Realized capitalization (realized cap) is a variation of market capitalization that values each UTXO based on the price when it was last moved, as opposed to its current value. As such, it represents the realized value of all the coins in the network, as opposed to their market value.
Realized cap reduces the impact of lost and long dormant coins, and weights coins according to their actual presence in the economy of a given chain. When a coin that was last moved at significantly cheaper prices is spent, it will re-value the coins to the current price, and thus increase realized cap by a corresponding amount. Similarly, if a coin is spent at a price lower than when it was last moved, it will re-value to a cheaper price and have a corresponding decrease on realized cap.
Given realized cap values each coin at the time last moved, it can be considered a proxy for the value 'stored' or 'saved' in the asset. This metric can therefore be considered an estimate of the aggregate cost basis for the network and makes it a powerful baseline for the creation of additional metrics (e.g. MVRV and NUPL).
Realized cap is computed by valuing each UTXO based on the price when it was last moved.
The realized cap considers the price at which each coin is last moved, making it a powerful metric for estimating the true economic weight, or the global wealth stored in the asset. It will discount long dormant or lost coins as they are considered to be of low economic value. Should these coins be spent after many years of dormancy, there will be a corresponding large impact on realized cap as they are repriced into an active state.
For example, bitcoin that were last spent in 2009 before BTC had a price and are now lost will have an economic value in the realized cap framework equal to zero. Market capitalisation will consider these coins in the calculation and thus may be considered to over-value the total market size.
Changes in realized cap will occur under the following framework:
Increases in realized cap will occur when coins that were last moved at cheaper prices are spent. This action re-prices them higher and realized cap will increase by the volume of coins multiplied by the difference between last price and current price.
Decreases in realized cap will occur when coins that were last moved at more expensive prices are spent. This action re-prices them lower and realized cap will decrease by the volume of coins multiplied by the difference between last price and current price.
Magnitude of change in realised cap is directly related to the difference in price between when a coin was last moved and the current price when it is spend. Coins re-priced by more significant amounts will have larger influence on the realised cap
A coin moved at the top of a bull market and spent at the bottom of the bear will have a large downwards impact on realised cap. Similarly, a coin bought at the bottom of a bear market and sold at the top of the next bull will have a large upwards impact on realised cap. A coin moved at the same price but at a later date will have no impact on realized price.
The realized cap is well paired against the market cap using the Glassnode Compare tool to observe various market phases. Under the framework that realized cap estimates the aggregate cost basis of the market:
Where the market cap trades above realized cap, the market is in aggregate profit.
Where the market cap trades below realized cap, the market is at an aggregate loss.
Historically, the market cap has traded at or below the realized cap in only a few instances, however each has presented opportunities that in hindsight represented cyclical bottoms for bear markets. Being the aggregate cost basis for the market, it makes sense from a psychological perspective that strong support and resistance would be formed at this level.
This was demonstrated in both the 2011 and 2013 market cycles, both of which occurred prior to the original formulation of the realized cap metric in 2018. Early bear market floor support was established coincident with the realized cap. Periods of time where market cap traded below realized cap represented ultimate bear market bottoms and accumulation ranges where the realized cap acted as both resistance, and then support once the level was breached.
The prevailing trend and gradient of the realized cap can also provide insight into the phase of the market using the following framework:
Bull markets tend to be characterised by a steep uptrend of the realized cap.This occurs as coins purchased at cheaper prices are spent to realize profits. Steeper uptrends suggest larger magnitude profits are being realized.
Bear markets tend to be characterised by shallow downtrends in the realized cap. This occurs as market interest in the protocol begins to pick, more coins are transacted in off-chain exchanges and new market entrants take losses in the bear market.
Accumulation phases following bear market capitulation and into early bull markets tend to be characterised by a sideways plateau to shallow uptrend of the realized cap. This occurs as smart money investors accumulate cheap coins providing ultimate buy support and begin to withdraw coins to cold storage wallets.
Combine: With market cap on the same axis for direct comparison of valuation models.
Antoine Le Calvez (September 2018)
CoinMetrics - Introducing Realized Capitalization