How to Spot Entry Points in the Crypto Market Using On-Chain Tools

Bitcoin represents a major step forward in the drive toward transparency of financial data. Thanks to the openness of all on-chain transactions recorded on the blockchain, crypto investors now have a whole set of new metrics for fundamental analysis.

Coin Metrics researchers described on-chain tools and the most notable indicators.

Bitcoin has created a new level of transparency and auditability, previously unknown to the world of financial and economic data. Because all transactions are recorded in a public ledger, we can analyse on-chain activity in considerable detail.

By creating metrics and analytical methods using data directly from the Bitcoin blockchain, one can obtain valuable insights into investor behavior that are impossible with traditional assets.

There are numerous on-chain metrics that can be used to identify Bitcoin’s market cycles and signals of approaching price local highs or lows.

In this report we examine five of the most reliable and time-tested on-chain indicators. For each, we explain the relevant parameters and the underlying [simple_tooltip content=’Mental models rooted in prior experience, ideas, strategies, ways of understanding that exist in the mind of a person and guide his actions.’]mentally models[/simple_tooltip], as well as interpretations of indicator changes.

Market Cap versus Realized Cap

The market capitalization to realized capitalization ratio (Market Cap versus Realized Cap, MVRV) has historically been one of the most reliable on-chain indicators for identifying Bitcoin’s price highs and lows.

In our calculation of MVRV we use free float market capitalization, based on the total on-chain supply of coins.

To understand MVRV, it helps to grasp three key metrics:

• market capitalization;
• free float market capitalization;
• realized capitalization.

Market Cap (often referred to as “market value”) is the most widely used metric for determining Bitcoin’s overall value. It is also frequently used to compare the first cryptocurrency with other crypto assets.

The term is inherited from traditional finance, where the metric is calculated by multiplying the number of all shares outstanding by the current market value of the securities.

In the realm of cryptocurrencies this corresponds to the product of the asset’s total supply and its market price. The metric often fluctuates significantly as prices move and investor sentiment shifts.

Free-float Market Cap. In the 1990s, traditional markets began to recognise the importance of the “free float” metric, which accounts for the tradable share of a company’s equity. The crypto space faced a similar problem, since a substantial portion of Bitcoin may be permanently lost.

Moreover, some Bitcoins have sat idle for a long time, outside of circulation. The best-known examples are coins that could belong to Satoshi Nakamoto. Thus, market capitalization can substantially distort the liquidity underlying crypto assets and many other metrics.

To account for these shortcomings, we introduced free-float market capitalization to more accurately reflect the available supply of crypto assets. This metric excludes demonstrably burned or lost coins, as well as crypto assets that have remained dormant in wallets for at least five years.

Instead of capitalization as the input parameter, the indicator uses free-float circulating supply multiplied by the current market price.

Realized Capitalization. Introduced in 2018, this metric shows a longer-term, lower-volatility measure of Bitcoin’s value. When calculating realized capitalization, the price of each Bitcoin at the time of its last on-chain transaction is taken into account.

Realized capitalization can also be viewed as an approximate measure of the aggregated cost basis, which is sometimes described as the “stored value.” The cost basis (the original cost of the asset or investment used to determine capital gains) is embedded in tooltips as described.

In reality, many Bitcoin transactions are not trading transactions, so realized capitalization does not represent a direct measure of the total stored value in Bitcoins. Nevertheless, the indicator provides a general sense of long-term investor sentiment.

Interpreting MVRV. Historically high MVRV signals that Bitcoin’s price is near a local top. A low ratio indicates the price is not far from a local bottom.

A few times MVRV has fallen below 1 — historically this has been one of the best periods to buy Bitcoin. An uptick indicates improving holder sentiment; a decline signals the opposite trend.

Spent Output Profit Ratio, SOPR

SOPR provides another lens on Bitcoin’s market cycles. The indicator, introduced by Renato Shirakashi in 2019, can be used to identify periods when long-term holders realise profits or sell the digital gold at a loss.

Unspent Transaction Outputs, UTXO. Although we treat each Bitcoin as a separate unit, coins are in fact composed of discrete chunks known as unspent transaction outputs. UTXOs differ: some are tiny fractions of a Bitcoin, others are relatively large chunks. Each on-chain movement uses inputs and creates new outputs.

To illustrate, suppose you own an address with 10 BTC. These Bitcoins likely consist of several smaller pieces. For example, you might have received 5 BTC in one transaction, 3.5 BTC in another, and 1.5 BTC in a third. Even though your wallet holds 10 BTC, it is represented as three separate parts.

If you sent 9 BTC to a friend, these three parts would be combined as inputs to the transaction. The transaction output would be 9 BTC sent to your friend’s address. They would constitute an unspent output until the recipient spends them on another address. A different UTXO would be created for the remaining 1 BTC returned to the sender.

Had the 10 BTC originally been represented on the blockchain as three UTXOs of 5 BTC, 3.5 BTC, and 1.5 BTC, they would now appear as two UTXOs of 9 BTC and 1 BTC.

Interpreting SOPR. The metric expresses the ratio of Bitcoin’s price at the time a UTXO is spent to the market price at the time that UTXO was created. In essence, it is a comparison of the selling price to the buying price.

Each time a transaction occurs, we can compare the price at which the UTXO was created with the cost at which the corresponding outputs were spent. The ratio of these two figures provides a simple way to assess whether coins were sold at a profit or a loss.

For example, if the price of Bitcoin at UTXO creation was $5,000 and was $10,000 at the time of spending the output, the ratio would be 2. Or conversely: if the price was $10,000 at UTXO creation and $5,000 at spending, the ratio would be 0.5. In this context, a ratio above 1 indicates profit-taking; below 1 indicates losses.

SOPR can be calculated for individual UTXOs as well as for groups of unspent transaction outputs. The chart above shows the daily SOPR for all UTXOs. The metric tends to be quite volatile, so the chart is smoothed with a seven-day moving average.

As with MVRV, it is important to remember that SOPR is an approximate measure. The indicator is not a precise gauge of profitability. Not every Bitcoin transaction is a trade, and therefore not every one represents a sale at a profit or a loss.

Theoretically, a high SOPR value signals that a large portion of Bitcoin is being sold at a profit. Historically high values have foreshadowed price tops and a pullback. Conversely, low values may indicate that holders are selling at a loss, historically a good time to buy.

SOPR at 1 has a special significance, signaling a turning point — a shift from profit-taking to selling at a loss.

Relative Unrealized Profit

This metric also uses UTXOs to provide information on the total unrealized profit of all Bitcoin holders relative to Bitcoin’s market value.

Relative Unrealized Profit (Bitcoin Relative Unrealized Profit) is calculated by dividing Bitcoin’s dollar-denominated “gross unrealized profit” of UTXOs by the cryptocurrency’s market capitalization. This metric is an adapted version of the metric proposed by Adamant Capital researchers, calculated using market and realized capitalization indicators.

Gross Unrealized UTXO Profit. In Bitcoin terms, gross unrealized profit is the total profit that could be realized if every market participant sold coins at the current market price.

Suppose the total supply of digital gold is 18 million BTC, and each coin last purchased for $1,000. If the current price is $10,000, the gross unrealized profit would stand at $162 billion ($180 billion—$18 billion).

In reality, Bitcoins are bought at different prices. Therefore the indicator uses a metric known as “gross unrealized UTXO profit.” Like SOPR, unrealized profit for Bitcoin is calculated using unspent transaction outputs.

The UTXOs are priced at the value at which they were created. If an output is created at a price of $5,000, the corresponding UTXO is assigned $5,000.

Then each UTXO price is subtracted from the current value of the cryptocurrency to determine the profit or loss at which it would be sold under current market conditions. All “profitable” outputs are summed to give gross unrealized UTXO profit.

Finally, dividing the figure by the market capitalization yields the share of Bitcoin’s value represented by potential profit.

Of course, some Bitcoins are purchased above the market price, resulting in potential losses for investors. However, gross unrealized profit excludes “loss-making” UTXOs, focusing only on potential gains.

Interpreting Relative Unrealized Profit. High values historically signal approaching local maxima and price corrections. Low values suggest the market has reached a bottom.

A Relative Unrealized Profit below 40% typically indicates favorable conditions to buy the asset. Historically, Bitcoin’s price has hit cycle lows around 30%.

This indicator can also be viewed as a kind of Fear and Greed index. High Relative Unrealized Profit suggests predominance of ‘greed’ and potential overheating; low values suggest ‘fear’ and possible undervaluation.

Low values of the indicator, on the other hand, can signal investor fear and potential undervaluation.

Market Cap to Thermocap

This metric is calculated by dividing Bitcoin’s market capitalization by the all-time revenue generated by miners (Thermocap).

Miner Revenue. Each time a miner mines a block, they are rewarded with newly issued Bitcoins. Miners also receive fees from all transactions included in the block. The block reward and fee income constitute miner revenues. The total revenue from mining Bitcoin (Thermocap) is often referred to as Thermocap.

Mining Bitcoin is, in many ways, akin to the resource sector, where higher profits accrue to enterprises whose processes are efficient and well-organised. The industry is also characterised by intense competition and slim margins for smaller players.

Miners incur costs, including mining hardware, electricity, and rent. To cover those costs and stay in business, these participants must continually sell a portion of their revenue.

The aggregate revenue from mining Bitcoin (Thermocap) can be viewed as an approximate figure for the funds miners spend to secure the Bitcoin network.

Market Cap to Thermocap can be viewed as a gauge of Bitcoin’s current market value relative to the total sum spent to secure the network.

Interpreting Market Cap to Thermocap. A high market capitalization relative to the total spent to secure the network usually signals that Bitcoin is overvalued. As with realized capitalization, Thermocap values move slowly and are far less volatile than market capitalization.

Historically, high Market Cap to Thermocap readings have suggested Bitcoin is at the peak of its cycle. Conversely, low readings indicate a relatively favorable buying environment.

HODL-Waves

The distribution of Bitcoin across groups, known as HODL-waves, classifies the supply by the time since the last on-chain movement of coins.

Introduced in 2018, the indicator provides a broad view of how the supply has changed over long stretches of time and can serve as a signal of market cycles.

Active Supply. Each Bitcoin in the circulating supply can be classified by the age since the last on-chain activity within a transaction.

For example, some Bitcoins moved from one address to another in the last seven days, while others have remained dormant in a wallet for more than five years.

As a next step, the supply can be grouped by the latest on-chain activity. For example, focus on Bitcoins that moved in the last 1–7 days, 7–30 days, 30–90 days, and so on.

Such groups of active supply form the basis of HODL-waves. Dividing the number of Bitcoins in each group by the current supply yields the share of supply that moved within the respective period.

This approach provides a clear view of trends in Bitcoin’s supply dynamics. It also reveals the share of coins held by long-term holders across different time horizons.

Interpreting HODL-Waves. In the chart above, red bars show the share of the supply that has remained in motion for relatively recent periods — from one day up to 90–180 days.

Historically, the share of “young” coins peaked during market-cycle tops. For example, in December 2017 more than 32% of Bitcoin’s total supply showed activity within 90 days of prices approaching $20,000. By August 2018, this figure had fallen to 15%.

At the top of the chart is the portion of supply that has not moved over extended periods. These long-dated ranges tend to widen as a market cycle bottoms approach, and narrow at price peaks as long-term investors start selling.

The dark green band at the very top represents coins that have never moved on-chain, except for the transaction in which they were issued. They account for about 12% of Bitcoin’s total supply.

Against the 2013 and 2017 rallies, the share of short-term supply (inactive for less than 180 days) reached 50%, coinciding with market-cycle tops. Periods when the long-term supply reached 60% have historically represented favorable buying times.

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