Become an On-Chain Savant 002 - Market Valuation Models (RCap)
Learn how to identify cycle bottoms and generational buys. Master a simple signal that has a 100% win rate. Stun CT with your Faultless proclamations that "The Bottom is In".
This is part two of my On-Chain Masterclass series. You can find the other parts here:
Market Valuation Models (Realised Cap) - This article
On-Chain Valuation Models
In the first instalment in the series, we described Market Cap (MCap). This is simply the gross valuation of the entire protocol, and is calculated as follows:
MCap = Total Supply x Price
Whilst this provides us with a ball park figure of what a network is worth, we’re here to look for a model which will give us an edge and indicate when the market is HTF oversold, overbought, or somewhere in-between. We want to identify the mythical generational buys that CT OGs bang on about from time to time. Enter, Realised Cap (RCap).
Realised Cap
Realised Cap is a modification of Market Cap, which values each BTC at the market price when it was last moved vs current value.
E.g. If Diamond Handed Dave bought 100BTC at $10K, and has kept them in cold storage ever since, the Realised Cap of that BTC is 100 x 10,000 = $1,000,000 (vs its $4,400,000 Market Valuation at the time of writing).
Should Dave decide to emerge from his mum’s basement and head to BTC Miami, he’ll probably send 1 BTC to his exchange to fund the rental Lambo, pre-owned Hublot, Balenciaga trackies, hookers and Nobu dinners he secretly hates, because they taste nothing like mum’s Tesco lasagna.
In this case, that 1 BTC’s Realised Cap is now $44,000, whilst the 99 BTC left in cold storage retain a Realised Cap of $990,000. This works in an identical manner on the way down, with reducing Realised Cap when Bitch Handed Bob capitulates, and sells the BTC he bought at 69K for 35K.
The advantage Realised Cap brings, is that it minimises the influence of lost and ‘cold’ supply, and increases the weighting of the highly liquid supply. Since Realised Cap re-values each coin every time it’s moved, it can be considered a proxy for the amount of pent-up value stored in the network. It also provides us with a basis from which we can guesstimate the global cost basis for all market participants (i.e. the average price a which the entire market has bought their BTC). We then use this as a baseline to create more useful metrics such as NUPL and MVRV (which will be covered in the next instalment).
One limitation to bear in mind is that this model doesn’t cover BTC that is traded and remains on an exchange, as it isn’t withdrawn, and can be transacted between parties several times without moving between on-chain entities.
How to Use Realised Cap
Since Realised Cap reprices BTC every time it’s moved, it provides a realtime metric for all economic value stored on chain. Should old dormant coins (that currently have a minor RCap) become active, they’ll have a huge impact on the metric, whereas in the traditional MCap framework they always had a value equal to freshly minted BTC.
The key behaviour to keep in mind is:
Realised Cap Increases when BTC that was last moved at a lower price level is moved at a higher price.
Realised Cap Decreases when BTC was last moved at higher prices is moved at lower prices.
Change in Realised Cap is the difference between current market price, and the price when the BTC was last moved (multiplied by the amount of BTC moved).
At a high level, Realised Cap informs us as to whether most of the market is holding significant unrealised profits that they’re likely to realise (i.e. market is likely to top out), or whether the market is so deep underwater that anyone who was going to capitulate and realise a loss did so already, and a HTF bottom is most likely in.
Applying Realised Cap
The simplest way to trade RCap is to compare it to MCap and use it as a market cycle bellwether.
If Market Cap is greater than Realised Cap the market is broadly in profit
If Market Cap is less than Realised Cap the market is broadly at a loss
Buying Generational Bottoms
Should one look back at Bitcoin’s price history, one would notice that MCap has only traded below RCap a few times. Each and every one of those times, this signalled a Generational Buying opportunity.
You would have never lost money buying these signals.
Here’s an image from Glassnode illustrating the signals (black line is MCap, orange is RCap):
Sure, the 2012 dip went quite deep, (but that was the first cycle, and crazy volatile), and 2015 was drawn out AF, but you would have never lost money buying these signals. Since RCap is essentially the market at large’s cost basis, it’s somewhat obvious that this would be a strong support/resistance level.
For the mouth-breathers in the back:
Periods where MCap is below RCap are Generational Buys and/or Cycle Bottoms. RCap will be support on the way down, and resistance on the way back up.
Using RCap to Identify Cycle Phase
So, buying when MCap is below RCap is a slam-dunk. What-about the 99% of the time when it’s above? Well, here’s a cheat sheet that can help you identify what part of a cycle we’re in.
RCap is rising steeply = Bull market, as BTC purchased cheaper is being spent to realised profits
RCap is melting downwards = Bear market, as Degens who FOMOed in at the top capitulate and sell at a loss to smart money who accumulate and send to cold storage
Flat or gentle uptrend = Accumulation and early bull market, as the smart money continues to withdraw to cold storage.
Conclusion
Realised Cap is a fundamental, but crucial metric that tells us whether the market is in aggregate profit, loss, accumulation, or at a generational bottom. This is further re-configured to create NUPL and MVRV, the two most popular market valuation models, which we shall cover in the next instalment.
Trade safe!
TCP
Become an On-Chain Savant 002 - Market Valuation Models (RCap)
Thanks for the thread, I wonder if I did get it wrong but You did mentioned before that if MCap trades below RCap this means a loss and good signal to buy but I quote the phrase you wrote after " Periods where RCap is below MCap are Generational Buys and/or Cycle Bottoms. " isn't there a typing mistake or I am the one who didn't get it well!