large realizedcap
large realizedcap

Realized Cap: Meet One of the Key On-Chain Indicators

Learn more about one of the key metrics for Blockchain network analytics

High-performance trading requires strategies and tools to get the best result in your operations. Among these tools, we highlight the Realized Cap indicator, created exclusively to identify the real value of the Bitcoin network. It’s estimated that about 15% of bitcoins issued are permanently lost and out of circulation. Through this knowledge, you’ll be prepared to create trading strategies, understanding what’s behind the appreciation or overvaluation of Bitcoin.

Want to understand more about the Realized Cap indicator? Stick with us, because in this article you‘ll learn the main function of this indicator, how it’s calculated and why it’s one of the main indicators of On-Chain data!

What is Realized Cap?

Realized capitalization is a metric developed by Coin Metrics, with the aim to provide an accurate measurement of the current size of the bitcoin market. This indicator provides a valuable insight into the behavior of cryptocurrency investors, which is no longer possible as it is in the traditional market, as the valuation of outstanding shares is tied to the current market capitalization value.

Realized Cap measures the cost of acquiring digital assets from the last time they were traded. But because Bitcoin is primarily used for trading and not for payments (for now), the Realized Cap indicator is used as an estimate for studying the acquisition costs of these transactions.

This indicator is important in on-chain data analysis because it measures the purchase value of each Bitcoin on the day it was last traded. Today, the volume of Bitcoin traded on the Blockchain network amounts to $490 billion in Market Cap, while the Realized Cap of the Bitcoin network is valued at $165 billion. The difference between the values is high, but it’s arguably the most accurate these days. You want to understand why? Check below to see how the calculation works!

How Does the Realized Cap Indicator Work?

The realized capitalization represents the total cost of acquiring all bitcoins in circulation in the market. The Realized Value indicator eliminates all lost coins from the total value calculation, showing the sum of long-term buyer volumes when entering their Bitcoin hold positions.

Bitcoin Price X Realized Cap Chart
Bitcoin Price X Realized Cap Chart

Let’s say you have 30 BTC in your wallet that were deposited in 3 different transactions:

  • 10 bitcoins were purchased at $5,000.00
  • 05 bitcoins were purchased at $15,000.00
  • 15 bitcoins were purchased at $10,000.00

The realized amount is found when calculating the acquisition cost of all bitcoins in your wallet. In this case, the realized value of bitcoins is:

(10 x $5.000) + (5 x $15.000) + (15 x $10.000) = $275.000,00.

To get the average acquisition value of these 30 BTC, simply divide the realized value by the total number of bitcoins: $275,000/30 BTC = $9,166.66.

 

In other words, you paid on average $9,166.66 per Bitcoin.

Is It A Gain Or A Loss?

It depends. If the current price of Bitcoin is less than $9,166.66, it means that you have paid a higher acquisition value than they are currently worth. However, if the current price of Bitcoin exceeds $9,166.66, it means that you’re profiting from the transactions.

Imagine that the current price of Bitcoin is around $20,000.00. These 30 BTC are now worth $600,000.00 on the market. If you sold them all, you’d have a profit of $325,000 ($600,000 – $275,000).

We can then calculate this acquisition cost across the Bitcoin network, giving us an estimate of the total amount of money users spent when acquiring their bitcoins.

Realized Cap Challenges

One of the biggest accounting challenges is dealing with coins that are stored in Deep Cold storage, making it difficult to interpret Realized Cap for currencies with little history of the movement.

Deep Cold wallet storage is about using methods that make it possible to send bitcoins to Cold Wallet, but it’s quite difficult to recover them. A simple example would be encrypting the wallet, saving it on some USB stick, and storing the hardware in a safe place. 

As the only information needed to send bitcoins to a wallet is its public address, it’s critical to store that information for future deposits, but if a hacker tries to use bitcoins, it would have to go through several different security levels.

Realized Cap: 2016 - 2021
Realized Cap: 2016 – 2021

Imagine if Satoshi Nakamoto stored his more than 700,000 bitcoins in a Deep Cold wallet and decided to use them in the historic height of 2020. In this case, the economic weight of bitcoin’s realized cap in circulation would be seriously undervalued, as it has already indexed the price of these “lost” bitcoins long ago, with values for the year 2009, with BTC values close to zero.

Realized Cap has difficulty differentiating between bitcoins that are actually lost or abandoned and coins that are only stored in Deep Cold wallets. However, even the most secure storage systems require “awakenings” from time to time – to renew the digital signature, either to take advantage of a fork or to draw a fraction of the total. Either way, many of these accounts will have some kind of movement.

From this information, we can use some approaches to estimate the balance of the network:

Price of the Last Drive

If someone sends a transaction to an account considered “lost”, their entire balance is revalued at the current market price. This appreciation occurs when accounts are active on the network.

Price of the Last Withdrawal

To prevent lost accounts from being revalued when someone sends money to them, we can use the price the last time you cashed out.

UTXO Virtual

The disadvantage of using the price of the last withdrawal is that an account that has a very high balance and draws a small amount, ends up triggering a revaluation of the entire balance of the portfolio to the market price.

While this is the desired effect (after all, we just want to cash out the lost coins), it’s unfair to UTXO-based Blockchains (unrealized transaction issues), where the entire balance of an address is not taken into account for realized cap, only the currencies actually used.

Meet Vector

If you enjoyed this article and want to know more about On-Chain Data, learn more about it on  VectorPro and have the most advanced cryptomarket trading and analysis tools available.