MVRV - Market Value To Realized Value is a simple and elegant tool for a gentleman to acknowledge the status of the market. Have you ever heard of it? It is Ryan's (from Messari) favorite indicator. And if you are looking for your own favorite, give this metric a chance.
Bitcoin, or digital gold, is the king of cryptocurrency. It is a monetary asset with no earning. It's an asset that is price vs. value, almost always judged on this relative basis. And the most delicate metric worth tracking for Bitcoin maybe is the MVRV - Market Value To Realized Value.
This metric can surely be applied to other assets. We will get into detail later. First, let's talk a bit about the current market.
Winter is Here
Although we are in the middle of summer, the chilling of a crypto winter is setting in.
Cryptocurrencies have suffered a brutal crash this year, losing $2 trillion in value since the height of 2021. Bitcoin is now off 70% from a November all-time high of nearly $69,000. Altcoins are also witnessing a tremendous crash all over the market.
Every crypto aficionado must be saying: "Winter is here."
The recent crash began earlier this year due to macroeconomic factors, including uncontrolled inflation that has caused the U.S. Federal Reserve and other central banks to hike interest rates.
From the destabilization of stablecoin to the collapse of humongous capital, many believe this winter will be more brutal than ever.
Many will lose faith and start to turn their bet against crypto. Many will breakdowns, become depressed, cut their losses, or even go bankrupt.
In the Messari Report, Ryan stated: "To make matters worse, the next bear market will be a regulatory nightmare, and we won't have the bull market vibes to help defend ourselves against all of the consumer protection, fraud and abuse, systemic risk, ESG, and illicit activity FUD that our enemies will throw at us. At the same time, the "grassroots" crypto herd will thin because it's tougher to wage war when you've lost 90% of your savings and need to go find a real job again."
This winter is harsh, but it will not be quite so bad if you are well prepared.
After all, Alpha is generated in the bear market.
Just stick around and pay attention during the bear market. Learn your lesson, strengthen your emotions and start your journey to becoming a man who provides for his family.
And a man can start with a simple and elegant indicator, MVRV.
There are many styles of trading and many tools for each individual type of trader.
In this article, we will introduce MVRV, one of our favorite "suits." Don't take this too seriously, there is no absolute right tool nor absolute wrong method. Just choose a suit that suits you best.
What is MVRV
MVRV stands for Market Value To Realized Value. By comparing the two metrics, Market Capitalization and Realized Capitalization, MVRV can be used to get a sense of when the price is above or below "fair value", and to assess market profitability.
MVRV shows the ratio between the current price and the average price of every coin/token acquired. The more the ratio increases, the more people will be willing to sell as the potential profits increase. The value of MVRV gives an idea of how much overvalued or undervalued an asset is.
Just look at the chart. You can only see the three previous "double bubbles" using a metric like MVRV since the price chart will not tell.
Extreme deviations between market value and realized value can be used to identify market tops and bottoms as they reflect periods of extremes in investor unrealized profit and loss.
At its foundation, MVRV is a comparison of the following:
- Market Cap: Current value of supply (market value of the asset)
- Realized Cap: Cost basis of supply (value stored in the asset)
The MVRV Ratio can generally be considered withing the following framework:
- High values and up-trends: The market value of the coin supply is increasing relative to the realized value (cost basis). Higher values indicate a larger degree of unrealized profit is in the system, and increases the probability that investors will distribute coins to lock in gains.
- MVRV Values > 3.5 has generally served as a strong signal for late stage bull cycles, and heightened probability of heavy distribution.
- Low values and down-trends: The market value of the coin supply is decreasing relative to the realized value (cost basis). Lower values indicate a smaller degree of unrealized profit is in the system which may signal both undervaluation, or poor demand dynamics.
- MVRV Vales < 1.0: indicates that a large cross-section of the supply is near break even, or held at a loss. These low values have typically provided strong signal of market capitulation and late stage bear accumulations.
MVRV Definition
The MVRV Ratio is used as an on-chain indicator for the purpose of studying aggregate investor behaviors as price moves to/from their cost basis. It can be considered as a mean reversion style model, where the Realized Cap (aggregate market cost basis) functions as the mean and MVRV measures deviations from this mean.
The value of an asset's given MVRV gives an idea of how much overvalued or undervalued an asset is based on short, mid, or long-term timeframes.
An MVRV value of 100% (or 2.0) means that if all holders sell their coins/tokens at the current price, they will generate a 100% (x2) profit on average. The more this ratio increases, the more likely traders have historically demonstrated their willingness to sell.
On the other side of the spectrum, a negative MVRV value indicates that the asset is "undervalued" on average. This means that if all coins were sold, most traders would realize losses at the asset's current price.
MVRV values (regardless of which timeframe) will hover around 0%, assuming the asset has had enough time to normalize after its introduction as a publicly-traded asset.
Overall, MVRV shows the average profit/loss of all the coins currently in circulation, given the current price.
We need to define two terms:
- MV, as in Market Value, refers to the well-known capitalization. The second part is the
- RV as in Realized Value. It is an alternative to the Market Value where every coin/token is multiplied by its acquisition price instead of the current price.
The definition of MVRV is:
MVRV = MV/RV
How to use MVRV
If Market cap growth outpaces that of the realized cap, MVRV values rise, indicating a possible motive for selling.
- Increasing trend: Increasing selling pressure
As MVRV increases, it indicates that the market cap is outpacing realized cap meaning there is an increasing motive for selling in the market.
- Decreasing trend: Decreasing selling pressure
As MVRV decreases, it indicates that realized cap is outpacing the market cap meaning there is decreasing motive for selling in the market.
The MVRV ratio allows traders to gauge both actual profitability vs. loss on the network, as well as gauge the inherent degree of fear and greed that comes with it. Assets have different extremes in terms of how far a positive or negative fluctuation in its MVRV can go. And if we measure the coin's current MVRV vs. its lowest and highest points, it's usually fair to make educated presumptions of when price tops and bottoms are forming.
- High MVRV Values ( > 2 )
MVRV value of 2 means that if all holders sell their coins/tokens at the current price, they will generate an x2 profit on average.
- Low MVRV Values ( < 1 )
If the MVRV value is between 0 and 1, then the market is "undervalued" on average, meaning most people will realize losses if they all sell their holdings at the current price.
Simple enough, "whenever MVRV hits 3 tends to be a good time to take gains" and "sell a kidney or a newborn to buy when MVRV falls below 1".
Closing thought
Once again, this is not financial advice. If you want to jump in the pool, check the water first.
Do I buy here when MVRV is below 1? Yes, I am. But should you? I don't think so.
I'm using MVRV to get a sense of the market and not follow it blindly. Sure, we are at the bottom, but there is always a lower low.
Get your s*** together, believe in yourself, not anyone else, or even any indicator else.
