The difference between Bitcoin’s realized cap and market cap is an underrated indicator of the phases of Bitcoin’s price cycles. The realized cap shows Bitcoin’s value based on the last price each coin moved, showing the actual capital invested into the asset.

When the market cap, which reflects the value of all existing coins based on the current spot price, significantly diverges from the realized cap, it shows a shift in sentiment. These shifts have historically aligned with phases of either euphoria or fear.

A high market cap relative to the realized cap shows that investors hold unrealized gains. While this is an unambiguous sign of a bullish sentiment in the market, it can also precede potential overextension. Conversely, when the market cap dips below the realized cap, it signals widespread capitulation and undervaluation of the asset.

The current discrepancy between Bitcoin’s market cap and realized cap reflects the overwhelming bullish sentiment that has dominated the market this month.

Bitcoin’s price increase was driven by optimism surrounding the US presidential election. On Nov. 5, President Donald Trump’s win sparked a rally in the crypto market, as his upcoming administration is expected to introduce concrete, Bitcoin-focused policies.

The outcome of the election created a bullish momentum, with investors gearing up for a much more favorable regulatory environment for crypto. This sentiment drove Bitcoin’s price to over $90,000, establishing a new ATH.

The price spike was mirrored in Bitcoin’s market cap, which increased from $1.132 trillion at the start of September to $1.789 trillion by mid-November. Most of this increase occurred in the days following the election, indicating heightened buying activity and a rush of capital into the market.

Graph showing Bitcoin’s market capitalization from Sep. 1 to Nov. 13, 2024 (Source: CryptoQuant)

While the surge definitely reflects the market’s enthusiasm and confidence in Bitcoin’s long-term potential under the Trump administration, the price itself also likely fueled speculative buying. Such rapid growth in market cap, particularly after a major event like a national election, is often a sign of heightened speculation.

While the market cap grew significantly, Bitcoin’s realized cap grew much slower. Moving from $621.691 billion on Sep. 1 to $679.281 billion on Nov.13, the realized cap’s rise clearly shows that new capital continues to enter the market.

This upward trend in realized cap shows that Bitcoin is being bought and sold at progressively higher valuations, gradually setting new cost basis levels. The election also seems to have accelerated this growth in the realized cap, with a notable increase from $656.006 billion on Nov.5 to $679.281 billion by Nov. 13.

Graph showing Bitcoin’s realized capitalization from Sep. 1 to Nov. 13, 2024 (Source: CryptoQuant)

The widening difference between the market and realized cap during this period is particularly telling. In September, the gap between the two stood around $510 billion; by mid-November, it had expanded to approximately $1.1 trillion.

The divergence suggests that Bitcoin’s current market price is significantly higher than the average price paid by holders, indicating that many investors are now holding substantial unrealized profits. Historically, such a large gap has been associated with market cycles nearing a euphoric phase, where optimism and speculation drive prices well beyond previous levels.

While the realized cap growth signals a steady inflow of capital and continued interest in Bitcoin, the rapid expansion of the market cap relative to the realized cap could indicate an overextended market where the valuation may be somewhat inflated by speculative buying.

This danger is also evident when looking at the crypto fear and greed index, which has dipped well into the extreme greed territory, remaining tied to greed for 28 out of the past 30 days, according to CoinGlass data.

Screengrab showing the crypto fear and greed index on Nov. 14, 2024 (Source: CoinGlass)

This pattern of divergence often precedes periods of consolidation or correction. Bitcoin’s stint at above $92,000 was relatively short-lived and was immediately followed by a correction to around $87,500 on Nov. 13.

The price has since rubberbanded between roughly $87,000 and $91,500 as of press time. Short, aggressive corrections like these can be expected in the coming weeks as the divergence between the market cap and realized cap persists.

If realized cap growth slows or reverses in the coming weeks, it could indicate that long-term holders are beginning to distribute their holdings in response to persistently high prices. This could put additional pressure on price growth, and we could see another, more extended correction below $90,000.

However, the steady increase in the realized cap so far shows that long-term holders remain confident, adding strength to this rally even as the market cap increases.

It will be important to monitor changes in the positions of large institutional holders, with a particular focus on ETFs and derivatives. The size of these positions will likely propel movement from retail investors and change sentiment in the coming weeks.

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