Market capitalization multiplies circulating supply by the current price. Realized capitalization instead values each unit at the price when it last changed hands, which measures something quite different.
Market cap assumes one price for everything
The conventional figure applies the latest traded price to the entire supply, including coins that have not moved in years.
That price was set by whatever quantity traded most recently, which is typically a tiny fraction of the total.
The figure therefore describes what the supply would be worth if all of it could be sold at the current price, a condition that does not hold in any market.
Realized cap values each coin at its last movement
The alternative examines every unspent output, notes the price when it was created, and sums those values across the supply.
The result approximates the aggregate amount paid for the supply currently held, which is closer to a cost basis than to a valuation.
It is computable only because the ledger records when every output was created, which is not possible for assets without a public transaction history.
The two move differently
Market cap moves whenever the price moves, including when nothing is traded in size and nothing changes about holdings.
Realized cap changes only when coins move, so it rises as holders transact at higher prices and stays flat during periods of inactivity.
It falls when coins move at prices below their previous acquisition level, which is why it declines during sustained downturns rather than merely stalling.
What the comparison is used for
Analysts compare the two as a ratio, treating it as an indication of whether the market price sits above or below the aggregate cost of the supply.
The comparison is descriptive rather than predictive, and it says nothing about what prices will do next.
It is also aggregate, so it cannot distinguish between many holders slightly above their cost and a few holders far above it.
Measurement caveats are substantial
Movements between wallets owned by the same party update the recorded price without any transaction having occurred, which distorts the figure.
Exchange internal transfers, custodial rebalancing and consolidation all produce this effect, and separating them from genuine trades requires heuristics.
Lost coins are included at their original price and never move again, permanently anchoring part of the total to prices from the network's earliest years.
That anchor cannot be removed, because the ledger provides no way to distinguish a coin that is lost from one whose holder has simply not moved it.