On-chain Metrics(Part-2)- Steemit Crypto Academy- S4W3- Homework Post for @sapwood

1. What is the difference between Realized Cap & Market Cap, How do you calculate Realized Cap in UTXO accounting structures? Explain with examples?

The realized cap is a powerful on-chain indicator that provides insight into the cost basis. of a market, relative movement of old and new coins, and is an important instrument in identifying an asset's points of highest opportunity.

The realized capitalization is a variant of the market capitalization which accounts for the realized value of coins on a particular network as opposed to their market value. This is done by taking into cognizance the price of a UTXO as at when it was last moved instead of its current value. The purpose of this is because not all coins released are truly active. Realized cap accounts for ;

• Some coins can be locked in smart contracts or completely lost
• cold storage coins which are not available at the spot price not Circulating

Market Capitalization

Market capitalization, on the other hand, is a term that reflects a digital currency's relative size. It's calculated by multiplying the quantity of coins in circulation by the asset's current market value.

For instance, let's say a particular coin has 7 million tokens in supply and eàch unit of such currency is currently being traded at $3.
Market capitalization will be equal to
Current price x Circulating supply = 3 x 7,000,000
= $21,000,000.

Realized cap calculation

The realized cap is calculated by valuing each UTXO based on the purchase value of each unit of asset on the day it was last traded
Let's say a particular asset has 15 UTXO's in total with a circulating supply of 15. 8 of which haven't been moved since day of purchase four years ago valued at $50. 5 of which have not been moved since last transaction two years ago valued at $300 as at when it was moved and the remaining two UTXO's have not moved since last month value at $2500 as at last movement date.

Using this instance the Realized Cap will therefore be
Realized cap = (8 * 50) + (5 * 300) + (2 * 2500) = $6900

If the current price of the asset is valued at $4000 then the market capitalization will be
Current price x Circulating supply
4000 x 15 = $60000

The realized cap is a highly powerful statistic for determining the genuine economic weight contained in an asset because it takes into account the price at which each coin was last transferred. Assets/coins deemed to have little economic value, such as inactive or long-lost coins (i.e. assets locked due to loss of means of ownership, private keys, and so on), will be discounted. If these coins are spent after many years of dormancy, the realized cap will be significantly impacted as they are repriced into an active state.

Due to the fact that volume on exchanges and side chains is ignored, the realized cap filters out emotions and speculation noise, unlike the market cap.

(2) Consider the on-chain metrics-- Realized Cap, Market Cap, MVRV Ratio, etc, from any reliable source(Santiment, Glassnode, etc), and create a fundamental analysis model for any UTXO based crypto, e.g. BTC, LTC [create 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 Capitalization

In a Downtrend phase or bear market, the realized cap remains flat or moves in shallow downtrends, this is because investors tend to hold their UTXO's until market interest in the protocol begins to pick.

In an uptrend structure or bullish phase, realized cap moves in a steep uptrend. This happens because old coins obtained at lower prices are spent in order to realize profit. A steeper movement indicates that greater earnings are being realized.

In consideration with the on chain metrics realized cap, market cap and MRVR ratio I'll be creating a fundamental analysis of bitcoin using santiment

Short term model

When BTC saw a downward swing towards the end of June and July, as shown by the lower highs and lows produced, the realized cap did not fall with the price, but instead remained flat. This is because, as previously said, investors will tend to retain their UTXO's until the market begins to recover. Another interesting point to note is that, despite the fact that BTC has experienced a modest drop in the month of September, the realized cap has continued to rise, despite the drop in the market value. This is a hallmark of a bull market.

Long term model

The realized cap produced steep uptrends with the continuous upward movement of price. The bullish movement picked up around September 2020 when BTC was in the $10k range. We see the upward bullish momentum that followed suit after this, however something interesting happened during January 2021. The price of BTC dipped to $29.8k but again the realized cap continued to show upward movement, as explained in the short term analysis such market reaction signals a bullish market and we see how the bullish movement that followed suit after this.

Market Capitalization

As previously stated, market capitalization is an on-chain metric that considers an asset's current price and circulating supply. As a result of this factor, there is a direct correlation or relationship between market capitalization and price movement.
To demonstrate this point, I'll conduct a fundamental analysis of market capitalization and price movement using santiment

Short term

In the chart above, I've enabled the area option to better illustrate the market cap and the price. From the image, it's clear that market cap moves in the same direction as price as with every significant change in price the market capitalization also adjusts for such change by the same percentage. Since this is the short term analysis the markets reactions and noise as market cap tends to adjust to price changes are captured

Long term

The above chart analysis confirms the obvious relationship between market capitalization and price. The correlated movement of the market cap and price can also be seen in the long term analysis. This is because the price is multiplied by the circulating supply when calculating market capitalization, so price plays a significant role in market capitalization.

The noise that occurs when the market cap tries to adjust to price movement is smoothed out in the long term analysis. We can tell because there is no significant difference between the two metrics with price playoffs. The green price line is almost imperceptible. When the BTC market slumped around March 18 2020, the market capitalization followed suit, and similarly, when BTC began its bullish movement and reached its all-time high price of $64,863 on April 14 2021, the market capitalization followed suit.

MVRV Ratio

The MVRV Ratio is an on-chain metric that helps in the identification of network value divergences. It represents the market's average profit or loss ratio. It is calculated by dividing an asset's market cap (speculative value) by its realized cap (stored value).

When the MVRV equals one or 100 percent, the market cap equals the realized cap and there is a point of unity; when the reading falls below one or 100 percent, the market cap falls below the realized cap, indicating the accumulation phase; historically, this point has been known to represent the best opportunity to buy an asset.

Short term Model

The preceding chart depicts the relationship between the MVRV ratio and price. We observe the movement pattern in the form of waves between the price and MVRV ratio corresponds.
As the price falls, so does the MVRV ratio. On the 19th of July 2021, the BTC price fell to 29.6k, and the MVRV ratio was in the accumulation zone at 62.57 percent. This was preceded by an upward positive price trend, with the MVRV ratio closely following.

Long term Model

The long-term model provides a more detailed description of the movements.
On January 9th, BTC reached a high of 41.3k, while the MVRV ratio reached a value of 198.50 percent. When the MVRV ratio was at its height, it triggered a negative movement until BTC reached a low of $29.8k on January 27th. The MVRV ratio also fell to 175 percent, which was followed by a positive movement until the MVRV ratio crested at 333 percent when BTC was at $57.8k.
According to this, the highs of the MVRV ratio are followed by a slight reduction in price, whereas the lows of the MVRV are followed by a bullish price movement.

(3) Is MVRV ratio useful in predict a trend and take a position? How reliable are the upper threshold and lower threshold of the MVRV ratio and what does it signify? Under what condition the Realized cap will produce a steep downtrend?

The MVRV ratio is very helpful in predicting a trend. Based on the signals given off by the MVRV ratio, traders can hold a very strong bias of the market movement. For instance the MVRV ratio gives off signals whenever it reaches it upper or lower threshold and with the incorporation of this signals with price action and fundamental analysis traders can be able to predict the trend in which they expect price to move towards and hence take a position.

How reliable are the upper threshold and lower threshold of the MVRV ratio and what does it signify?

Upper threshold

The upper limit of the MVRV ratio is thought to indicate a potential selling opportunity. This signal, however, is unreliable since it is coin-specific or time-specific. The price response to the MVRV ratio reaching the upper level in the chart above is merely a minor decrease in price, similar to a corrective movement to the downside before price continues with the present market trend. Because different assets react differently to this threshold, it cannot be regarded a valid measure.

Lower threshold

The lower threshold of the MVRV ratio occurs when the market cap is less than the realized cap, suggesting an oversold position, the MVRV ratio provides a good buy signal. In the figure above, we can see that if the MVRV ratio falls below a certain level, it is accompanied by a bullish trend. This has historically been demonstrated to be a consistent dependable metric because the overall trend in asset price movement is usually continually bullish, so when price enters the accumulation phase/lower threshold, it incurs interest in the projects and is thus frequently preceded by an upswing.

When will realized cap produce a steep Downtrend

Because a big percentage of investors prefer to hold their balances rather than sell at a loss during a slump, the realized cap generally moves sideways or in a shallow downward trend. Although it is uncommon for the realized cap to create a sharp downward trend, it is not wholly impossible.
The realized cap can cause a strong downtrend when the majority of investors lose faith in an asset, prompting them to sell off even at a loss.