Understanding supply and demand of cryptocurrency Using Market Value to Realized Value (MVRV)

TL; DR

The market value to realized value ratio indicates when an asset becomes undervalued or overvalued.

If the MVRV is below zero there is a market bottom.

The peak of the market top, usually, occurs when the MVRV is between 7.0 and 9.0

After a market bottom or top there will be a price reversal.

Introduction

An important aspect of trading cryptocurrency is the ability to estimate the level of supply and demand in the market. The major ways to understand these components include analyzing the price action and technical analysis indicators. The Market Value to Realized Value (MVRV is an important indicator since it estimates the crypto market tops and bottoms. As such, it assists traders to find medium to long term entry and exit points.

Understanding Market Value to Realized Value (MVRZ)

Market Value to Realized Value, developed by Murad Mahmudov and David Puell in 2018, is a trading indicator which indicates if a cryptocurrency is undervalued or overvalued at a specific moment.

A variation to the Market value to realized value indicator is the MVRV Z-score that adds the z-score to the original concept. Basically, the Z-score indicates the standard deviation below or above the mean value. The main function of the MVRV Z-score is to enable the investors to find the difference between the all-time average price and the current market price.

To understand what market value to realized value is, we should understand two key terms, market value and realized value.
Market value, also called market capitalization, refers to the total value of a cryptocurrency at the current market price. We use the following formula to calculate it.

Market Value = Price x number of coins in circulation

On the other hand, realized value refers to the actual value of acquiring the cryptocurrency. In other words, it is the total amount which people who hold the asset have spent. Usually, we get this figure on-chain since it is difficult for an individual to calculate it.

Let’s look at an example to make it easy to understand. In this case, we calculate the realized value of Bitcoin which an investor purchased on three different occasions.

12 BTC at $15,000 each
13 BTC at $12,000 each
5 BTC at $20,000

We obtained the realized value by calculating the cost of acquisition of the BTC.

12 X $15,000 + 13 X $12,000 + 5 X $20,000 = $436,000
In this case, the realized value of BTC is $436,000 and its average price is $14,533.33.

What is MVRV?

Simply stated, the MVRV is the ratio between the market value and realized value of an asset such as Bitcoin. Therefore, it indicates the relationship between the current price of an asset and its average price.

The investors are willing to buy more Bitcoin, for example, when the MVRV value is high. This is because if the MVRV is high the investors make high profits. Thus, this index helps to determine the level of profit or loss of an asset at a certain price.

In addition, the difference between an asset’s market value and its realized value is called its fair value. It is the one that traders use to tell if the asset is overvalued or undervalued.

How to calculate the MVRV

As we said before, there are only two inputs required to calculate the MVRV. These are the market value and the realized value of an asset.

Here is the formula for calculating the MVRV:

MVRV = Market Value / Realized Value

Significance of the MVRV Z-score

If the value of the MVRV Z-score is more than 1, it indicates that the market capitalization is greater than its realized value. When the value is less than 1 it means that the realized value is bigger than its market cap.

Analysts use the figure to gauge the profit level of Bitcoin or any other asset. For example, if the MVRV value is 2.0 it shows that the investors will make 100% profit if they sell their Bitcoin at the current market price.

A positive value shows that the investors can generate profit if they sell their assets while a negative one indicates that they will make a loss if they dispose of their cryptocurrency at the current market price.

Undervalued and overvalued asset

A cryptocurrency can be undervalued, neutral or overvalued. It is undervalued if its MVRV is between 0 and 1. What this means is that the traders will make a loss if they sell their assets at the market price.

On the other hand, if the value is more than 3.7 the cryptocurrency is overvalued. Most investors accumulate Bitcoin when the MVRV value is less than 1.0

Bitcoin top and bottom

It is very easy to tell when Bitcoin is overvalued or undervalued using the MVRV. If the value of BTC is below 0, it is within a market bottom. On the contrary, a Bitcoin top can emerge when the MVRV is above 3.7. However, the peak of the market top is most likely to occur when the MVRV is between 7 and 9.

In the 2014 to 2015 bear market the MVRV for Bitcoin was below 1.0 for 300 days. In 2018 to 2019, it was in the market bottom zone for about 134 days. Already, in the current bear market Bitcoin has been in the market bottom for over 170 days.

In addition, CryptoQuant shows that the MVRV ratio fell below 1.0 around mid June 2022, as the following diagram indicates.

MVRZ ratio- CryptoQuant

As the image shows, the MVRV dropped below 1 around 13 June 2022 and has stayed there ever since. This means that BTC is in the market bottom. According to Macromicro, as of 16 December the BTC MVRV was -0.16.

As you notice, on that chart there is a green zone, at the bottom. Therefore, once the MVRV is within the green zone the asset is in a market bottom. Although it is difficult to predict the number of days cryptocurrency can spend in the market bottom, in the end there will be an upward price reversal.

The MVRV can also get into the pink or red zone, we find at the top of the chart. After spending time within this overvalued zone, there will be a downward price reversal at the end. Once the MVRV is above 5.0, the possibility of price reversal is extremely high. The following diagram indicates BTC market bottoms between 2014 and 2022.

MVRV 2014 to 2022- Binance

Conclusion

The MVRV is an indicator which shows market bottoms and tops of an asset. If the MVRV spikes over 6.0 the asset is at a market top. However, if it drops below 1.0 the market gets into a bottom. The market top is a period of distribution while the low is a period of accumulation.