Why NUPL Isn't Accurate - MONDAY ON-CHAIN
+Hey DEFI TIMES community,
The NUPL chart has been considered an appropriate way to determine the top of any crypto bull market.
The chart tracks the difference between Relative Unrealized Profit and Relative Unrealized Loss. As you can see, at any given moment, the chart displays five different colors: red, orange, yellow, green, and blue.
Red = Capitulation
Orange = Fear
Yellow = Optimism
Green = Belief
Blue = Greed
The yellow to green colors have historically indicated a bull market, while orange or red colors have marked brutal bear markets. As you can see, we are in a high green area, which indicates that we are about to enter the euphoria phase.
History suggests that shortly after entering euphoria, we will see a major correction of down to -70%. Of course, many people are counting on these indicators to determine this cycle's top accurately. That's why some people are currently extraordinarily cautious and instead prefer to sit on the sidelines.
Today, I want to explain why the NUPL chart will not accurately predict this cycle's top. Instead, I believe that we are far away from Bitcoin's peak in 2021, even though the NUPL chart tells otherwise.
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Institutions vs. Retail
Today, the market conditions are different from 2017. The 2017 hype was all about ICOs and speculation; Retail drove the prices up and down.
Now, the market environment looks differently. The majority of the volume comes from institutional investors. Take a look at the quarterly Coinbase volume. Only 35% of the Q4 2020 volume comes from retailers, which means that 65% is institutional right now.
We see that volume drastically increases while the percentage of retail is going down. During the peak of 2017, the institutional rate was as high as 80%!
I expect the trend to continue. Retailers do not drive this bull market; companies and institutions push the market now.
Grayscale, MicroStrategy, Tesla, and soon Apple?
The Grayscale Trust is one of the biggest Bitcoin trusts in the world. Currently, they hold over 650,000 BTC.
Their BTC holdings seem only to go up, no bitcoin is leaving their trust. Grayscale has contributed significantly to the Bitcoin boom because it has bought over 100,000 BTC since early December!
In addition, MicroStrategy buys Bitcoin on a regular basis and even declared that one of their business models was buying and holding bitcoin. Michael Saylor, CEO of MicroStrategy, has started a new trend of companies putting bitcoin on their balance sheet. Rumors suggest that he even convinced Elon Musk to buy Bitcoin in the first place.
Shortly after the tweet, Tesla bought $1.5 billion worth of bitcoin.
The trend is clear: Companies are the main drivers of the Bitcoin economy. Elon Musk and Tesla have legitimized our space. We can expect many more companies to follow very soon. It doesn't matter which company will be next - whether it's Apple, Facebook, or any other tech corporation.
In the end, every single company in the world will have Bitcoin on its balance sheet. We are only at the very beginning of the crypto revolution.
Recently, the first Bitcoin ETF in North America launched! The Bitcoin ETF has downright exploded during the last couple of days! Since its inception, it has captured more than 11,000 bitcoin.
Just look at the recent growth: It's a Bitcoin black hole - just like Grayscale. And there's one thing to consider: The ETF is located in Canada, not in the US. Imagine how high those numbers can get when the first ETF launches in the United States.
In my opinion, the probability of finally being able to launch a Bitcoin ETF in the US has never been higher than in 2021. The more time goes by, and the more often we try, the closer we move to a Bitcoin ETF being approved in the US.
There is currently enough institutional demand. This time, we have earned it!
By the way, there are two Ether ETFs in the works right now - also in Canada. Let's see what they could do with the ETH price in the coming months!
The macro-environment has changed
It's not 2017 anymore. The macro-environment is entirely different from what it used to be.
2017 → 80% retailer-volume
2021 → 35% retailer-volume
Four years can make a big difference. This cycle is undoubtedly institutionally driven. Why would anyone believe that 2017 top indicators are still meaningful today?
The NUPL chart is an excellent metric to keep in mind. It shows the market sentiment.
- Are we overly bullish?
- Will people take profit in the short run?
- Is it a good time to take profits off the table?
However, the NUPL chart will not provide clear signs of whether we have reached a potential market top. Why? Institutional investors act differently from what we are used to in a retail environment. They won't sell as quickly as retailers do.
To understand why institutional investors have stronger hands, you have to imagine the portfolio allocation of retail investors vs. institutional investors.
A typical retail investor could have the following portfolio:
- 70% Bitcoin
- 20% ETF
- 10% Cash
In contrast, professional investors cannot invest more than 5% in a highly speculative asset like Bitcoin - except Michael Saylor, of course ;)
Let's assume you have invested 1% of your money in Bitcoin, and your net worth is $100,000.
+ $99,000 other assets
Suddenly, Bitcoin goes up by 5x. Now, your portfolio looks like this:
+ $99,000 other assets
Even though Bitcoin has gone 5x, your portfolio is only up by 4% - And this is precisely the situation institutional investors are facing.
They don't care if Bitcoin increases by 500% or dumps by -40%. It's a small portion of their portfolio anyway.
If you take away one thing, remember that institutional investors drive the market, and they won't sell that quickly.
The NUPL chart is a great metric, but it's not that accurate anymore, especially in an institutional environment; However, I still recommend keeping an eye on this chart. NUPL can always be a handy tool to determine local tops and overheated markets.
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.