The power of Network Profit/Loss indicator (feat. YFI)

We recently added a new metric to Sanbase called Network Profit/Loss (NPL for short), which computes the overall daily ROI across all network transactions.

Here’s how it works: for each coin on the blockchain, NPL takes the price at which it was last moved and assumes this to be the coin's acquisition price. Once the coin changes addresses again, NPL assumes it was sold.

As a result, a substantial spike in a coin’s NPL indicates that its holders are (on average) selling their bags at significant profit. On the other hand, a strong dip implies the coin’s holders are (on average) realizing losses, suggesting panic sell-offs and investor capitulation.

Because it tickets all on-chain transactions as speculative, NPL is obviously not a perfect measure of investor sentiment, and seems to work better for assets like Bitcoin than varied use-case tokens like Ethereum.

However, in the few months that I’ve been playing around with the metric, it seems to give very interesting macro insights on the day-to-day holder behavior.

Perhaps there’s no better example of this than YFI’s Network Profit/Loss chart over the last 30 days, shown below.

The green bars highlight significant NPL dips, suggesting short-term capitulation and ‘weak hand’ sell-offs. The red bars show major NPL spikes, implying interim profit taking:

As Maksim (Santiment’s founder) likes to say, to achieve sustained price rallies, we need to see signs of significant market ‘pain’ first. Buy when there’s blood in the streets and all that.

As evident on the chart, strong NPL dips have marked a number of local YFI bottoms over the past 30 days, implying near-term capitulation of YFI holders as they realized significant losses on their initial investment. Blood in the streets.

On the other hand, pronounced NPL spikes have coincided with a number of local price tops for the DeFi darling, as YFI holders begin to claim their unrealized profits and the market struggles to absorb rising sell pressure (less people willing to buy YFI at a premium during the rally).

If you want to read more, I wrote about the power of Network Profit/Loss in my recent article on top and bottom markers. Even with its built-in deficiencies, NPL seems to give a unique insight into short-term investor sentiment and sometimes produce solid trend reversal signals for both BTC and lower-cap altcoins.

Of course, not all patterns will look as clean as the one above. If only it were that easy!

Disclaimer: The opinions expressed in the post are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.