Understanding Top Indicators - MONDAY ON-CHAIN


Hey DEFI TIMES community,

The bull market is on fire! Thousands of new people are entering the space on a daily basis. Bitcoin is hitting a new all-time high regularly.

We all know that we should enjoy the rally while it lasts; however, we are all aware that the party will stop at some point - and missing that point will be painful. If you have been through 2018-2019, you know what I’m talking about.

That’s why most people aim to sell large amounts of their crypto - before the bear market!

But timing the top is extremely difficult, close to impossible! Nevertheless, you might want to keep an eye on possible top indicators to get a feeling of the market sentiment. 

Even though these top indicators have been working in 2017 they might not work again in 2021. So, always take them with a grain of salt. You should never base your decisions only on these indicators. They can be a very valuable part of your decision making though.

Today, I want to give you a broad overview of the most important top indicators that I’m actively using.

Let’s dive into it!


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Understanding Bull Cycle Top Indicators

Percent of Bitcoin supply in profit (PBSP)

One of the most important top indicators is pretty straightforward: The percent of Bitcoin supply in profit (PBSP). 

Now, what does that mean? The chart calculates the percentage of circulating bitcoin whose price at the time they last moved was lower than the present price. As you can see, currently 97% of all coins are in profit. 

However, you have to consider that such numbers are pretty common in a bull market - especially when you consider that Bitcoin is close to all-time highs. When we hit another all-time high, nobody can be at a loss (by definition). 

So you should take the “Percent of Supply in Profit” indicator with a grain of salt because you cannot use it to determine a possible cycle top. The PBSP only lets you determine possible local topics!

So if you are an active trader, the PBSP might a good metric to consider!

Net Unrealized Profit/Loss (NUPL)

The Net Unrealized Profit/Loss (NUPL) is the difference between Relative Unrealized Profit and Relative Unrealized Loss. You can calculate it by subtracting the realized market cap from the market cap, and divide the result by the market cap.

The NUPL is probably the most common top indicator of previous Bitcoin bull markets. It’s pretty simple: When the chart turns blue, the top is near! We see four stages in the NUPL chart:

  • Red - Capitulation

  • Orange - Hope

  • Yellow - Optimism

  • Green - Belief

  • Blue - Euphoria

The chart indicates that we are in a belief phase right now. Several times in this bull market, we were extremely close to entering the euphoria stage - but luckily we were rejected.

I’m keeping a close eye on this metric and will keep you updated once we enter the euphoria phase, but be aware that this metric might not hold in 2021.

Reserve Risk

The Reserve Risk indicator measures the confidence of long-term Bitcoin holders at any given price.

The green area means that confidence is high and the price is low. The red area indicates the other way around.

The red area has historically indicated a potential market top. While we are currently far away from such a scenario, Reserve Risk might be a great metric to consider in your analysis!

Stock-to-Flow Ratio (S2F)

The Stock-to-Flow Ratio is probably the best-known top indicator out there. It was invented by the pseudonymous Twitter user Plan B. He later outed himself as a Dutch person working in traditional finance!

The S2F model has been shockingly accurate ever since. It’s based on the assumption that scarcity creates value. You calculate the S2F ratio by dividing the supply of a commodity by the newly issued (minted) supply. That means: The less supply is issued, the higher the S2F ratio, the higher the worth of a particular commodity.

Now, Bitcoin’s issuance is cut in half every four years, which also means that Bitcoin’s value as a network increases - and that’s how the S2F model justifies Bitcoin’s price.

S2F predicts a Bitcoin price of $100,000 in June 2021. According to the model, this would also mark the top of this bull cycle. 

If you believe in the accuracy of the S2F model, a price of $100,000 might be a good price to take profits; however, don’t expect this model to predict the exact top. In previous bull markets, we shot way above its price targets! Let’s see if it holds true this time!

Puell Multiple

The Puell Multiple was created by David Puell. It is calculated by dividing the daily issuance value of Bitcoin by the 365-day moving average of the daily issuance value.

When the Multiple crosses a certain threshold value (In this graph: threshold = 4), we could see a top scenario. 

In plain words, a Puell Multiple of four means that the daily issuance Bitcoin value is four times higher than its 365-day moving average.

Conclusion

You should take all of the above top indicators with a grain of salt. They should only be part of your decision-making. Even though they have historically been correct, they could be wrong in this bull cycle. So, always consider other metrics in your decision-making.

However, keeping a close eye on all of them can give your a good feeling of where we are in this market cycle.

In my opinion, we still have a way to go in this bull market. But nobody knows for sure; we can only collect data and form our opinions based on the most likely outcome. 

On-chain metrics are the best kinds of data we have! But nothing is for sure in crypto!


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All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.

Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.