Calculating the MVRVWe find Market Value to Realized Value (MVRV) by dividing the market value by the realized value. Adding together all the UTXOs (units) valued at the price when they last were moved gives us the realized value. The realized value can be viewed as the cost basis of the network, so we can use MVRV as a proxy to estimate the unrealized profit that is latent in the network. The market value is another word for market cap.
How can MVRV estimate market tops and bottoms?MVRV can be used to estimate when the price is above or below fair value. For example, during the bull market in the spring of 2021, MVRV topped out at 3.96, the highest level seen since December 2017, when it briefly reached 4.72. Conversely, when the market bottomed out in the middle of July, it briefly touched 1.54. Cryptoquant has set an upper threshold (sell) for bitcoin at 3.7 and a lower point at 1 (buy). From the chart above, we can see that since the start of 2013, bitcoin’s MVRV has only lied below 1 for short periods, and it has only happened close to the bottom of the worst of the worst bear markets. At this point, the price is suppressed, and it’s possible to snap up cheap coins. An MVRV lower than 1 means that the asset’s market cap is lower than the total cost basis. In other words, very few holders have unrealized profits. Human emotions drive the market, and because it’s tough for most people to cut a loss, most will avoid selling until profit. Conversely, when the MVRV is very high, it means that most holders are sitting on unrealized gains.
Simulating trading strategies based on MVRVMVRV is best used as a medium to long-term metric. Using Cryptoquant’s thresholds for buy and sell, we can simulate a trading strategy based on MVRV and look at the historical returns. As shown in the table, history from January 1st, 2013 shows that buying the same amount of bitcoin every day when MVRV is lower than 1 has given 31% returns on average during the subsequent 90-day period. On the other hand, buying the same amount of bitcoin every day when MVRV was above 3.7 has given an average 90-day return of -7%. The divergencies in 90-day returns between buying when MVRV is below 1 or above 3.7 are also apparent when examining the chart. MVRV usually spikes above 3.7 in the late phases of bull markets, just weeks before the air goes out of the balloon. Buying the same amount every day is not typical for medium-term traders but is more desirable for long-term investors. For them, it is advisable to use this as an opportunity to get cheap coins for long-term hodling.
For medium-term traders, things get more interesting. As shown in the table, buying when MVRV hit 3.7 from above and holding for 30 days has yielded 62% returns on average. The reason is that bull markets historically have ended about one month after the 3.7 level was hit. In addition, the last phase of a bull market is usually the phase with the most extreme returns. By selling when MVRV passes 3.7, you will most likely miss the latest and wildest part of the bull market. The exact mechanism also happens when MVRV falls below 1. Although the level below 1 is an excellent place for long-term holders to buy cheap coins, buying immediately when MVRV falls below 1 from above and holding for 30 or 90 days has historically given returns of -7% and -37%.