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How To “Buy The Dip” In Bitcoin

SOPR, Spent Output Profit Ratio, is a useful on chain indicator, particularly for Bitcoin-based swing trades. The Glassnode team developed the indicator in an effort led by Renato Shirakashi. The indicator was released in April 2019. Let’s look at the one hour version of the indicator, for it’s a nice way to see key levels.

SOPR looks on-chain at whether bitcoins are being sold for a profit or a loss with on chain analysis. It examines the difference between the price paid, and the price sold for bitcoins entering and leaving wallets. 

Look at Spent Outputs in dollar terms, relative to their value at creation in dollar terms. In short, divide the realized value of Spent Output by the value of creation. The question we are asking is: “Are people in a profit or a loss when they’re selling their Bitcoin today?” 

SOPR is visualized in a chart. We are looking at whether the Spent Output Profit Ratio, or SOPR, is positive (represented by red on the chart or whether it is negative (represented by green on the chart.)

When it’s positive, that means on average people are selling at a profit. The price for which they sold is greater than the price they paid. If it’s negative, then people are selling at a loss. 

When using this indicator, you’re looking for pullbacks into the green areas where we’re confirmed in the bull market. The inverse is true in a bear market, but it doesn’t tend to be as sensitive in bear markets. Be a bit cautious when trying to use it. 

SOPR Is Best When In A Bull Market

Before using the indicator, determine whether the market is in a bull or bear cycle, as displayed here in a 2016-2018 chart or whether we are in a bear market, as from 2018 to 2019. There’s lots of other tools and indicators that can help determine this. We are, at the time of writing, in a confirmed bear market. 

In the case of the 2016-2017 bull market, for example, that was clearly a bull market.

On the chart, you’ve got the price which is the white line, and then we have the indicator where we’re looking for dips into the green.

We’re looking for the indicator to flash green to spot the buy the dip opportunity, when people are selling at a loss in the short term in the bull run, presenting a clear case for buying the dip.

Therefore, SOPR tells us that people are, at any given time, selling at a loss. When examining large timeframes, we see that SOPR came through on buying the dip opportunities. 

We see the indicator signal a buying opportunity at $360, where after the price rallied up. We can see the dots where SOPR signals a bottom, and that the price won’t go much lower, but, rather, keep increasing. 

You can see this particular dip here from $760-$770, down to less than $600.