Performing high-performance trades requires the use of strategies and a set of tools to obtain the best result in your operations. Among these tools, the Realized Cap indicator stands out, created exclusively to identify the real value of the Bitcoin network.
It is estimated that around 15% of bitcoins issued are permanently lost and out of circulation. Through this knowledge, you will be prepared to create operational strategies, understanding what is behind the valuation or overvaluation of Bitcoin.
Do you want to understand more about the Realized Cap indicator? Then continue with us, because in this article you will understand the main purpose of this indicator, how it is calculated, and the reason why it is one of the main indicators of On-Chain data.
What is Realized Cap?
The Realized Capitalization is a metric developed by Coin Metrics that aims to provide an accurate measure of the current size of the bitcoin market. This indicator offers a valuable insight into the behavior of cryptocurrency investors, which is no longer possible in the traditional market, as the valuation of shares in circulation is linked to the current market capitalization value.
Realized Cap measures the cost of acquiring digital assets the last time they were traded. However, as Bitcoin is used primarily 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 the analysis of On-Chain data as it measures the purchase value of each Bitcoin by the day it was last traded. Today, the volume of Bitcoin traded on the Blockchain network corresponds to $ 490 billion of Market Cap, while the Realized Cap of the Bitcoin network is valued at $ 165 billion. There is a great difference between the values, but it is arguably the most accurate nowadays.
How does the Realized Cap indicator work?
The Realized Capitalization represents the total acquisition cost of all bitcoins in circulation in the market. The Realized Value indicator removes all lost coins from the calculation of the total value, showing the sum of the volumes of long-term buyers when entering their Bitcoin hold positions.
Bitcoin Price vs Realized Cap
For instance, let's just say you have 30 BTC (Bitcoins) in your wallet and that they were deposited in 3 different transactions:
10 bitcoins were purchased at USD 5,000.00
05 bitcoins were purchased at USD 15,000.00
15 bitcoins were purchased at USD 10,000.00
The realized value is found when calculating the acquisition cost of all bitcoins in your portfolio. In this case, the realized value of the bitcoins is:
(10 x 5,000) + (5 x 15,000) + (15 x 10,000) = USD 275,000.00.
To obtain the average acquisition value of these 30 BTC, just divide the amount realized by the total number of bitcoins: USD 275,000 / 30 BTC = USD 9,166.66.
In other words, you paid an average of USD 9,166.66 per Bitcoin.
Is that gain or loss?
It depends.
If the current price of Bitcoin is less than USD 9,166.66, it means that you have paid a higher purchase price than they are currently worth. However, if the current price of Bitcoin exceeds USD 9,166.66, it means that you are profiting from operations.
Imagine that the current price of Bitcoin is around USD 20,000.00. These 30 BTC are now worth USD 600,000.00 in the market. If you sold them all, you would make a profit of $ 325,000 (USD 600,000 - USD 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 on purchasing their bitcoins.
Realized Cap Challenges
One of the biggest accounting challenges is dealing with the coins that are stored in Deep Cold wallets, making it difficult to interpret the Realized Cap for currencies with poor handling history.
Storage in Deep Cold wallets consists of using methods that make it possible to send bitcoins to Cold Wallet, however, it is very difficult to recover them. A simple example would be to encrypt the wallet, save it to a flash drive and store the hardware in a safe place. Since the only information needed to send bitcoins to a wallet is its public address, it is essential to store this information for future deposits, however, if a hacker tries to use bitcoins, he would have to go through several different levels of security.
Let's imagine that Satoshi Nakamoto has stored his more than 700 thousand bitcoins in a Deep Cold wallet and decides to use them in the historic maximum of 2020. In this case, the economic weight of the Bitcoin Realized Cap in circulation would be seriously undervalued, as he has already indexed the price of these “lost” bitcoins a long time ago, with values for the year 2009, with BTC values close to zero.
Realized Cap has a hard time differentiating between bitcoins that are actually lost or abandoned and coins that are only in deep Cold wallets. However, even the most secure storage systems require “awakening” from time to time - to renew the digital signature, whether to take advantage of a fork or to withdraw a fraction of the total. In any case, 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 movement
If someone does a transaction to an account that is “lost”, their entire balance is revalued at the current market price. This revaluation occurs when the accounts are active on the network.
Price of the last withdrawal
To prevent lost accounts from being reevaluated when someone sends money to them, we can use the price of the last time they had a withdrawal move.
Virtual UTXO
The disadvantage of using the price of the last withdrawal is that an account that has a very high balance and withdraws a small amount, ends up triggering a revaluation of the entire balance of the portfolio at the market price.
Although this is the desired effect (after all, we only want to discount the really lost coins), it is unfair for UTXO-based Blockchains (unrealized transaction exits), where the entire balance of an address is not taken into account for the Realized Cap, only the currencies actually used.
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