What is the MVRV Indicator?

MVRV stands for Market Value to Realized Value Ratio. This metric compares a cryptocurrency’s market value (Market Cap) to its realized value (Realized Cap). It is a popular technical indicator in the crypto market to evaluate whether a token is overvalued or undervalued. MVRV provides insight into whether the current price of a cryptocurrency is justified and is a reliable tool for identifying the peaks and troughs of market cycles.

Market Value, or Market Cap, is calculated by multiplying the current price of Bitcoin (BTC) by its circulating supply. Realized Value, on the other hand, represents the stored value in the assets, essentially the cost basis of the token supply.

One way to understand Realized Value is that it helps exclude lost, unused, and unclaimed bitcoins from the total value calculation. Another perspective is that it reflects the investment level of long-term, legitimate buyers in Bitcoin, excluding the value fluctuations caused by short-term market hype.

The Origin of MVRV

Cryptocurrency analysts Murad Mahmudov and David Puell introduced the MVRV ratio in October 2018. The idea came from a presentation by Nic Carter (in collaboration with Antoine Le Calvez) at the Honeybadger Conference in September 2018, where Nic provided new insights into the concept of Realized Value.

Inspired by this presentation, the MVRV ratio was developed. MVRV aims to offer a more precise method for evaluating the market’s overall condition and price levels. Traditional market value indicators only consider the current market price, ignoring the cost basis and holding patterns of investors. By considering Realized Value, MVRV provides a clearer picture of market profits and losses, offering more valuable guidance for investment decisions.

MVRV and Its Variations

The introduction of the MVRV indicator brought a fresh perspective to analyzing the crypto market. Although MVRV is relatively straightforward, analysts have created various variations to meet different needs and improve calculation methods. These variations usually adjust how Realized Value is calculated to better reflect market sentiment. Some notable variations include:

• MVRV-Z Score: This combines the MVRV ratio with the Z Score, a statistical measure of how much a value deviates from the average. This indicator is particularly useful for Bitcoin and helps determine if the cryptocurrency market is overvalued or undervalued.
• STH-MVRV and LTH-MVRV Ratios: These are two key MVRV variations in addition to the MVRV-Z Score. The Short-Term Holder MVRV (STH-MVRV) and Long-Term Holder MVRV (LTH-MVRV) offer more nuanced market cycle analysis by breaking down the holder groups into short-term and long-term holders.

How to Calculate MVRV and Its Variations

MVRV and its variations, like MVRV-Z, STH-MVRV, and LTH-MVRV, each have specific applications in different scenarios. Let’s discuss how to calculate and interpret these various indicators.

Basic MVRV

The basic formula for calculating MVRV is: MVRV=Market Cap/Realized Cap

Market Cap is the total market value of a cryptocurrency at a given time. Realized Cap is the total cost paid by investors for holding the cryptocurrency since it was first bought. It includes all purchase prices but does not account for unrealized gains or losses.

The aim of using Realized Cap is to better reflect the cost basis of tokens for long-term holders, excluding the value of tokens that have been lost or remain unused for a long period.

For example, if a cryptocurrency is currently priced at $50 and has a circulating supply of 1,000,000 coins, its Market Cap is $50,000,000. If the average cost basis of these tokens is $30, the Realized Cap is $30,000,000. In this case, the MVRV ratio is $50,000,000/$30,000,000 = 1.67.

In general, a high MVRV value indicates that the current market valuation is high compared to the historical actual investment, suggesting a potential bubble. Conversely, a low MVRV value may indicate that the cryptocurrency is undervalued.

MVRV-Z

The MVRV-Z score is an indicator used to evaluate the relative valuation of cryptocurrencies. It combines Market Value (Market Cap) and Realized Value (Realized Cap) and standardizes them using the statistical measure of standard deviation (Z).
The formula is: MVRV-Z score = (Market Value (MCap) - Realized Value (RCap)) / Market Value Standard Deviation (Z)

This score helps identify whether the market is in an extreme state during large cycles. For example, if the current BTC price is $40,000, with a total circulating supply of 18,000,000 coins, the Market Value is $720,000,000,000. If the average cost basis of these tokens is $30,000,000,000, the Realized Value is $540,000,000,000. Assuming the long-term average Market Value, based on historical data, is $350,000,000,000, and the Standard Deviation is $50,000,000,000.

The MVRV-Z score would be: ($720,000,000,000 - $540,000,000,000) / $50,000,000,000 = 3.6

Generally, a high MVRV-Z score indicates that the market is overvalued or even in a bubble. Conversely, a low MVRV-Z score indicates that prices may be undervalued or at a market bottom.

LTH-MVRV and STH-MVRV

LTH-MVRV and STH-MVRV are indicators that show the relationship between a token’s market value and realized value for long-term holders and short-term holders, respectively.

LTH-MVRV (Long Term Holder MVRV): This is calculated by determining the MVRV value of UTXOs (Unspent Transaction Outputs) that have been held for more than 155 days.

The formula is: LTH-MVRV = (Market Cap of UTXOs held ≥ 155 days) / (Realized Cap of UTXOs held ≥ 155 days)

STH-MVRV (Short Term Holder MVRV): This is calculated by determining the MVRV value of UTXOs that have been held for less than 155 days.

The formula is: STH-MVRV = (Market Cap of UTXOs held < 155 days) / (Realized Cap of UTXOs held < 155 days)

Note: For the origin of the 155 days, you can refer to this article.

LTH-MVRV and STH-MVRV are indicators that analyze the value based on the behavior of long-term and short-term holders. Investors can use the appropriate indicator to evaluate market cycles based on their investment horizon.

How to Use MVRV to Determine Cryptocurrency Market Cycles

MVRV is a valuable tool for determining whether the cryptocurrency market is overvalued or undervalued and for identifying market cycles’ peaks and bottoms.

Overvaluation: When the MVRV ratio is significantly higher than the historical average, such as above 3 or 4, the market may be overvalued. In such cases, investors should exercise caution and consider taking some profits.

Undervaluation: When the MVRV ratio is significantly lower than the historical average, such as below 1 or 0.5, the market may be undervalued. This could be a good buying opportunity. An MVRV < 1 often indicates that the market is in an irrational panic phase, potentially signaling a bottom.

Market Cycle Assessment: By observing MVRV trends, investors can better understand market cycle stages. For instance, a declining MVRV from a high level may indicate a transition from a bull market to a bear market. Conversely, a rising MVRV from a low level may indicate a transition from a bear market to a bull market.

Below is the historical MVRV chart for Bitcoin. Notably, the bull market peaks in 2011, 2013, 2017, and 2021 correspond to MVRV values of 7.43, 6.18, 4.85, and 3.82, respectively. In contrast, the bear market bottoms in recent years, such as in 2018 and 2022, had MVRV values of 0.69 and 0.76, respectively.

Source: lookintobitcoin

Additionally, analyzing Bitcoin trends can provide a certain level of accuracy when determining cryptocurrency market cycles. Among all MVRV derivative indicators, MVRV-Z is particularly effective in identifying bull markets for BTC. The historical chart of BTC MVRV-Z shows that past bull markets are marked by significant MVRV-Z growth, peaking in the red zone. Conversely, when MVRV-Z falls into the green zone, it typically indicates a bear market. These green zones are often seen as good opportunities for long-term holders, or “diamond hands,” to accumulate coins.

Source: lookintobitcoin

Advantages and Limitations of MVRV Indicator

The MVRV indicator is an effective tool for assessing Bitcoin’s fair value. However, like any indicator, it has its advantages and limitations.

Advantages

Firstly, the MVRV and MVRV-Z indicators are simple, easy to understand, and easy to calculate, making them accessible even to regular cryptocurrency enthusiasts. Using historical data, they can effectively identify market trends. They also help track market dynamics and can provide early signals before significant price movements. Lastly, these indicators can show if the market is overvalued or undervalued and quantify how much the market deviates from its fair value.

Limitations

However, the MVRV indicator has some limitations that investors should consider:

1. Inability to Predict Market Trend Duration: The MVRV indicator cannot forecast how long bear or bull markets will last. Therefore, investors are recommended to use a dollar-cost averaging strategy to mitigate the negative effects of prolonged price movements in cryptocurrencies.
2. Market Sensitivity to MVRV Thresholds: As awareness of the MVRV indicator grows, Bitcoin prices often react when MVRV values reach critical points (e.g., when MVRV-Z hits 7), regardless of other market trends.
3. Focus on Long-term Trends Only: The MVRV indicator effectively predicts long-term cycle trends and shows whether a cryptocurrency is overvalued or undervalued. However, it cannot provide a precise valuation of Bitcoin.
4. Limited Long-term Validation: Compared to other financial indicators, the MVRV is relatively new. Although it has successfully identified multiple Bitcoin bottoms, it has not yet been validated over the long term from a financial market perspective.

Lastly, it is important to remind readers that when using the MVRV indicator or any other financial indicators for quantitative trading, it is crucial to consider additional indicators to make more comprehensive and accurate investment decisions.

Conclusion

MVRV is a powerful technical indicator that helps investors better understand the price movements and cycles in the cryptocurrency market. By effectively using MVRV, investors can more accurately determine if the market is overvalued or undervalued, thus optimizing their investment decisions. However, no single indicator can offer perfect market predictions. Investors should use other analysis tools and methods to fully evaluate the market conditions.