Introduction
The MVRV indicator is a popular technical analysis tool used by traders and investors to identify market trends and make informed decisions. It is a simple yet effective tool that can help traders identify whether a market is overvalued or undervalued, as well as when a trend may be about to reverse. In this article, we will discuss what the MVRV indicator is, how it works, and how it can be used to improve trading decisions.
07/17/2022
in-depthTrading and investment
in-depthTrading and investment
Main
- Market Cap versus Realized Cap (MVRV) is a popular on-chain indicator that helps identify bitcoin price highs and lows.
- The MVRV indicator is designed to analyze long-term trends and cycles. It is used as a tool for detecting two main market phases – accumulation and distribution.
- MVRV is based on the idea of a struggle between two types of market participants – speculators and hodlers. In the context of the indicator, hodlers are investors who have given up short-term financial gain in favor of a long-term one; Speculators are short-term traders. The indicator helps to determine which players dominate the market at a particular point in time.
Who developed the MVRV indicator and when?
MVRV is a joint development of crypto enthusiasts Murad Makhmudov and David Pewell. The indicator is their personal take on the analysis of Bitcoin market cycles, described in October 2018 in a blog post on Medium.
The authors of MVRV were inspired by the realized capitalization concept presented by Nick Carter of Castle Island Ventures and Antoine Le Calves of Blockchain.info at the Riga Baltic Honeybadger conference in September 2018.
Subsequently, modifications of the MVRV appeared. Using additional data and refinement metrics, developed MVRV Z-Score and MVRV (Free Float) — they have gained the greatest popularity in the cryptocurrency community.
How to calculate the MVRV indicator?
The MVRV indicator is a ratio obtained by dividing the market capitalization by the realized capitalization. The indicator is based on daily updated data.
Market capitalization is a way of determining the total value of all existing coins (Bitcoin) at a particular point in time. Corresponds to the product of the total supply of an asset and its market price.
Realized capitalization is a more complex version of market capitalization that takes into account the price of each coin at the time of the last transaction on the network. If the last movement of individual 10 BTC occurred at a price of $20,000, then the realized capitalization for these coins is $200,000. Thus, the capitalization for all coins is calculated at the price at the time of their last movement.
In the case of modified versions of MVRV, the variables may change. For example, to determine MVRV Free Float, the market capitalization indicator was replaced with free float market capitalization. The latter does not take into account provably lost or non-moving coins for more than five years.
How and why to use the MVRV indicator?
The MRVR indicator and its derivatives are used to determine long-term trends, identify cycles of accumulation and distribution. A drop in the ratio below 1 suggests that active speculators outnumber long-term investors.
In the understanding of Makhmudov and Pewell, the multi-month finding of the coefficient below the value of 1 indicates an accumulation cycle. For the MVRV Free Float and MVRV Z-Score versions, the accumulation cycle begins when the indicator falls below 1 and 0, respectively.
As a value indicating the distribution cycle, in the original version of the MVRV indicator, the level is higher than 3.7. In the MVRV Free Float and MVRV Z-Score modifications, distribution cycle levels are above 3.2 and 7, respectively.
The MVRV concept assumes that the decline in the ratio and the increase in the number of dormant coins are backed by long-term investor faith in Bitcoin technology and price growth. Increasing the indicator to speculative levels (3.2-7) and reducing the number of coins without movement are seen as a way to increase awareness of the asset and expand its user base.
MVRV is one of the most popular indicators on the crypto market. It is used not only by individual researchers, but also by professional analytical companies like Glassnode, Coin Metrics and CryptoQuant.
Risks of using the MVRV indicator
Despite its popularity, MVRV is an experimental cryptocurrency market analysis tool. Like any other indicator, the ratio carries risks for users. Let’s consider some of them.
Indicator components
Capitalization and realized capitalization, as the main variables in the MVRV calculation, may become irrelevant along with the development of Lightning Network and Liquid Network technologies.
These solutions allow transactions to take place outside of the main Bitcoin network. If they are widely accepted, the logic of the indicator’s calculations may change radically and lead to incorrect conclusions.
Trading risks
Reaching any levels of MVRV is not a buy or sell signal. MVRV is not a trading indicator and is not intended to measure the behavior of traders.
Interpretation
Ideally, MVRV would mean that any movement of bitcoin on the network is the purchase of an asset and its withdrawal to your own wallet. However, it is impossible to know what is really hidden behind on-chain transactions.
Transferring conditional 100,000 BTC, bought at a price of $100, to another address at the moment when quotes rose to $50,000, is not a purchase or sale. The user could simply change the way the asset was stored by sending the coins to a different address. But MVRV interprets this behavior as a change of ownership and assumes that Bitcoin was bought at $50,000, not $100.
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Conclusion
The MVRV indicator is a valuable tool for cryptocurrency investors as it provides insights into the overall market sentiment and helps track market cycles. It is important to note that the MVRV indicator should not be used as the sole basis for making trading decisions, but rather as a supplement to other types of analysis. Ultimately, the MVRV indicator can be a useful tool for investors looking for an edge in the crypto markets.
FAQ
What is the MVRV indicator? All you need to know
The MVRV (Market Value to Realized Value) ratio is an indicator that measures the ratio of the market value of an asset (market capitalization) to its realized value. It is used to measure the degree of speculation and market sentiment in the cryptocurrency market. A high MVRV ratio indicates a market that is overvalued, while a low MVRV ratio indicates a market that is undervalued.
What is the MVRV ratio?
The MVRV ratio is calculated by dividing the market capitalization of an asset by its realized value. Market capitalization is the total value of all the coins/tokens in circulation, while realized value is the sum of the USD value of all the coins/tokens that have moved within the last one year.
What does a high MVRV ratio indicate?
A high MVRV ratio indicates that the market is overvalued. This means that the market is being driven by speculation and hype, and may be at risk of a correction.
What does a low MVRV ratio indicate?
A low MVRV ratio indicates that the market is undervalued. This suggests that the market may be in a buying opportunity, and may be ready for a rally.
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