The Market Value to Realised Value (MVRV) ratio is a long-term metric used to assess bitcoin’s market cycles over the long term.
The metric was created by Murad Mahmudov and David Puell, building on Nic Carter’s measure of realised cap. The indicator was later enhanced by Awe & Wonder with the MVRV z-score.
How to Calculate the MVRV Ratio
To understand the MVRV ratio, the definitions of its components are required:
- Market value: the number of coins circulating multiplied by the current price, also known as market capitalisation.
- Realised value: similar to market value but accounts for lost coins and coins that are held as a store of value, which is done by aggregating the UTXOs and assigning a price to each one based on when they were last moved. The realised cap can also be thought of as the sum of levels which long-term buyers entered their bitcoin positions.
The MVRV ratio is obtained by dividing the market value by the realised value. To use the ratio in your trading, two threshold values are given.
The upper threshold is 3.7. If the MVRV moves above this level, bitcoin is indicated to be overvalued.
The lower threshold is 1.0. If the MVRV moves below this level, bitcoin is indicated to be undervalued.
These threshold values are displayed below for bitcoin’s price history up until August 2018.
Source: Adaptive Capital
In the latest stages of bull markets, the market value will far exceed bitcoin’s fair price (or realised value). Whereas when the market is bottoming, the market value undershoots bitcoin’s real value. The historical data above shows that when the market value exceeds realised value (shown by the MVRV ratio below 1) is the best period to accumulate bitcoins.
However, the upper threshold may evolve over time and require calibration, since as bitcoin grows the volatility in the market value should decrease over time. Since it is a long term measure, the MVRV is only applicable for long timeframes, such as multi-year analysis.
You can find the live data (shown above) for the MVRV ratio here.
The MVRV z-score
The MVRV ratio was used by Awe and Wonder to create the MVRV z-score, where a z-score is basically the number of standard deviations from the mean.
The chart of the MVRV z-score, shown below, uses the realised value as the true population mean and measures how far the market value deviates from this mean.
Source: Awe & Wonder
The parabolic spikes would have raised a warning about the price of bitcoin before the market topped, showing that market value deviated significantly from realised value. Most financial time series data have a property known as ‘mean reversion’ and the MVRV basically illustrates this where we expect the market value to eventually return to the realised value of the Bitcoin network.
Awe & Wonder suggested combining the MVRV z-score with another indicator that identifies buying climax patterns, such as daily returns exceeding two standard deviations of the mean.
You can view the live data for the MVRV z-score here.