A few days ago, I came across an interesting data point: the realized profit and loss ratio indicator for Bitcoin has dropped back to 3.16. This number actually has some significance.

Looking back through historical records, in 2014, it took 285 days for this indicator to fall from 3.16 to 1; in 2018, it took 274 days; and last year in 2022, it took 296 days. Although the cycles are similar, the market sentiment reflected behind them is worth pondering.

How is this ratio calculated? It compares the average realized profits and losses of investors over the past 365 days. To put it simply, it shows who made money and who lost money during this cycle, using numbers to tell the story.

During a bull market, this value soars—because many people are cashing out profits at high levels, with winning trades clearly outnumbering losing ones. Conversely, in a bear market, the ratio drops very low, as investors are forced to cut losses in a state of loss, and the market is filled with panic and capitulation.

Using a 365-day moving average instead of daily data helps filter out short-term noise and reveals the true long-term trend. This indicator is quite effective in judging whether the market is overheated (ratio too high) or in extreme panic (ratio too low). In other words, it uses data to reflect the overall profit and loss status of market participants, which is very helpful in understanding where we are in the bull-bear cycle.