A look at on-chain indicators, more specifically Spent Output Profit Ratio (SOPR), in order to determine the overall state of the current market.
SOPR has fallen substantially below the 1 line for a prolonged length of time. This is the first time this has occurred in the current bull run. Unless the line is reclaimed, this could mark a change in the direction of the trend from bullish to bearish.
What is SOPR?
SOPR is an indicator that measures the profit or loss of every single transaction that is made in the market. This is done by measuring the difference between the purchase and sale prices. Therefore, it shows whether the overall market is at a profit or at a loss.
A SOPR >1 means that participants in the market are selling at a profit, while the opposite is true for values <1.
A consistent indicator reading above 1 suggests that the asset is in a bull market. In such times, participants rarely sell at a loss. This means that at the worst case scenario, the SOPR bounces at the 1 line but does not drop below it.
In the 2015-2017 bull run, the SOPR briefly fell below the 1 line three times. However, it bounced immediately and continued to increase afterwards (black icons).
Afterwards, it moved freely above and below the 1 line in the period from Jan. 2018 to March 2020. As stated above, this is a sign that the direction of the trend is undecided.
In the current bull run, it re-tested the one line on Sept. 2020 and moved upwards. However, in April 2021, it fell well below the line and has been struggling to move back above it.
Therefore, this is either a sharper than usual retracement or it forewarns of a change in the direction of the trend.
This occurrence can be more easily seen in the hourly time-frame. It is akin to that of Jan. 2018 – March 2020, though on much lower time-frames.
The long-term holder SOPR is also dropping, and has nearly reached the 1 line. This means that even holders are getting impatient and are selling at low prices, just slightly above break even.
If holders capitulate, it would likely drive down the regular SOPR way below 0, confirming the change of trend.
So the current movement is crucial for the direction of the long-term trend. If SOPR continues to trade below 0, it would indicate that the trend is bearish. Furthermore, it would likely cause long-term holders to capitulate, eventually being the catalyst of another sharp fall.
Therefore, SOPR has to quickly reclaim the 1 line in order for the trend to remain bullish.