The current price of bitcoin reflects the current level of trade, while the “realization of prices” measures the average actual cost to the market as a whole of these bitcoin. This indicator is calculated on the basis of the price of each bitcoin that last moved on the chain and is therefore often considered as the market-wide average hold-up cost line.
How prices are calculated
Achieving prices is based on “realized market value”. The so-called realization of market value consists of valuing each of the bitcoins in circulation at the prices corresponding to their previous chain transfer and adding these values to the total.
Subsequently, prices would be achieved by dividing the market value of the realized market value by the volume of the supply in circulation. Unlike the traditional market value at the latest exchange prices, this approach does not change significantly and immediately as a result of short-term increases and declines, which are closer to the historical buy-in costs of currency holders.
- Market prices: current transaction prices of bitcoin
- Realized market value: sum of all bitcoin at last move price
- Realized prices: achieved market value divided by supply in circulation
What's the difference with market prices?
Market prices fluctuate rapidly with buying and selling moods, but at a slower rate. This is due to the fact that most bitcoins do not shift in chains in each line fluctuations.
This means that even if Bitcoin were to rise or fall in a short period of time, prices would not normally change sharply in parallel. This indicator will be adjusted gradually only if more holdouts are completed in the new price bands.
As a result, analysts usually see the realization of prices as a cost line beyond the market “emotives”. The current price is higher than the realized price, indicating that the currency holder as a whole is in surplus; the current price is lower than the realized price, which means that the market as a whole is in deficit.
Why is it often used to observe the bottom of the cycle?
One of the most important uses for achieving prices is to assist in judging the bottom area of bear markets. Historically, the period at which the current prices of bitcoin have fallen to achieve prices is not common, and such periods tend to occur near the lower point of the main cycle.
The article states that when the current price is lower than the realized price, it means that a large number of currency holders are in deficit. At this time, the willingness of ordinary holders to sell tends to be reduced, while long-term buyers who wish to buy low-end coupons are likely to grow, and markets are more likely to enter the bottom-replacement phase.
On the contrary, when current prices are significantly higher than realized, the overall market surplus expands, with the consequent upward pressure on profitability. This is why the realization of prices is often used to match the MVRV, MVRV Z-score indicators and to observe whether Bitcoin is in the heat or cold zone.
This indicator also has limitations
However, the realization of prices is not an accurate time-determination tool. It relies on the premise that a chain transfer may largely represent the holder in the immediate vicinity of the price at the time, but in reality not every transfer corresponds to a real sale.
Moreover, the realization of prices per se will also be adjusted to changing market structures and cannot be used as a separate basis for judgement. More commonly, it is used in conjunction with data on chain activity, warehouse distribution, financial flows, etc., to observe the market stage.