Bitcoin’s Ultimate Market Indicator

Alex Mologoko
Sep 13, 2023

Bitcoin’s Ultimate Market Indicator 

Realized Price, Why It Matters, and the Elementus Edge

Bitcoin Realized Price is a crucial metric for understanding the overall economic state of the Bitcoin ($BTC) market. In this series, we’re going to explore what it is and why it matters in greater detail. 

Diving Into Realized Price

This metric represents the average cost basis at which all Bitcoins were purchased, considering the value of each Unspent Transaction Output (UTXO) when it last moved from one wallet to another. It’s essential for large financial institutions, as it provides insights into market participants' profit or loss status. When the $BTC market price is above the realized price, the market participants are, on aggregate, in profit. 

Conversely, when the $BTC market price is below the realized price, the market participants are, on aggregate, incurring a paper loss and less likely to sell since they’d incur a loss. This information is invaluable for making informed investment decisions, especially during periods of market distress, which historically occur at major cycle lows. Figure 1 below shows Bitcoin market price versus realized price, and highlights how to use this indicator to identify profitable entry points.

Figure 1: $BTC market price versus $BTC realized price (2011-present)

The Pitfalls of Realized Price

However, the generally accepted calculation of realized price has its limitations. It does not account for the nature of the transaction, considering all movements of Bitcoin from one wallet to another as a 'purchase.' This method does not differentiate between economic transactions and non-economic transactions, such as internal transactions (transferring from hot to cold wallets), depositing/withdrawing money from exchanges, and using mixers/changers. It’s important to note that if these non-economic transactions are included in a realized price calculation, the true value for which people bought Bitcoin will be misconstrued or misrepresented. Figure 2 below illustrates an adjusted realized price calculation using Elementus’ proprietary attribution data, and the discrepancy that can result from excluding non-economic transactions. 

Figure 2: $BTC market price versus $BTC adjusted realized price (2011-present)

The Elementus Edge

Recognizing the importance of accurate data, only Elementus delivers attribution data that offers a precise version of realized price based on economic transactions alone. This refined calculation filters out non-economic transactions, leading to a more accurate reflection of the average purchase price of all Bitcoins in circulation and a better understanding of the market's economic state.