LEARN NET UNREALIZED PROFIT/LOSS (NUPL) INDEX IN 3 MINUTES——BLOCKCHAIN 101

Today’s lesson is once again dedicated to our exclusive crypto market indicator training session. This is also our fourth class on crypto-specific indicators. If anyone has a particular indicator they would like us to cover, feel free to leave a comment below.

Now, back to our topic. Today’s technical indicator is “Net Unrealized Profit/Loss,” commonly referred to as the NUPL indicator. In the following explanation, we will use the CVDD indicator as a reference for our discussion.

Net Unrealized Profit/Loss (NUPL) is a popular on-chain metric used to gauge the overall sentiment and profitability of Bitcoin and other cryptocurrencies. By analyzing the ratio of unrealized profits and losses across all UTXOs (unspent transaction outputs), NUPL provides insights into whether the market is in a state of euphoria, hope, fear, or capitulation.

Understanding NUPL Calculation

NUPL is calculated as follows: NUPL=（MarketCap-RealizedCap）/MarketCap

• Market Cap: The total value of all circulating bitcoins at the current market price.
• Realized Cap: The aggregate value of all UTXOs, each valued at the price when it was last moved.
• Unrealized Profit: When the current price is higher than the purchase price.
• Unrealized Loss: When the current price is lower than the purchase price.

A positive NUPL value indicates that the market is in a net unrealized profit state, while a negative NUPL value signals unrealized losses dominating the market.

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NUPL Interpretation: Market Sentiment Zones

NUPL can be divided into different sentiment zones, each representing a specific market phase:

1. Capitulation (NUPL < 0) – The market is at a loss, often indicating a bottom.
2. Hope/Fear (0 < NUPL < 0.25) – Investors are uncertain, typically seen in early bull markets.
3. Optimism/Denial (0.25 < NUPL < 0.5) – A growing bull market as confidence builds.
4. Greed (0.5 < NUPL < 0.75) – Strong uptrend with rising profit-taking behavior.
5. Euphoria (NUPL > 0.75) – Extreme optimism, often marking a market top.

Historical Analysis of NUPL Cycles

Historically, NUPL has been an excellent indicator for identifying Bitcoin’s market cycles:

• 2011 Peak: NUPL entered the euphoria zone above 0.75 before a major crash.
• 2013 & 2017 Bull Markets: Bitcoin peaked when NUPL exceeded 0.75, signaling excessive greed.
• 2020-2021 Bull Run: NUPL surged above 0.75 in early 2021 before Bitcoin corrected significantly.
• 2022 Bear Market: NUPL fell into the capitulation zone, coinciding with a market bottom.

Practical Applications of NUPL in Trading

1. Identifying Market Tops and Bottoms:
   • When NUPL exceeds 0.75, it suggests a potential market top, indicating a time to take profits.
   • When NUPL turns negative, it signals capitulation, often presenting a buying opportunity.
2. Confirming Bull and Bear Trends:
   • A rising NUPL confirms a strengthening bull market.
   • A declining NUPL suggests weakening momentum and potential trend reversals.
3. Comparing with Other On-Chain Metrics:
   • MVRV Ratio: Helps confirm overvaluation or undervaluation of Bitcoin.
   • SOPR (Spent Output Profit Ratio): Measures realized profits and can validate NUPL signals.

Limitations and Considerations

While NUPL is a valuable indicator, it should not be used in isolation. Market conditions, macroeconomic factors, and investor behavior must be considered for a comprehensive analysis. Combining NUPL with other metrics such as RSI, funding rates, and exchange inflows can improve accuracy.

Conclusion

NUPL is a powerful tool for understanding market sentiment and spotting potential tops and bottoms. By studying historical trends and integrating this metric into a broader trading strategy, investors can make more informed decisions and enhance their profitability in the crypto market.