It is computed from the same cost-basis data as realized-cap: compare each coin's last-moved price to today's. Readings near 100% mean almost nobody is under water, which usually occurs near all-time highs; readings under 50% describe deep bear markets.
The behavioural claim is that holders sitting on losses sell less readily, so a low figure indicates exhausted supply and a very high one indicates abundant potential sellers. Historic bottoms have coincided with prolonged periods under about 50%, on a small number of observations.
As always, cost basis derived from on-chain movement is an approximation. Coins bought and sold inside an exchange never move on-chain, so a growing share of real trading is invisible to the metric, and its coverage has fallen as custodial holdings have grown.
Related: realized-cap, mvrv, nupl, hodl-waves