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How NUPL Data Revealed the Bitcoin Bubble of 2021

Bitcoin has seen many ups and downs in its history. One of the most dramatic episodes was the bull run of 2021, when the price of Bitcoin soared to new heights, reaching over $60,000 in April. However, this euphoria was short-lived, as the price crashed by more than 50% in the following months, wiping out billions of dollars of value.

Many factors contributed to this volatility, such as regulatory uncertainty, environmental concerns, market manipulation, and technical issues. However, one of the most interesting and overlooked aspects of this phenomenon was the psychology of Bitcoin investors, which can be measured by a metric called NUPL (Net Unrealized Profit/Loss).

What is NUPL?

NUPL is a metric that shows the total profit or loss of Bitcoin investors. It does this by comparing the market value of Bitcoin to the total purchase price of all Bitcoins. For example, if the total market value of Bitcoin is $1 trillion and the total purchase price of all Bitcoins is $500 billion, then the NUPL value is 0.5, meaning that investors are in 50% profit overall.

NUPL can be used to gauge the overall sentiment of Bitcoin investors and whether the market is overvalued or undervalued. Generally, NUPL values can be interpreted as follows:

  • NUPL > 0: Investors are in profit overall. This indicates a positive sentiment and a bullish market.
  • NUPL = 0: Investors are neither in profit nor loss. This indicates a neutral sentiment and a balanced market.
  • NUPL < 0: Investors are in loss overall. This indicates a negative sentiment and a bearish market.

How NUPL Data Revealed the Bitcoin Bubble of 2021

By looking at the historical NUPL data, we can see how the sentiment of Bitcoin investors changed over time and how it correlated with the price movements. The chart below shows the NUPL values and the Bitcoin price from January 2020 to February 2024.

Source: CryptoQuant

As we can see, the NUPL value reached a peak of 0.8 in April 2021, when the Bitcoin price was also at its highest. This means that investors were in 80% profit overall and were very optimistic about the future of Bitcoin. However, this also signaled that the market was overvalued and due for a correction.

In fact, the NUPL value of 0.8 was the highest ever recorded since the inception of Bitcoin, surpassing the previous peaks of 0.78 in December 2017 and 0.76 in June 2019, which were also followed by significant price drops. Therefore, the NUPL data was flashing warning signs months before the peak of the 2021 bull run, indicating that the market was in a bubble and that investors were too greedy.

The NUPL value then declined sharply as the Bitcoin price crashed, reaching a low of 0.2 in July 2021, when the Bitcoin price was around $30,000. This means that investors were in 20% profit overall and were very pessimistic about the future of Bitcoin. However, this also signaled that the market was undervalued and due for a rebound.

In fact, the NUPL value of 0.2 was the lowest since March 2020, when the Bitcoin price was around $5,000 and the COVID-19 pandemic caused a global market crash. Therefore, the NUPL data was flashing buy signals months before the recovery of the 2021 bear market, indicating that the market was in a dip and that investors were too fearful.

The NUPL value then increased gradually as the Bitcoin price recovered, reaching a high of 0.6 in December 2023, when the Bitcoin price was around $50,000. This means that investors were in 60% profit overall and were moderately optimistic about the future of Bitcoin. However, this also signaled that the market was approaching a turning point and that investors should be cautious.

In fact, the NUPL value of 0.6 was close to the threshold of 0.5, which is considered a critical level for the Bitcoin market. According to some analysts, when the NUPL value crosses above 0.5, it indicates that a bull market is starting and that investors should buy. Conversely, when the NUPL value crosses below 0.5, it indicates that a bear market is starting and that investors should sell.

As of February 8, 2024, the NUPL value is 0.48, slightly below the 0.5 threshold. This indicates that investors are still in profit overall, but have lost some of their profits from the peaks of late 2023. This also indicates that the market is in a state of uncertainty and that investors should be vigilant.

Conclusion

NUPL is an important metric for gauging the overall sentiment of Bitcoin investors and whether the market is overvalued or undervalued. By looking at the historical NUPL data, we can see how the sentiment of Bitcoin investors changed over time and how it correlated with the price movements. The NUPL data revealed that the Bitcoin market was in a bubble in April 2021 and that investors were too greedy. It also revealed that the Bitcoin market was in a dip in July 2021 and that investors were too fearful. It also revealed that the Bitcoin market is approaching a turning point in February 2024 and that investors should be cautious.

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