By traditional metrics, the entire bitcoin network currently has a value of around $185 billion. This number is called the “market cap,” and it’s a concept borrowed from stock trading. In high finance, market caps serve as a kind of shorthand for a company’s overall value, multiplying the last price a stock sold for by the total number of shares the company has. It’s a useful stock market tool, but it’s not a perfect model for measuring the overall value of a cryptocurrency. Bitcoin isn’t a stock, after all.
In 2018, cryptocurrency analytics firm Coin Metrics introduced a new model for measuring the overall value of the bitcoin network. They named this new approach the Realized Market Cap (RMC). Coin Metric claims that their RMC model more accurately reflects the real value of both BTC and the bitcoin network itself. According to this approach, bitcoin’s RMC only just crossed the $100 billion valuation threshold in late August of 2019.
Is RMC a better method for measuring bitcoin’s value than the standard market cap? How does it compare to other models? Will it work for other cryptocurrencies? In this post, we’re going to examine six important things to know about the Realized Market Cap model.
1. RMC is designed to reflect the value of BTC that are actually in circulation. When someone loses their bitcoin — misplaced private keys, failed hard drives, coins sent to the wrong address — those BTC are often gone forever. By some estimates, as much as 20% of bitcoin’s total pool of 21 million BTC are permanently lost. The RMC model aims to de-emphasize the value of these lost coins by weighing the current value of the BTC at a given address by value of those coins the last time they were moved. Bitcoin held in an address that hasn’t been active since 2013 is considered to be less valuable than one moved in 2019, as it represents a higher probability that the coins are actually lost.
2. RMC provides a clearer picture of BTC dominance. According to the traditional model, BTC represents around 70% of all cryptocurrency investments. This metric is generally referred to as “BTC dominance,” and it provides a useful tool for measuring the market share of other tokens. Ethereum’s ETH token, for example, currently has a 7.5% market share when measured against BTC. But if Coin Metric’s RMC model is correct, and inactive coins are actually less valuable than active ones, the picture looks very different. Under this interpretation, bitcoin’s real dominance number would be closer to 90%, as the vast majority of alt-coin balances relatively inactive.
3. RMC demonstrates the size and security of the BTC network. While bitcoin’s overall market cap tends to fluctuate dramatically with BTC’s price — it was $327 billion during the 2017 price spike, for instance — things look quite different when viewed through the RMC model. RMC-based charts show BTC’s overall price volatility is consistently going down, while the RMC’s logarithmic chart shows smooth, steady growth in value.
4. RMC tends to follow traditional market cap closely. According to Coin Metric, one of their core requirements for the RMC model is that it would not “deviate from Market Cap by more than a single order of magnitude.” This approach appears to be successful. As of this writing, the traditional market cap currently values BTC at $185 billion. The RMC model, on the other hand, shows BTC’s value at a touch over $100 billion.
5. RMC isn’t perfect, and doesn’t take “deep cold storage” into account. One of the serious limitations of Coin Metrics approach is that it combines “lost” tokens with those that are being kept in long-term “deep cold storage.” As the RMC developers themselves admit, if the so-called “Satoshi” coins — around 1 million BTC — were ever activated, it would completely throw off their model. As the Coin Metrics team explains, “In that case, Realized Cap would be seriously underweighting the economic [value] of Bitcoins in circulation, since it prices those long-lost coins at 2009 values… of $0 per BTC.”
6. RMC isn’t as accurate on smaller and less-active blockchains. For an active, heavily traded token like BTC, the RMC model may provide a more accurate value estimate than the traditional market cap approach. For tokens that see relatively little trading volume, an RMC model can actually be less informative than the standard market cap valuation.