In the last article on cryptocurrency training we reveal tricks to analyze Polkadot parachains and How to take advantage of Angel's strategy with the liquidity tokens of said parachains. As you may have seen, recently it seems that the cryptocurrency market is beginning to give signs that we should observe. Better let's continue with volume 3 of the cryptocurrency training on onchain metrics, since we are still going to miss something...
Metric #1: Accumulation Trend Score
What is the Accumulation Trend Score?
The first metric that we are going to analyze in this cryptocurrency training will be the Accumulation Trend Score. Translated into Spanish it literally means accumulation tendency score. As the name already indicates, this metric allows us to see the relative size of users who are actively accumulating or distributing tokens on the blockchain in terms of their BTC holdings. The accumulation trend score represents both the number of bitcoins in users' custody and the number of new bitcoins they have bought or sold over the past month.
How is the Accumulation Trend Score measured?​
The accumulation ratio is measured by multiplying the users' network participation score and the change in their balance. The idea behind the accumulation ratio is to have a weighted participation score relative to the relative balance change, so that strong (institutional) hands accumulating bitcoins have a greater impact than weak (retail) hands accumulating bitcoins. This accrual ratio is calculated for both purchases (positive balance changes) and sales (negative balance changes).
Accumulation tendency score calculation formula. Source: Glassnode.
At the same time, to prevent strong hands from having more weight in the score, a user can never have an accumulation ratio that exceeds his participation score, no matter how much he accumulates. In this way, weak hands with significant changes in their balances do not affect the calculation of the metric. The accrual score is then calculated by adding all of each user's accrual ratios together over the last month, for both purchases and sales.
How do we interpret the Accumulation Trend Score?
The accumulation tendency score metric uses a score from 0 to 1. If the accumulation tendency score is close to 1 it tells us that large hands (or a large portion of the network) are accumulating. On the contrary, if it shows us a value closer to 0, it tells us that they are distributing their bitcoins or are not accumulating. In this way we get to know the size of the users' holdings in the market and their portfolio management. Therefore:
Accumulation trend score metric graph. Source: Glassnode.
A score close to 1 reflects that, over the past month, large participants (or a large portion of the network) have been accumulating coins. A score close to 0 reflects that, over the past month, large participants have not been accumulating coins or that they have been selling them.
Metric #2: Stock to Flow Ratio​
What is the Stock to Flow ratio?
The Stock to Flow ratio is the second metric of this cryptocurrency formation. Introduced in 2019 by the famous Twitter influencer and trader PLANBE, this metric is a ratio that predicts value changes in a more direct way. Compare the current supply of bitcoins to new bitcoins mined, or the amount mined in a year. A higher ratio can indicate a period of greater scarcity, which generally translates into a higher price of Bitcoin.
How is the Stock to Flow ratio measured?
The Stock to Flow ratio was originally applied to the gold and silver market, but was adopted by the cryptocurrency ecosystem community. It is used to measure the value of Bitcoin between the available supply and the number of coins to be mined.
Bitcoin supply vs. new bitcoins mined. Source: Coin Desk.
Bitcoin is a deflationary asset, meaning that its supply becomes scarcer over time. That is because it has a limited supply of 21 million units and approximately every 210.000 blocks the number of bitcoins that are mined in each new block created is reduced. Therefore, the ratio is measured by dividing the number of bitcoin reserves by the annual production of bitcoins.
How do we interpret the Stock to Flow ratio?
As we see in the graph below, we can determine what the S2F ratio is telling us through colors and an average (red line) that shows us the path of the ratio. These colors determine how many days are left until the next halving event. When halvings happen, we see the path go from red to green, which translates into a period of growth in Bitcoin.
Stock to Flow ratio graph. Source: Look Into Bitcoin.
Next, we see how the path turns from green to blue, where the correction occurs from the achievement of maximums and the beginning of a bear market. Finally, when the blue darkens and turns purple, the capitulation period occurs and, consequently, the next accumulation period before the next halving. The red line tells us how far the price of Bitcoin is from the ratio of the relationship between the supply and the mining of new bitcoins.
Metric #3: NUPL (Net Unrealized Profit/Loss)
What is NUPL?
The last metric of this cryptocurrency formation is the NUPL. This metric translated into Spanish is the ratio of net unrealized profits and losses. This metric allows us to see which Bitcoin addresses are in profit or loss by calculating the price of creating a UTXO and the current price. In this way, we can determine the balance of profits and losses of the Bitcoin community on a time scale.
How is NUPL measured?​
This metric that measures net unrealized profit and loss is calculated by dividing the relative unrealized profit and the relative unrealized loss. It can also be calculated by subtracting the realized capitalization from the market capitalization by dividing the result by the market capitalization. This result is presented on a color scale that fluctuates on the chart next to the current Bitcoin price.
NUPL calculation formula. Source: Glassnode.
How do we interpret the NUPL?​
Any value greater than zero indicates that the network is in a state of net profit, while values ​​less than zero indicate a state of net loss. In general, the more the NUPL deviates from zero, the closer the market trend will be to the highs and lows. Therefore, this metric can help us investors identify when to take profits (blue) and when to re-enter the market (red).
Chart of net unrealized profit and loss metrics. Source: Cryptoquant.
Conclusions from this cryptocurrency training
After having reviewed volume 3 of the cryptocurrency training on onchain analysis metrics, we have learned how to interpret three new different metrics. They will be very useful for our operations in the cryptocurrency market, since we have learned both metrics to measure accumulation or distribution periods (accumulation tendency score), supply ratios versus annual production (stock to flow) and to determine the balance of profits and losses of the Bitcoin community on a time scale (Net Unrealized Profit/Loss).