The Net Unrealised Profit/Loss (or NUPL for short) indicator is the difference between relative unrealized profit and relative unrealized loss. The indicator tells us how much of bitcoin’s circulating supply is at any given point in time in profit or loss - and by how much.
To create the NUPL indicator, we need to know three things:
- The number of current UTXOs that are in profit,
- The number of current UTXOs that are at a loss, and
- The unrealised profit (or loss), which is calculated by taking the difference between the current price and the price at the time the bitcoin last moved.
Unrealised profits and losses are normalised by market capitalisation to reveal patterns at each stage of the market cycle. Then the delta of each curve (unrealised profit and unrealised loss) is then used to calculate the NUPL indicator.
Arbitrary thresholds are then set at 0.00, 0.25, 0.50, and 0.75, where these thresholds have historically captured shifts in investor sentiment. When a high proportion of bitcoin’s market capitalisation consists of unrealised profits, investors are considered greedy. Whenever NUPL has exceeded 0.75, it has corresponded with euphoria and greed in the market, aligning with five market tops in bitcoin’s price history.
Conversely, when a high proportion of bitcoin’s market capitalisation consists of unrealised losses, investors are considered fearful and this occurs whenever the NUPL has been below 0.00.
We can derive the NUPL indicator with market capitalisation and realised capitalisation using the following formula:
(Market Capitalisation — Realised Capitalisation) / Market Capitalisation
Bitcoin’s NUPL is illustrated in the chart below, so you can see how the indicator identifies different phases of each market cycle. You can calculate the NUPL indicator with freely available data with the formula using market capitalisation and realised capitalisation.
By identifying which stage of the market cycle we are currently in, the NUPL indicator can help traders to set entries and identify exit points. For instance, a trader may want to go long on bitcoin when the NUPL indicator suggests that a move from the capitulation phase to the hope-fear phase is completed, and then to take profits once the market enters the belief-denial phase.
The chart above shows we are currently in the hope-fear phase, after entering the capitulation phase in the middle of March. A trader could wait for the market to enter the optimism-anxiety phase (NUPL > 0.25) to go long on bitcoin and take profit once NUPL reaches 0.50 or above.
The weakness of the NUPL indicator, as with all on-chain metrics, is that bitcoins transacted off-chain are not accounted for and therefore is an incomplete picture of profits and losses. Nevertheless, the NUPL indicator has been accurate since 2010 in identifying market tops, and to a lesser extent, bottoms.