🔍Deep Dive: Bitcoin's Realized Price

Welcome to yet another insightful edition of Bitcoin Insights’ ‘Deep Dive’, where we conduct statistical analysis of the most noteworthy data metrics throughout the Bitcoin ecosystem.

This week, we explore Bitcoin’s “Realized Price”, a metric that reflects the average price at which each Bitcoin was last transacted on-chain.

As we’ll come to learn, this metric offers a more robust view on Bitcoin's valuation (compared to just the spot price which is significantly more volatile).

This allows us to draw various unique insights to help us better assess market risk, establish price floors, and understand potential inflection points.

Let’s get straight to it!

Table of Contents

1. The Importance of Realized Price

2. Interpreting Deviations from Realized Price

3. Statistical Modeling

4. Does RPI Correlate With Bitcoin’s Price?

5. Key Takeaways

⌛️ Estimated Read Time: 0.6 Blocks (~5 Mins)

The Importance of Realized Price

Bitcoin's Realized Price (RP) is defined as the average price at which each Bitcoin in circulation was last transacted on-chain. It is calculated by taking the realized market capitalization (the sum of all Bitcoin at the price they last moved) and dividing it by the total supply of Bitcoin in circulation.

The importance of the realized price is that it can help us in assessing broader market risk. By comparing the current market price to the realized price, investors can estimate the amount of unrealized gains or losses in the market, which can help quantify the extent of speculative activity and potential for market corrections.

The chart below shows the realized price (red) vs. Bitcoin’s spot price (blue).

Realized price plays a crucial role in establishing a price floor for Bitcoin, offering a real foundation for valuation.

While the market price can fluctuate wildly and often reflect short term speculative bubbles or panic-driven sell-offs, the realized price represents a deeper, more accurate assessment of the amount of total capital invested in the market.

This dollar amount helps ground Bitcoin’s valuation in more concrete terms that the spot price, which typically is more akin to reflecting “on-paper” values.

Interpreting Deviations from Realized Price

Technically, the market price should not deviate substantially from the realized price, as the latter provides a more stable and reliable benchmark.

However, significant deviations do occur due to market speculation, emotional trading, and various macroeconomic factors.

Once such example would be a supply shock consisting of a group of large whales who bid the price up on a random Sunday evening based on the imminent release of a specific news event.

Although the price shoots up, the real amount of dollars entering the market may not be that large on a relative basis (compared to Bitcoin’s overall market capitalization).

In other words, higher short term Bitcoin prices represent the willingness to pay of the last buyer, not the average buyer. If it is too high for the average buyer, the price will correct lower to more reasonable levels.

Thus, deviations from the realized price can be very helpful indicators for investors to gauge intrinsic market health and risk.

Statistical Modeling

Having established the importance of RP for gauging market risk, we can now proceed to statistically model the price as a function of RP.

We run the following regression model:

log(Price) = a + b*log(Realized Price) + e

The resulting estimates are given below. Note how closely price and RP follow each other. The R-squared is 98%, indicating that our model was able to capture 98% of price fluctuations.

The figure below shows the predictions of price based on this model. It provides a nice and stable valuation metric. In bull markets, Bitcoin trades above the prediction, and in bear markets, it trades mostly below.

If we measure the deviations from the model’s prediction, we arrive at a metric that quantifies market risk.

Since the market structure and magnitude of deviations change, we correct for these fundamental changes using the volatility metric discussed in our previous research article.

Once these deviations are adjusted by volatility, we get the Realized Price Index (RPI), as depicted in the chart below.

Does RPI Correlate With Bitcoin’s Price?

The metric spends almost all of its time between -10 and 10, with values below -5 and above 5 indicating high inflection likelihoods, as shown in the chart below.

To better visualize the accuracy of RPI in guiding us through volatile Bitcoin price swings, we have colored the price by RPI with green representing an RPI of below 5 (likely local bottom) and RPI of above 5 (likely local top).

The model does a fantastic job predicting local bottoms and also picks the tops but with some nuance.

As the market overheats in a bull run, the metric flashes a red signal indicating an overbought status. In many instances, soon after this signal, the market corrects, and the signal turns off, preparing the market for another run-up.

Thus, the RP metric is not necessarily picking cycle tops, but rather local tops. Anytime the market corrects enough, the metric resets, and the price has room for further upside from the point at which it reset.

Key Takeaways

Bitcoin's realized price is an essential metric that offers a grounded view of the asset’s valuation.

By representing the average price at which each Bitcoin was last transacted on-chain, it provides a stable foundation for assessing market risk, predicting price floors, and understanding market deviations.

Statistical modeling of the realized price further enhances its utility, enabling investors to gauge intrinsic market health and risk with high conviction, knowing the model includes a statistically significant R2 of 0.98.

The Realized Price Index, derived from our model, serves as a powerful tool for understanding the state of the market, offering insights into potential inflection points.