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The SOPR indicator: search for price lows and highs for bitcoin

Validated Venture

Spent Output Profit Ratio (SOPR) is an onchain indicator, which is used to analyze bitcoin market cycles. How does it work? Do we really need it? Let’s find out together!

SOPR identifies periods when long-term investors sell BTC at a loss or, conversely, when profitable positions are fixed.

This onchain analysis tool can be used to identify the first cryptocurrency’s local price lows and highs. The developer of SOPR believes that the indicator is outperforming.

How does SOPR work?

Researcher Renato Shirakashi proposed the SOPR indicator in 2019, explaining its mechanism in his blog.

Shirakashi, like the MVRV onchain indicator, assumed that each bitcoin transaction entailed the purchase or sale of the first cryptocurrency. SOPR, on the other hand, uses the ratio of bitcoin’s purchase price to its sale price instead of realized capitalization.

SOPR calculates the bitcoin purchase price based on the dollar value of the previous coin move and the sale price based on the dollar value of the most recent transaction.

SOPR uses data on Unspent Transaction Outputs to determine these. The purchase price represents the conditional transfer of 10 BTC, while the sale price represents the subsequent movement of those 10 BTC.

For example, at a price of $20,000 per 1 BTC, a UTXO of 10 BTC was created — the purchase price. Moving those 10 BTC at a time when the price of one BTC is $40,000 means selling. Consequently, the SOPR ratio for these coins will be 2 — the ratio of the dollar value of two differently directed transfers of specific BTC coins. Depending on the SOPR modification, the calculation is done for each UTXO or for the selected category.

The SOPR data is superimposed in the shape of a curve on the bitcoin price chart. The value of BTC at which the SOPR coefficient is greater than one is considered the breakeven point for sale.

SOPR indicator (blue curve) and BTC price chart. Source: CryptoQuant

Real-time SOPR changes for bitcoin can be tracked on sites such as Decentrader and Glassnode. A chart from the latter platform is also available on TradingView. Glassnode has also created similar indicator versions for Ethereum and Litecoin.

The SOPR indicator modification

In addition to the original version of the SOPR indicator, analysts have created several modifications of the oscillator with more accurate parameter settings. Let’s consider the most well-known variants:

  1. Adjusted SOPR (aSOPR). It is the most popular SOPR variant because UTXOs with an age of less than an hour are excluded from the calculations. This strategy mitigates the impact of some speculators and arbitrage traders who use Bitcoin as a transit medium in an exchange or trade transaction.
  2. The Short Term Holder SOPR (STH-SOPR) is a profitability coefficient for the spent output. Although not as sensitive as aSOPR, STH-SOPR considers UTXO age greater than one hour and less than 155 days.
  3. Long Term Holder SOPR (LTH-SOPR). A variant of the indicator designed for analyzing long-term bitcoin investor trends. Only UTXOs older than 155 days are considered in the calculations.

SOPR indicator modifications

The use of SOPR

The SOPR indicator is one of the simplest tools for analyzing bitcoin market cycles. The interpretation of the oscillator values has only a few directions:

  • If the value is 1, this indicates that investors are selling bitcoin at breakeven. The buy price is equal to the sell price of bitcoin.
  • A value greater than 1 indicates an uptrend in price, and investors are selling bitcoin at a profit.
  • A value less than 1 indicates a downward price trend — investors are holding unprofitable positions or taking losses.

The risks of using SOPR

The simplicity and popularity of the indicator does not mean that there are no risks of using SOPR when trading bitcoin. Like other onchain indicators, such tools are an experimental way to assess market sentiment.

Interpretation. SOPR is based on the assumption that every bitcoin transfer is a purchase or sale of an asset. This interpretation is not factual and can be detrimental to the trader. No one can know exactly at what price and when all the bitcoins were sold or bought.

Trading. SOPR indicator is designed to evaluate and analyze the long-term trends and behavior of investors in certain market conditions. Making any trading decisions based on SOPR values is not included in the description of the indicator. Bitcoin price behavior may differ significantly from transaction data.

Large BTC hodlers. Any large investor or crypto exchange with enough BTC can “corrupt” the logic of the SOPR indicator and distort the data. For example, Microstrategy, which owns almost 130,000 BTC as of September 2021, will want to change the way it stores its first cryptocurrency and move funds to other BTC addresses. SOPR will “see” BTC moves online, indicating that investors are fixing positions, even though it is a normal BTC transfer.

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