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Hello my great friends. It is good to be with you all once more. I am using this opportunity to engage in the homework task of @sapwood who continued on his teaching of onchain metrics. The topic is **Onchain Metrics(Part-2)**.
# What can you say is the difference between Realized Cap & Market Cap, How do you calculate Realized Cap in UTXO accounting structures? Explain with examples.
### Market Cap
The market cap is a metric that tells us the market value of a cryptocurrency or company. All of that cryptocurrency, whether issued or yet to be issued are used in the calculation of market capitalization. This onchain metric is calculated by **multiplying the total number of the circulating supply of crypto asset by the current market price of a unit of that crypto asset.**
This onchain metric determines the companies asset worth at a given price and at a particular time. Thus this can change any time due to price being the major determinant, since price can be influenced by the players in the market. So using this valuation system can not give a fair value of the networth of the crypto asset or company
To illustrate how it works, assuming the circulating supply of a crypto is 20 million coins and currently, the price is $2 for one of that coin. So the market cap will be calculated as below:
**Market cap = price * Total no of coin(shares)**
**Market Cap = $2 * 20,000,000**
**The Market Cap = $40,000,000**
Investors primarily uses this valuation method to decide whether or not to invest in a particular crypto asset. It is an easy and quick way of estimating the value of the crypto asset just by the way, the market sees them via the price of the crypto. Helps them to ascertain the risk in such investment as well.
### Realized Cap
Realized Cap is a valuation system that give a more accurate and fair value of a crypto asset. In this valuation, the total number of coins in circulating supply is not multiplied by the current market price, rather, the value of the asset is gotten by multiplying the asset(UTXO) with the price as at when it was last moved from one wallet to another wallet. Since not all the coins in supply are moved at once, the summation of all the multiplied UTXOs will give us the Realized Cap. It considers the price of a crypto asset(UTXO)as at when it was moved from one wallet to another and not the current price of that asset.
This valuation removes the effect of dormant and lost coins, reflecting the actual value of the coins in the market. It estimates the true economic value or wealth stored as an asset. All those UTXOs that have not been active in the market, thus not impacting on the market is valued at the price it was last moved, in this way, considering them to be of low economic value. So whenever they are moved to another wallet, it will now have an economic importance, thus impacting on the market.
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**Difference between Market Cap and Realized Cap**
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Sn|Market Cap|Realized Cap
-------|--------|---------
1|Calculated using current market price|Calculated using the price at which UTXO was last moved
2|all the coins multiplied by the price|Different UTXO have different price values
3|Show the market value of the coin at a glance|Reflects the actual networth value of the coin as a store of value
4| can be influenced by market makers(investors)|cannot be manipulated easily by investors
5|the value gotten can be highly volatile|There is less volatility in its value calculated.
# Explain how to calculate the Realized Cap in UTXO accounting structures? Explain with examples?
#### The formular for calculating the Realized Cap is
[source](https://dataguide.cryptoquant.com/market-data/capitalization-models)
To illustrate this.
X coin have a total supply of 30 coins and 30 UTXO in total. 7 UTXO was last transferred to another wallet when the price was $3000 on January 2014. 8 UTXO was last moved to another wallet April 2017 when the price was $7000. 10 UTXO was last moved in November 2020 when the price was $4500 and 5 UTXO was last moved or transferred to another wallet on August 2021 at the price of $8000. Meanwhile the current price of X coin is $7000.
Realized Cap = (7*3000)+(8*7000)+(10*4500)+(5*8000)
Realized Cap = $21000+$56000+$45000+$40000
**Realized Cap = $162,000**
**Market Cap** = 30*7000 = **$210,000**
We also need to note that when the market cap is higher than the Realized Cap, it means more profitability for the coin, but if the Realized Cap value is higher than the Market Cap value, it means there is going to be some losses for the coin.
# Consider the onchain metrics-- Realized Cap, Market Cap, MVRV Ratio, etc, from any reliable source(Santiment, Glassnode, etc), creating a fundamental analysis model for any UTXO based crypto, e.g. BTC, LTC [design a model for both short-term(up to 3 months) & long-term(more than a year) & compare] and determine the price trend/predict the market (or correlate the data with the price trend)w.r.t. the on-chain metrics? Examples/Analysis/Screenshot?
### Realized Cap 3 months
To be able to read the chart and understand the chart, we need to understand the effect a trend movement on the realized cap line.
● when there is a bullish trend, there will be a steep gradient of the Realized Cap(Rc)
● If it is trading in a range form or sideways, the RC will be flat.
● If it is a bearish trend, there will not be a steep decline but a gradual decrease of the RC or better still a flat contour.
From the chart analysis above, we can see that during the bullish movement, the RC went up at very steep gradient. When the price movement reversed and became bearish, instead of falling down sharply, it became flat. It was going down slowly because during a bearish trend, many prefer to hodl their coins instead of selling.
Additionally, on April 14, 2021, price of bitcoin went up to $64k while the RC is 324.7B, however, on May 17th, 2021, when the price came down to $49.2k, the RC went up to 354.57B. What this implies is that many UTXOs was moved or transferred to another wallet leading to increase in the value of Realized Cap.
**Realized Cap long Term**
From the chart above, we can see that the upward movement in price is also equaled to the upward movement of the Realized Cap. As at 22nd Sept, 2020, the price of BTC was $10.46k while the RC is 113.19b. However, on the 21st of March, 2021, the price of BTC was $57.786k while the RC is 290.61B.
This analysis shows that during this bullish trend, UTXO holders took advantage of the price increase to sell their coins. This movement of coins at a higher price led to increase in the RC value, this gave rise to the steep gradient formed on the chart.
From the analysis done for the long term Realized Cap increases as price increases.
**Market Cap short term 3 months**
Market Cap value is calculated by multiplying the total circulating supply of coins by the current market price. Due to this calculation, the value of Market Cap is directly affected by the price. Thus, increase in price leads to increase Market Cap and decrease in price leads to decrease in Market value.
From the charts above, checking the marked points in the chart, we can see that increase in price necessitates an increase in Market Cap and a decrease in price leads to a decrease in Market Cap.
**Market Cap long term 2yrs**
The two charts above for 2yrs also shows the same relationship between price and the Market Cap. The boxes marked in the charts when compared shows the result. Price increase leads to increase in Market Cap price decrease leads to decrease in Market Cap value since the total supply of coins remains the same.
So for Market Cap value have a correlation with the price whether it is for longterm or short term.
**MVRV**
MVRV is an onchain metrics that helps us to know the average profit or loss experienced in the market. It is arrived at by dividing the Market Cap value by the Realized Cap value. It is used to spot out the top or bottom of an asset.
When the MVRV is higher, it is a indication that the average profit is higher signaling a potential bearish market, while, if the MVRV is lower, it means the market is in its accumulation zone, may have a potential breakout. The most ideal thing to do during a trade is to buy at a lower price and sell at a higher.
To explain the reading of MVRV,
● If the MVRV is >1(100)%, it signifies that a seller would be selling at a profit at the current price. if the MVRV is 2(200), the average profit will be twice the amount invested 2x, MVRV is 3(300%) means making an average profit of 3x
● If the MVRV is <1(100%), it implies the person will sell at loss at the current market price.
● If MVRV is equal to 1(100%) the market is at an equilibrium price or at break even.
**MVRV on short term basis 3 month**
From the first chart, we noticed that on June 30th, 2021, the price was at $34k while the MVRV was 89.17%. This show it is not a good time to sell, rather a time to accumulate the coin, since it has a potential upside movement.
On the 26th of July, 2021, the price rose to $37.3k and the MVRV also rose to 100.86%. There is a direct correlation between price and MVRV ration. How at this point, it is at break-even point. Not a time to sell off our position yet. As price increased, the MVRV ratio also increased.
From this last chart we observed that on August 23rd, 2021, at the price of $50.1k, the MVRV rose to 153.57% making it a time to enjoy some average profit of 1.53x.
This confirms my analysis from the first chart, that the coin have a potential upward movement in price.
**MVRV on Long term basis 2 yrs**
The chart above shows that at the price of $11.425k, MVRV ratio was 84.99% on Oct 13, 2020, most likely when the onchain metrics calculation began for BTC.
This second chart illustrates what happened on April 13, 2021. The price was at $63.57k while the MVRV grew to 270.69%. We can see the formation of higher highs and higher lows as the bullish momentum continued. Once more we notice too that on a long term basis, the value of MVRV increased along with upward movement in price.
In conclusion, after the short and long term analysis, it is very clear that MVRV have a direct correlation to price. As price increases so also the MVRV value.
# can MVRV ratio be useful in predicting a trend and take a position? How reliable are the upper thresholds and lower thresholds of the MVRV ratio and what does it signify?Under what conditions will the Realized cap will produce a steep downtrend? Explain with Examples/Screenshot?
### Can MVRV be useful in trend prediction and taking a position?
We have earlier noted that MVRV is derived by dividing the Market Cap by the Realized Cap. We have also seen the readings of the MVRV, which range is bullish and which would represent selling at a loss. Thus knowing this will help us to know when to enter a trade. When a coin have spent so much time at the accumulation zone, below 100%, it is signal to enter a long position and be patient, waiting for market dynamics to play out itself.
From the chart above, Another way of using this is by adding resistance and support lines on the chart. Like I have drawn lines of various resistance and support. So when we use it in addition to the ranges of MVRV, A trader determines when to enter a long or short trade
In conclusion, MVRV ratio can be used to predict Trend and to enter a trade position. However, it gives a more accurate prediction for long term investors. So I would personally recommend using it for long term investments.
**What is the reliability of the upper threshold and lower thresholds of the MVRV ratio and what does it signify?**
In the preceding question, I mentioned about support and resistance as an additionally way of getting the best from the use of MVRV ratio. The upper threshold is the same thing as the resistance while the lower threshold is the support. Both thresholds can change depending on the trend movement at the time. Those points are points of temporary accumulation, signifying the struggle between the buyers and sellers. If the resistance is broken and price goes further, this implies the bulls are in charge, but if the support is broken and the price goes further down, it implies that the bears are in control of the market.
So the upper threshold and the lower threshold can be relied upon as a resistance or support levels for the coin.
**What conditions will make the Realized cap produce a steep downtrend?**
Realised cap value is the value of the asset is gotten by multiplying the asset(UTXO) with the price as at when it was last moved from one wallet to another wallet. From the foregoing we have seen that the realized cap have a steep gradient or increase, when coins that have been on **hodl** are now moved to another wallet at a higher price to take profit.
The condition that will make the realized Cap have a steep downtrend is when the market does not not have confidence in that coin. Under that situation, there will be a massive sell-off by investors. This was the case with XRP during the court case, investors temporarily lost confidence in the coin.
The chart below shows.
Another condition is when people buy at the end of an uptrend and then sell at end of a downtrend. This is most unlikely since many traders will prefer to wait patiently for increase in price, unless if it is to limit their losses for time-based investors.
# Conclusion
This lecture have taught me about Realized Cap. I did not know about it before, but now, I have fully understand how it works. Understanding of the MVRV ratio will help me to know when to invest in a coin especially long term investment to avoid unnecessary losses in the market.
Great thanks to @sapwood for making this knowledge available to me.
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