A higher SOPR value suggests that the majority of transactions involve bitcoins being sold for more than their cost basis, typically indicative of a bullish market sentiment where investors feel confident enough to take profits. Conversely, a lower SOPR value points to bitcoins being sold at a loss, signaling bearish sentiment and potential market stress. Again, LHCR focuses just on long-term holders, a subset of all transactions, as their actions are often more indicative of market trends than short-term traders.
The LHCR model capitalizes on this information to assess market conditions and predict future price movements. When the Lth-SOPR metric indicates a trend of long-term holders cashing out at significant profits (Lth-SOPR > 1), it suggests a potential local market top as these experienced investors might be perceiving the market to be overvalued. The Price Indicator in this scenario would trend towards 100, signaling an expectation of a price downturn.
Alternatively, if the Lth-SOPR shows long-term holders are selling at a loss (Lth-SOPR < 1), it may indicate a market bottom. These investors, who typically exhibit a higher tolerance for volatility and a propensity to hold through downturns, selling at a loss could reflect their assessment of persistent unfavorable market conditions or capitulation phases. In this case, the Price Indicator would move towards -100, indicating a potential for market recovery as selling pressure diminishes and prices become attractive for accumulation.