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Bitcoin’s extreme volatility this week has wiped out a significant amount of unrealized profits across the entire market.

Data from Glassnode showed that on Aug. 1, over 85% of Bitcoin’s circulating supply was in profit, reflecting a stable and enduring bullish sentiment as the price settled at around $65,000. However, as the price began declining over the past week, a huge chunk of this profitability was wiped away.

With Bitcoin dropping to below $50,000 on Aug. 5, the percentage of supply in profit fell to 71%, the lowest since October last year. Even though the price recovered to around $56,000 on Aug. 6, the supply in profit remains at just above 73%.

Both long-term and short-term holders saw a sharp increase in their supply held in loss.

On Aug. 1, STHs held 1.603 million BTC in loss, but this figure rose to 2.868 million on Aug. 5 before decreasing slightly to 2.804 million BTC the next day. This shows that over 1.2 million BTC was bought at prices higher than current market prices, and STHs are sitting on a significant amount of unrealized losses.

The short-term supply in profit plummeted as well. Between Aug. 1 and Aug. 5, the STH supply in profit fell from 1.490 million BTC to just 190,724 BTC, recovering slightly to 236,790 BTC on Aug. 6.

Long-term holders also saw losses, although significantly less pronounced than their STH counterparts. Long-term holder supply in profit decreased from 13.486 million BTC to 12.908 million BTC between Aug. 1 and Aug. 5.

Meanwhile, long-term holder supply in loss grew 148,601 BTC on Aug. 1 to 760,521 BTC on Aug.5, decreasing slightly to 704,926 BTC on Aug. 6. This gradual increase indicates that even LTHs are not entirely insulated from market volatility, though their broader time horizon offers some cushion.

Looking at the entity-adjusted NUPL for long-term and short-term holders provides a clearer and more refined understanding of actual market profit and loss. Previous CryptoSlate analysis found that entity-adjusted metrics, especially NUPL, filter out non-economic transactions, which include internal transfers within the same entity.

These internal movements can distort traditional metrics by creating the false impression of heightened market activity or profit-taking, leading to an inaccurate representation of market sentiment.

The current data shows that the entity-adjusted LTH-NUPL has remained consistently above 0.5 throughout the year, reflecting a sustained belief among long-term holders in Bitcoin’s upward trajectory.

As of Aug. 6, LTH-NUPL stands at 0.625, indicating that long-term holders still have significant unrealized profits despite recent price fluctuations.

On the other hand, the entity-adjusted STH-NUPL saw significantly more volatility, dropping into negative territory in response to Bitcoin’s price drop. As of Aug. 6, STH-NUPL is at -0.111.

While short-term holders faced substantial unrealized losses and reacted more dramatically to price drops, long-term holders maintained a relatively stable outlook.

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Entity-adjusted Bitcoin metrics provide a refined view of market sentiment by filtering out non-economic transactions. This is especially important when analyzing net unrealized profit and loss, such as the LTH-NUPL and STH-NUPL.

Non-entity-adjusted metrics can show skewed, unclear, or incorrect data because they include all transactions, even internal transfers within the same entity. These “in-house” transactions do not represent real economic activity but can artificially inflate or deflate the apparent level of unrealized profit or loss.

For instance, large internal transfers might create the illusion of increased market activity or profit-taking, resulting in false interpretations of market tops or bottoms and ultimately causing inaccurate market predictions.

Entity-adjusted LTH-NUPL is an advanced metric that considers the actual economic activity of long-term holders by excluding these “in-house” transactions. This helps filter out activity from large institutional players that have become ubiquitous in the industry since the launch of spot Bitcoin ETFs.

Historically, LTH-NUPL has been a reliable indicator of market sentiment, particularly in identifying market tops and bottoms. When the LTH-NUPL crosses above 0.7, it typically signals the beginning of a euphoria or greed phase in the market. This phase often correlates with market tops as long-term holders realize significant unrealized profits. Conversely, values between 0.5 and 0.7 indicate a belief or denial phase, depending on the price direction.

In 2024, LTH-NUPL has consistently remained above 0.5, suggesting a strong belief in the market’s upward trend among long-term holders. The metric briefly crossed into the greed phase from May 11 to May 13, showing a short-lived euphoria as Bitcoin reached its new all-time high.

Since July, LTH-NUPL has been trending upwards with significant volatility, reaching 0.70 on July 27 before slightly decreasing to 0.66 by July 31.

This upward trend in LTH-NUPL reflects the confidence of long-term holders in the ongoing market rally despite the occasional volatility. The metric’s resilience above 0.5 throughout the year shows the cohort’s sustained belief.

Entity-adjusted STH-NUPL, on the other hand, measures the net unrealized profit or loss of short-term holders, defined as entities holding Bitcoin for less than 155 days. Historically, STH-NUPL has been less effective in predicting market tops and bottoms than LTH-NUPL.

During Bitcoin’s bull run in December 2017, STH-NUPL briefly entered the belief/denial phase. However, it has mostly ranged between 0 and 0.24, indicating a state of hope or fear among short-term holders, with extreme volatility corresponding to price movements.

This year, STH-NUPL saw as much volatility as its LTH counterpart. The ratio entered the optimism category above 0.24 in March, only to drop into capitulation territory below 0 in late June and mid-July. This drop reflects the market’s severe correction and the ensuing panic among short-term holders.

Since July 7, STH-NUPL has been trending upwards, breaking above 0 and entering the hope category on July 15. As of July 31, the metric stands at 0.033, a slight decrease from a recent high of 0.081 on July 27. This upward trend indicates a gradual recovery in market sentiment among short-term holders, though it remains cautious and uncertain.

The disparity between LTH-NUPL and STH-NUPL highlights long-term and short-term holders’ contrasting behaviors and sentiments. LTH-NUPL’s higher and more stable values suggest a stronger and more consistent belief in the market’s long-term potential. Having held their assets through various market cycles, long-term holders exhibit greater resilience and confidence, contributing to the metric’s effectiveness in predicting market tops and bottoms.

In contrast, STH-NUPL’s lower values and higher volatility reflect the short-term holders’ sensitivity to market fluctuations. Short-term holders are more likely to react to immediate price movements, leading to frequent shifts between hope, fear, and capitulation phases. This reactive behavior makes STH-NUPL a less reliable indicator of long-term market trends.

LTH-NUPL’s ability to signal market tops is rooted in the behavior of long-term holders during euphoric phases. When LTH-NUPL exceeds 0.7, it indicates that long-term holders are sitting on substantial unrealized profits. Historically, this has led to profit-taking activities, subsequently triggering market corrections or tops.

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Bitcoin‘s swift climb above $64,000 has put most of the industry green. Alongside the rest of the market, Bitcoin reversed weeks of negative performance upon news of the assassination attempt of former US President Donald Trump.

The market’s increase in profitability can be seen through the percentage of Bitcoin’s supply in profit. While the metric is simple, it provides a clear snapshot of the market’s health and shows the distribution of gains and losses.

Data from Glassnode showed the percentage of supply in profit increased from 73.67% on July 7 to over 87.29% by July 15. It represents a significant increase and confirms the extent of the positive sentiment in the market. This could potentially encourage further buying pressure as the market becomes more profitable for a large segment of short-term holders.

The profitability and sentiment of short-term holders (STHs) are best assessed through the net unrealized profit/loss (NUPL). NUPL measures the difference between the market value and the cost basis of held coins, offering a real-time gauge of whether the cohort is in a state of profit or loss. For STHs, who tend to be more sensitive to price fluctuations and market changes, a positive NUPL indicates a favorable environment, potentially reducing selling pressure and fostering a more stable market. Conversely, a negative NUPL might signal distress among short-term traders, increasing the likelihood of selling and market volatility.

Data from Glassnode showed that NUPL turned positive on July 15 as BTC crossed $64,000. It represents a culmination of a gradual increase we’ve seen over the past week or so, with STH NUPL increasing from -0.1456 to 0.0076. This is a critical indicator of market recovery and growing optimism among recent buyers. It suggests that the market is absorbing new demand effectively, and short-term traders are beginning to see positive returns on their investments.

Market value to realized value (MVRV) is another critical metric for assessing STH profitability. It compares Bitcoin’s market value to its realized value, providing a ratio that reflects the current market conditions relative to the cost basis of recent investments. An MVRV ratio above 1 indicates that the market value is higher than the realized value, suggesting that investors, on average, are in profit. For STHs, a rising MVRV ratio indicates increasing profitability, which can boost confidence and reduce the selling pressure.

Like the STH SOPR, the STH MVRV increased from 0.8728 on July 7 to 1.0076 on July 15. This metric moving above 1 for the first time since June 20 indicates that short-term holders’ market value now exceeds their cost basis. This crossover point is a bullish signal, often suggesting that the market is recovering and short-term holders are gaining confidence as their holdings become profitable.

The improvement we’ve seen in both NUPL and MVRV ratios shows a significant shift in the profitability of short-term holders. The consistent rise in these price and profitability metrics creates a solid foundation for the bullish trend to continue in the coming weeks. As more STHs move into profit, the potential selling pressure they create might decrease, allowing for a more sustained price increase.

However, a sharp price correction can potentially wipe away this unrealized profit and push STHs back into the red. The reactive nature of this cohort means any negative news could flip the trend and create losses.

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