In the Bitcoin market, price volatility is extremely high, and changes in market sentiment and trends are often rapid and difficult to predict. To help investors more accurately grasp market trends and investment opportunities, on-chain indicators have emerged. On-chain data refers to publicly available information within the blockchain network used to measure market conditions, such as Bitcoin transaction volume, address activity, and fund flows. This data directly reflects the behavior of participants within the Bitcoin ecosystem, making it widely used for analyzing market sentiment, assessing price trends, and forecasting future movements.

The significant advantage of on-chain analysis indicators lies in their transparency and real-time nature, as anyone can access transaction information on the Bitcoin blockchain. By conducting in-depth analysis of this information, investors can not only make more forward-looking market judgments but also identify potential investment opportunities in complex market environments. The following introduces the main on-chain indicators.

Criteria for Selecting Indicators

When selecting Bitcoin on-chain indicators, the key is to assess whether these indicators can effectively reflect market dynamics, investor behavior, and key elements of price trends.

Reflecting Market Valuation Levels

Assessing whether the market valuation is reasonable is a crucial goal of on-chain analysis. The MVRV (Market Value to Realized Value) ratio is a widely used indicator that evaluates whether the current market price is overvalued or undervalued by comparing market value with realized value. A high MVRV indicates that the market price may be in a bubble phase, suggesting that investors should be cautious of potential corrections; conversely, a low MVRV suggests that the market may be undervalued, presenting a good opportunity for accumulation.

Reflecting Investor Behavior and Market Sentiment

One major advantage of on-chain data is the ability to directly observe investor trading behavior and sentiment changes. The SOPR (Spent Output Profit Ratio) analyzes the profitability of on-chain transaction outputs to determine whether investors are in a profit or loss state. When SOPR is greater than 1, it indicates that most investors are trading at a profit, which may lead to selling pressure in the market; when SOPR is less than 1, most investors are at a loss, suggesting that the market may be nearing a bottom. The RHODL ratio (Realized HODL Ratio) analyzes market sentiment from the perspective of holding periods—when short-term holders are active, the market tends to experience high volatility, while dominance by long-term holders usually results in greater market stability.

Reflecting Capital Flows and Supply-Demand Dynamics

Capital flows directly affect market supply and demand, making them a critical dimension for analyzing price trends. The exchange net inflow/outflow indicator compares the amount of Bitcoin entering and exiting exchanges to reveal investors’ buying and selling intentions. High net inflows may indicate increased selling pressure, leading to potential price corrections, while high net outflows suggest that more Bitcoin is being moved to cold wallets or long-term holding addresses, reducing market supply and potentially driving price increases.

Providing Insights Across Market Cycles

Bitcoin’s market operates in cyclical patterns, and the selection of on-chain indicators should accommodate different market cycles to help investors identify key turning points. In bull markets, the HODL Waves indicator, which analyzes the distribution of Bitcoin held over various time periods, can help determine if investors are taking profits. In bear markets, the MVRV-Z Score can assist investors in assessing whether the market has reached a bottom. By combining indicators suitable for different cycles, investors can gain a more comprehensive understanding of market conditions and optimize their investment strategies.

MVRV Ratio

Calculation Formula: MVRV = Market Cap / Realized Cap

Market Cap: Current price × Circulating supply

Realized Cap: Calculated based on the price of each Bitcoin at its last on-chain movement

The MVRV ratio helps identify market cycles and investors’ profit and loss conditions. When the MVRV significantly exceeds 3, it indicates an overvalued market, where investors may tend to realize profits. Conversely, when the MVRV falls below 1, it may suggest that the asset is undervalued and that the market is in a state of panic selling. This indicator can also be analyzed alongside historical data to determine whether the current price is deviating from its normal range, thereby predicting the likelihood of a price correction.

Historical MVRV Chart

Source: Dune

MVRV-Z Ratio

Calculation Formula: MVRV-Z Score = Standard Deviation of Market Cap / (Market Value − Realized Value)

The MVRV-Z score incorporates the concept of standard deviation to normalize the deviation between market value and realized value. This calculation helps determine whether the deviation is extreme, providing a more precise measure of Bitcoin’s overbought or oversold conditions.

Generally, an MVRV-Z score greater than 7 indicates extreme overvaluation, suggesting that the market may be near a peak. Conversely, an MVRV-Z score below 0 suggests extreme undervaluation, implying that the market may be nearing a bottom. Compared to the unadjusted MVRV indicator, the MVRV-Z score is more accurate in capturing extreme market valuation states. It offers an advantage in minimizing the impact of short-term price fluctuations and is better suited for medium- to long-term trend analysis.

Historical MVRV-Z Score Chart

Source: CoinAnk

MVRV-Z Score Chart for the Past Year

Source: CoinAnk

RHODL Ratio

Calculation Formula: RHODL Ratio = Realized Value of Bitcoin Held for 1 Week / Realized Value of Bitcoin Held for 1-2 Years

RHODL is an on-chain indicator based on the age distribution of Bitcoin UTXOs (Unspent Transaction Outputs). It measures the difference in capital distribution between short-term and long-term holders to analyze market cycles and investor behavior. By comparing the value of UTXOs held for short periods (e.g., within one week) with those held for longer periods (e.g., over a year), the RHODL ratio reveals changes in the proportion of funds held by active traders versus long-term holders. This helps identify key market turning points, such as bull market peaks or bear market bottoms. The RHODL ratio is adjusted for Bitcoin supply inflation, eliminating the influence of newly issued bitcoins on market dynamics.

The RHODL ratio effectively reflects market sentiment and capital flows, assisting investors in identifying bull and bear market phases. A high RHODL ratio (>50,000) typically appears at the peak of a bull market when short-term holders dominate, indicating potential market overheating and increased risk. Conversely, a low RHODL ratio (<10) is often seen at bear market bottoms when long-term holders dominate, suggesting bearish sentiment but potential buying opportunities. A rapid increase in the RHODL ratio indicates a growing number of short-term holders, which could signal an overheating market. In contrast, a slow decline in the RHODL ratio implies increasing confidence among long-term holders, potentially signaling an accumulation phase.

Historical RHODL Ratio

Source: Coinglass

AASI (Active Address Sentiment Indicator)

Calculation Formula: AASI = Deviation of Active Address Count / Deviation of Price

The core purpose of AASI is to measure the relationship between Bitcoin price changes and the number of active on-chain addresses. By quantifying the deviation between Bitcoin price movements and the number of active addresses, AASI helps investors assess market sentiment and identify unusual price trends.

The calculation method is based on the ratio of the deviation in price and active address count. First, it measures the deviation of Bitcoin price and active address count relative to their historical trends (e.g., using moving averages or logarithmic regression). Then, the two values are divided and standardized to ensure comparability across different time periods.

AASI Indicator Chart Since 2014 (Short-term Sentiment Indicator Based on 28-day Changes)

Source: Coinglass

SOPR (Spent Output Profit Ratio)

Calculation Formula: SOPR = Transaction Input Value (USD) / Transaction Output Value (USD)

Historical SOPR Data Chart

Source: Glassnode

The SOPR indicator assesses the profitability or loss status of transactions on the Bitcoin network. By measuring the relationship between the price at which Bitcoin is transferred on-chain and its purchase price, SOPR provides an intuitive signal of market participants’ profits or losses. This helps investors gauge market sentiment and trends to optimize trading strategies.

SOPR plays a crucial role in market trend assessment and trading decisions by helping investors understand market profitability and the potential for trend reversals. When SOPR > 1, the market is in a profitable state, indicating that most investors are selling at a profit. This is typically characteristic of a bull market, where prices are likely to continue rising, making it an ideal time to hold positions or accumulate on dips. Conversely, when SOPR < 1, the market is at a loss, reflecting increased selling pressure from investors, which may lead to further price declines. In such scenarios, it is advisable to remain cautious and avoid premature buying. In bull markets, SOPR = 1 often serves as a support level, indicating that the market is entering a break-even zone where prices are less likely to drop further. In bear markets, however, SOPR = 1 can act as a resistance level, as investors tend to sell at the break-even point, making it difficult for prices to rise above this level. Investors can use SOPR’s dynamic changes to develop appropriate accumulation or reduction strategies.

SOPR analysis can be further refined by examining short-term (STH-SOPR) and long-term (LTH-SOPR) data. Short-term SOPR primarily focuses on the profit or loss status of short-term holders, making it useful for capturing short-term market sentiment fluctuations. When it drops significantly below 1, short-term selling pressure may provide a buying opportunity. On the other hand, long-term SOPR reflects the confidence levels of long-term holders; when it remains above 1, it indicates that long-term holders are confident in supporting the market. By combining short-term and long-term SOPR, investors can make more accurate assessments of both short-term fluctuations and long-term trends. In a bull market, a consistently high SOPR above 1 with steady growth is usually a sign of a healthy trend. Conversely, in a bear market, a prolonged SOPR below 1 indicates weak market sentiment, requiring investors to wait for a trend reversal signal. This comprehensive approach helps investors better understand market dynamics and optimize their trading strategies.

NUPL (Net Unrealized Profit/Loss)

Calculation Formula: NUPL = (Unrealized Profit - Unrealized Loss) / Market Cap

NUPL is calculated based on the relationship between Bitcoin’s market value and unrealized profit and loss. The NUPL value typically ranges between -1 and 1, where a positive value indicates that the market as a whole is in an unrealized profit state, while a negative value suggests that the market is experiencing unrealized losses.

Historical NUPL Chart

Source: Coinglass

Puell Multiple

Calculation Formula: Puell Multiple = 365-Day Moving Average of Miners’ Daily Revenue (USD) / Miners’ Daily Revenue (USD)

Historical Puell Multiple Chart

Source: Coinglass

The Puell Multiple is an on-chain analysis indicator based on Bitcoin miners’ revenue, used to evaluate the relative relationship between Bitcoin’s current price and miners’ income. It helps determine whether the market is overvalued or undervalued by comparing miners’ daily revenue to the average revenue over the past 365 days, producing a ratio. If the Puell Multiple is greater than 1, it means miners’ income is above the historical average, often signaling that the market could be in a bull phase or an overheated state. Conversely, if the value is below 1, it suggests miners’ income is below the average, indicating potential market undervaluation or a bear market bottom.

In practical applications, when the Puell Multiple exceeds 4, it indicates that Bitcoin’s price might be in a bubble phase, suggesting a possible opportunity to take profits or reduce holdings. When the Puell Multiple falls below 1, it could present a buying opportunity, making it suitable for long-term investors to gradually accumulate positions. The Puell Multiple can be used in conjunction with other on-chain indicators, such as MVRV and SOPR, to provide a more comprehensive data perspective and enhance investment decision-making.

Exchange Net Inflows/Outflows

Calculation Formula: Net Flows = Inflows − Outflows

Spot Exchange Net Inflows/Outflows Trend Chart

Source: Coinglass

Monitoring Bitcoin inflows and outflows from exchanges helps investors assess market liquidity conditions, reflect market sentiment and trends, and provide guidance for trading decisions. Net inflows/outflows are considered key indicators of market supply and demand, sentiment shifts, and investor behavior.

When Bitcoin inflows to exchanges exceed outflows, it often signals potential selling pressure, as investors may be preparing to sell, which is typically a sign of a possible price correction. Conversely, when outflows exceed inflows, it indicates that investors are opting for long-term holding, reducing Bitcoin’s circulating supply in the market, which is generally seen as a bullish signal. By analyzing fluctuations in net inflows and outflows, investors can anticipate short-term market trend shifts and make informed buy or sell decisions.

Exchange net inflows/outflows data also serve as a strong indicator of market sentiment. During price increases, a rise in outflows is usually a positive signal, indicating growing investor confidence and the potential for continued upward momentum. On the other hand, during price declines, an increase in inflows may suggest market pessimism, with investors preparing to sell, potentially leading to further price drops. When combined with factors such as trading volume and price trends, exchange net inflows/outflows can provide valuable insights into whether the market is overvalued or undervalued, helping investors develop more precise trading strategies.

Risk Reminder

Although on-chain data is transparent, it primarily reflects historical trading behavior and cannot predict unexpected market events such as policy changes or sudden shifts in market sentiment. This means that short-term fluctuations in on-chain indicators may not accurately foresee significant market changes. On-chain indicators can also be influenced by large market participants or institutions, particularly when these entities conduct large-scale fund movements on exchanges, potentially causing distortions in the indicators and misleading retail investors.

On-chain indicators are often limited to technical data analysis and do not take into account external factors such as macroeconomic conditions, regulatory policies, or overall market sentiment. For instance, regulatory changes or global economic turmoil can significantly impact the Bitcoin market, but these factors are not reflected in on-chain data. Relying solely on on-chain indicators for trading decisions may overlook potential market risks.

For example, when Bitcoin’s price surpassed $60,000 in 2021, indicators such as MVRV, SOPR, and exchange net inflows/outflows signaled optimistic market sentiment and suggested further upside potential. However, the subsequent market crash demonstrated that these indicators failed to account for macro factors such as China’s tightening regulations and the impact of leveraged liquidations in the derivatives market. Similarly, during the 2022 bear market, indicators like the MVRV-Z Score and RHODL suggested that the market had entered an undervalued zone, prompting many investors to buy the dip. However, the FTX exchange collapse triggered panic selling, leading to further price declines.

In conclusion, on-chain indicators are powerful tools that help investors analyze market dynamics in depth. However, they are not foolproof. Investors should complement them with other analysis methods, such as technical analysis, fundamental analysis, and consideration of macroeconomic conditions, to make more comprehensive and informed decisions.