSOPR is getting lower and lower, which is the divergence phenomenon.

The logic behind this phenomenon is: as prices rise, low-priced chips are traded in large quantities at high prices, thereby raising the average holding cost of the "last wave" of buyers; when these short-term holders sell at higher prices, the profits generated are greatly reduced, so the aSOPR becomes lower and lower.

As the saying goes, "A spent bow cannot pierce a thin silk cloth." This is often the characteristic of entering a stage top range.

2. 2020.12 - 2021.4 / 2021.7 - 2021.11 Bull market peak stage

Similar "divergence phenomenon" also appeared in the two bull market peak stages in April 2021 and November 2021.

As shown in the above figure, on January 8, 2021, the price of BTC was $40,770, and aSOPR reached the "highest point A"; on February 21, the price of BTC was $57,480, and aSOPR began to decline to the "second highest point B"; on April 13, the price of BTC was $63,600, and aSOPR dropped to the "lowest point C". At this time, the first top range of the cycle appeared.

With the occurrence of the May 19 incident, the market experienced a round of deep correction. It rose again during 2021.7 - 2021.11. The second top interval of this cycle was generated, and aSOPR also showed a "divergence phenomenon" again.

Have you noticed? Once there is a divergence in the bull market peaking phase, we can sell in batches at point B (yellow) and point C (red). Although it is not the absolute highest price to escape the peak, it is most likely at the top range (who can guarantee that they can sell at the top?).

Now that we understand the logic of aSOPR, let’s take a look at the current situation.

On March 11, 2024, the BTC price surged to $72,100, at which time aSOPR reached the "highest point A" for the first time. Then on March 28, the BTC price dropped to $70,740, and aSOPR began to drop to the "second highest point B". Then on April 24, the BTC price dropped to $64,260, and aSOPR dropped to the "lowest point C". That is to say, after the "highest point A" appeared, the BTC price became lower and lower, and the aSOPR also became lower and lower. This is not "divergence" but "synchronization". Therefore, the current bull market cycle does not have the characteristics of catching up.

After reading this, do you think that simple indicators can also be useful?