It's by understanding and anticipating the emotions of others that we can take advantage of market opportunities. With the transparency of on-chain data on Bitcoin and other assets, we have the opportunity to exploit this information to our advantage.If you find it easy to get lost among all the existing metrics, the concept of MVRV (Market Value to Realised Value) plays a crucial role in market analysis! Particularly when it comes to measuring investor greed and fear during Bull Run phases. The aim of this article is to explore how this indicator can be used effectively during these periods. All in order to anticipate market movements and better understand the dynamics at play on the market and in Bitcoin.
Bitcoin & MVRV
We discussed this topic with you back in May, to learn how to understand and use it.But to give you a quick reminder, here are the main points: MVRV is calculated by taking into account two specific measures: * The price at which each BTC was acquired (Realized Price), * By comparing this base cost with the current price (spot price). Thanks to this comparison, we are able to determine the extent of unrealized profits or losses left by the market as a whole.This is how we obtain the Market Value to Realised Value ratio. This is one of the best-known on-chain indicators used by most people.
This metric is an extremely versatile and useful tool for analyzing the $BTC market.
There are many ways to interpret it, and that's the beauty of it!Firstly, this metric can be used to identify when sellers are exhausted at cycle lows. It also helps pinpoint periods of strong selling pressure at the top of the market. It also detects price levels where investor behavior is likely to change. But we're going to focus here on using this tool to measure investors' emotional state. Particularly when they are making large profits.
This will enable us to identify the moments when greed takes hold in their minds, when prices and the market are running amok.
During a bull market
The MVRV measures the extent of unrealized gains or losses held by investors. Naturally, the higher the MVRV ratio, the greater the market gains. In 2017 and 2021, the MVRV ratio exceeded 3.4. A level at which it becomes crucial to question the sustainability of such market profits!To illustrate this, let's assume that the current price of Bitcoin is $68,000. If the MVRV is 3.4, this means that the average cost price for investors is around $20,000. In other words, they hold an unrealized profit of $48,000 per Bitcoin, a gain of 240%. This is a clear sign that a majority of investors are getting greedy and not taking their winnings off the table.
This is often an indicator that the market may be close to a reversal. Indeed, when more experienced investors start taking profits en masse, this can lead to a significant correction. Or even mark the end of a bullish cycle. So it's essential to keep an eye on these levels! Whether to anticipate changes in investor behavior or market movements.
Parenthesis at market lows
Conversely, the lower the MVRV ratio, the greater the losses for investors. This may reveal signs of capitulation, such as an MVRV ratio below 0.7, observed in 2018-19 and 2022. For example, if the current Bitcoin price is $15,000 and the MVRV is 0.7, this means that investors' average cost price is around $21,400. In other words, they hold an unrealized loss of $6,400 per Bitcoin, or a loss of 30% on average.
These levels often accurately signal the bottom of the cycle, indicating an ideal zone for accumulating Bitcoin or other assets!
Measuring investor greed
Rather than focusing on long-term holders (LTH), who are less reactive to market fluctuations, it is more relevant to observe the behavior of short-term investors. LTH-MVRV is a useful indicator for tracking market cycles. But it lacks reactivity for daily analysis.So we're going to take a look at investors who have been in the market for less than 6 months. They often enter the market through FOMO (Fear Of Missing Out) and are looking for quick gains. The STH-MVRV (Short-Term Holder MVRV) is particularly useful for assessing their greed, as it measures the unrealized profits they hold.
When the ratio is high, it indicates that these investors have accumulated substantial profits in relation to their initial purchase price. This can encourage them to hold on to their positions, hoping for even more gains.However, if the market weakens, this greed can backfire. Fearful of losing their unrealized profits, they may sell en masse, triggering strong selling pressure.This creates a snowball effect, sending the market into a downward spiral.
By monitoring the STH-MVRV, we can anticipate when this greed might lead to hasty decisions. And therefore to market reversals.
Concluding our understanding of the market
After a cycle peak, the MVRV often experiences a sharp reversal, moving from very high values to very low levels in a short space of time, sometimes just a few days. An MVRV that falls sharply below its annual moving average is often the sign of a bear market in the making. Unrealized profits evaporate in an instant, turning into unrealized losses, leaving many investors in the lurch.Example: Between May 10 and May 23, 2021, investors' unrealized gains fell from $708 billion to $301 billion, or around 57% of profits evaporated in just 13 days. A similar event occurred in November 2021, as well as in December 2017.
At this stage, many investors find themselves with an unfavorable purchase price. And it usually takes some time for confidence to return to the market. In the past, this has often been the harbinger of a bear market. This is when the greediest usually jump ship, in disgust or spite, after suffering heavy losses.
MVRV is a formidable tool for better understanding investor psychology, particularly at the end of bullish cycles. By capturing the moments when greed reaches its peak, it offers invaluable help in anticipating market reversals.
With this indicator in hand, we have a key to navigating more serenely through market turbulence. From now on, no more excuses for failing to make the most of opportunities as they arise!
