Bitcoin’s realized profit/loss ratio shows market satisfaction with current price levels

Bitcoin’s yearly realized profit/loss ratio measures the proportion of realized profits to realized losses over a rolling one-year period. It’s an underused but significant metric as it can act as an indicator of market sentiment. When the ratio is high, it suggests that more investors are realizing profits than incurring losses, which is typically characteristic of bull markets. Conversely, a low ratio indicates that more investors are realizing losses than profits, which is common in bear markets, which suggests negative market sentiment and a lack of confidence in price stability.

Additionally, the ratio helps identify market trends. High peaks in the ratio often align with market tops, where profit-taking is prevalent, while low troughs align with market bottoms, where losses are more common. This metric also reflects the market’s maturity; a stable ratio can indicate a mature or stable market with balanced buying and selling pressures, while volatility in the ratio may reflect speculative activity and potential market instability.

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Graph showing Bitcoin’s yearly realized profit/loss ratio from 2011 to 2024 (Source: Glassnode)

This year has been particularly volatile regarding the realized profit/loss ratio. The ratio has seen a massive increase since the beginning of the year, moving from 176.33% on Jan. 1 to 423.26% on May 14. The ratio peaked on April 11 at 454.02%—the highest since late May 2021. 

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Graph showing Bitcoin’s yearly realized profit/loss ratio from Jan. 1 to May 14, 2024 (Source: Glassnode)

In January and February, the stable increase in the ratio showed traders realizing higher profits than losses, indicative of a new wave of bullish sentiment forming in the market. The rate of increase skyrocketed in April when the ratio went from a March high of 190% to a three-year high of 454.02% on April 11. At the time, Bitcoin’s price consolidated at around $70,000. 

There is a notable discrepancy between Bitcoin’s ATH and the ATH in the realized profit/loss ratio—the ratio peaked on April 11 rather than March 13, despite BTC posting a new ATH on the latter date. This can be attributed to delayed profit-taking, trading volume, liquidity differences, and psychological factors.

Investor psychology is often overlooked despite playing one of the most critical roles in financial markets. The consolidation at $70,000 after BTC saw a drop to $61,000, which made this price level a more significant psychological milestone, leading to a wave of profit-taking and a peak in the ratio. In contrast, Bitcoin’s new ATH set at $74,000 might not have had the same psychological impact, preventing traders from realizing profits as they hoped for a more extended uptrend. 

Investors also often react to ATHs with a delay, processing new price levels before deciding to take profits. While many traders could have taken profit on March 13, the cumulative realized profits and losses over the year influence the ratio. Higher trading volumes around April 11 compared to March 13 could have resulted in more realized transactions, impacting the ratio more significantly. The increased liquidity at the time might have made it easier for large holders to realize profits without substantially moving the market, as the price remained stable at around $70,000. The composition of market participants might have also varied at the time, with more retail investors engaging around April 11, who are typically more prone to realizing profits.

The ratio’s stability in the past week or so reflects BTC’s lack of volatility. The significantly higher realized profit ratio shows that investors are realizing profit at a stable rate every day. This is especially interesting given Bitcoin’s price hovering between $60,000 and $63,000 in the past week.

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Graph showing Bitcoin’s yearly realized profit/loss ratio from March 29 to May 14, 2024 (Source: Glassnode)

A prolonged sideways movement like this suggests the market is in a consolidation phase, which often follows significant price movements. Historically, consolidation phases have preceded new market trends, both bullish and bearish. 

Price consolidation like this usually pushes investors to be cautiously optimistic, choosing to hold onto their BTC rather than realize profits or cut losses. However, the consistently high realized profit ratio we’ve seen over the past weeks shows the market is satisfied with the current price level and is realizing significant amounts of profit. 

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