Importance of Entity-Adjusted Metrics
Entity-adjusted Bitcoin metrics refine market sentiment analysis by filtering out non-economic transactions. This approach is crucial for accurately assessing net unrealized profit and loss (NUPL), particularly for long-term holders (LTH) and short-term holders (STH).
The Problem with Non-Entity-Adjusted Metrics
Metrics that do not adjust for entities can display misleading data. They include all transactions, even those within the same entity, known as “in-house” transactions. These do not reflect real economic activity and can distort the apparent levels of unrealized profit or loss.
Large internal transfers may create false impressions of market activity or profit-taking. This can lead to incorrect interpretations of market peaks or troughs, resulting in inaccurate market predictions.
Advantages of Entity-Adjusted LTH-NUPL
Entity-adjusted LTH-NUPL excludes in-house transactions, focusing on actual economic activity of long-term holders. This metric accounts for the impact of large institutional players, especially since the introduction of spot Bitcoin ETFs.
LTH-NUPL has historically been a reliable indicator of market sentiment, identifying market tops and bottoms. When LTH-NUPL surpasses 0.7, it signals a phase of euphoria or greed, often correlating with market peaks. Values between 0.5 and 0.7 suggest a belief or denial phase, depending on the price direction.
Recent Trends in LTH-NUPL
In 2024, LTH-NUPL has stayed above 0.5, indicating a strong belief in an upward market trend among long-term holders. The metric briefly entered the greed phase from May 11 to May 13, coinciding with Bitcoin’s new all-time high.
Since July, LTH-NUPL has shown significant volatility, reaching 0.70 on July 27 before decreasing slightly to 0.66 by July 31.
Understanding Entity-Adjusted STH-NUPL
Entity-adjusted STH-NUPL measures the net unrealized profit or loss of short-term holders (those holding Bitcoin for less than 155 days). STH-NUPL has been less effective in predicting market tops and bottoms compared to LTH-NUPL.
During Bitcoin’s December 2017 bull run, STH-NUPL briefly entered the belief/denial phase but mostly ranged between 0 and 0.24, indicating hope or fear among short-term holders. This reflects their extreme sensitivity to price movements.
Recent Trends in STH-NUPL
In 2024, STH-NUPL has experienced volatility similar to its LTH counterpart. The ratio entered the optimism category in March but fell into capitulation below 0 in late June and mid-July, reflecting market corrections and short-term holder panic.
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, down from a recent high of 0.081 on July 27. This suggests a cautious and gradual recovery in market sentiment among short-term holders.
Contrasting LTH-NUPL and STH-NUPL
The disparity between LTH-NUPL and STH-NUPL highlights the different behaviors and sentiments of long-term and short-term holders. Higher and more stable LTH-NUPL values indicate stronger confidence in the market’s long-term potential. Long-term holders exhibit resilience and confidence, having weathered various market cycles.
Conversely, lower values and higher volatility in STH-NUPL reflect short-term holders’ sensitivity to market fluctuations. Their reactive behavior leads to frequent shifts between hope, fear, and capitulation phases, making STH-NUPL a less reliable indicator of long-term market trends.
Conclusion
LTH-NUPL’s effectiveness in signaling market tops stems from long-term holders’ behavior during euphoric phases. When LTH-NUPL exceeds 0.7, it shows significant unrealized profits among long-term holders, often leading to profit-taking and subsequent market corrections.
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