Original title: Mastering the MVRV Ratio
Written by Checkmate, Glassnode
Compiled by: Anthony, DaLing Think Tank
The MVRV ratio is one of the most popular and widely used chain indicators, however, there are many features of MVRV that are rarely used. In this article, we will explore how to empower MVRV to find extreme cycles, identify market trends, and get early warning of sell-offs.
It was originally conceived by on-chain pioneers Murad Mahmudov and David Puell in a paper published in October 2018 and has since become a staple Bitcoin analysis tool.
The MVRV ratio is often used to observe macro shocks and can be used to explore Bitcoin market cycles, especially to find highs and lows. But in reality, the MVRV indicator is more subtle and information-dense than many analysts think.
In this article we will explore the MVRV ratio, starting with the very basics and working our way up to more advanced studies. Our goal is to show the mechanics that make MVRV work and explore what makes this indicator such a powerful tool. We will cover three topics:
1. Explore extreme values of MVRV to find cycle peaks and lows.
2. Momentum of MVRV and how to use the indicator to track macro bull/bear trends.
3. Distribution differences show how MVRV warns of the peak of a selling cycle.
Reintroducing MVRV
MVRV is short for market value (MV) to realized value (RV), which is the ratio between market price and realized price. Since realized price is the average price at which each Bitcoin was last traded on-chain, MVRV can be considered a measure of “unrealized profit” in the supply.
An MVRV of 2.2 means the market price is 2.2 times the actual price (120% profit)
An MVRV of 1.0 means the market price is equal to the actual price (break-even)
An MVRV of 0.8 means the market price is 0.8 times the actual price (20% loss)
The chart below shows the MVRV ratio, which roughly shows the maximum unrealized profit for longs in a bull market, and the maximum unrealized loss for shorts in a bear market.
A high MVRV value (> 2.4) indicates that the market is holding a large amount of unrealized profits.
A low MVRV value (< 1.0) indicates that the market is facing unrealized losses.
The average profit percentage held by the market can be calculated as MVRV - 1.
The chart below shows this oscillator, highlighting that MVRV is below 1 and the average Bitcoin holder is losing money, with the average Bitcoin acquisition cost being higher than the current spot price.
Such events are relatively rare and usually occur in the late stages of a secular bear market. These large unrealized losses often trigger massive selling events that can form cycle lows.
Exploring the limits of value
The next question is, what are the high and low values of MVRV? How do we measure the extreme deviations associated with cycle tops and bottoms?
First, we will look at it from a visual standpoint, we have marked the MVRV levels at 0.8 (blue), 1.0 (green), 2.4 (orange), and 3.2 (red). From these markings it looks like the tops and bottoms line up pretty well, at least initially. However, if we want to get a good grasp of MVRV, we will need to do a bit more analysis than eyeballing it.
A simple way to do this is to calculate the proportion of days in history that MVRV traded below or above a certain level. We can calculate and display this using the Workbench tool and only consider dates since 2017, in line with more mature Bitcoin markets. If MVRV is below a certain level on only 10% of the trading days, it means that it is above that level on the other 90% of the trading days.
Now we can better quantify the likelihood of these MVRV levels:
Blue Extreme Lows: MVRV is below 0.8 on approximately 5% of trading days.
Green Consistently Lower: MVRV has been below 1.0 on approximately 15% of trading days.
Orange is consistently higher: MVRV has been above 2.4 on about 20% of trading days.
Red Extreme Highs: MVRV has been above 3.2 on approximately 6% of trading days.
If we plot the periods when MVRV is above/below these key levels, we can start to spot cycle tops and bottoms.
Blue: Cycle lows are usually formed when MVRV is below 0.8 (about 5% of trading days)
Green: Selling begins when MVRV falls below 1.0 (less than 15% of trading days)
Orange: When MVRV is above 2.4 (about 20% of trading days), the market starts to recover
Red: The cycle typically peaks if the MVRV is above 3.2 (which is above about 6% of trading days)
Now that we have defined a set of “extreme levels” for MVRV, we can visualize them as pricing ranges. If the MVRV ratio is equal to 2.4, it means that the corresponding profitable pricing range is 2.4 times the realized price.
The tool now allows us to estimate the price levels at which the market will reach extreme unrealized profits (high values) or unrealized losses (low values). Reaching these prices may increase the probability of triggering investor behavior such as profit taking or selling, which is ultimately the basis for the cycle tops/bottoms we are looking for.
For a more advanced and statistically robust approach, we can also calculate the historical average MVRV and use +/- 1 standard deviation to find extreme values. This provides a more robust and statistically significant approach.
MVRV Momentum
The previous section explored the use of MVRV to determine cycle extremes. Next, we will use MVRV as a tool to determine macro market trends.
The chart below shows the MVRV ratio (orange) moving along the 1-year moving average (blue). Note that periods where MVRV is trading above the 1-year moving average generally depict bull markets, while periods where it is trading below the 1-year moving average depict bear markets. Strong breaks of the 1-year moving average threshold by MVRV are often characteristic of cycle transition points.
Strong breakouts (green) indicate a large amount of Bitcoin’s base cost
Below current price, now in profit (lots of BTC accumulated near lows)
A strong breakout (red) indicates a large amount of Bitcoin’s base cost
Above current price, now in the red (lots of BTC accumulated near highs)
We can convert this observation into an oscillation range by taking the ratio between MVRV and the 1-year SMA. This tool is particularly useful for finding sharp transitions that occur at cycle turning points.
The beginning of a bear market: A sharp drop (negative values (red)) means that most Bitcoins have a high basis cost and the Bitcoin market is in the red. This suggests that a "top-heavy" market may be sensitive to price drops.
The beginning of a bull market: A sharp increase (positive (green)) means that the basis cost of most Bitcoin is low and the Bitcoin market is back in profit. This indicates a "top-light" market entering an accumulation phase after a large sell-off.
Key transition points from past cycles are shown as a measure of how responsive the MVRV momentum oscillation is to changes in the macro cycle.
Distribution Differences
In the final section, we will explore how to provide early warning of large MVRV distributions, which typically occur near the top of a market cycle. This can happen on both a macro and micro level.
The chart below shows the MVRV ratio for the entire 2020-23 cycle. We can clearly see how prices in October-November 2021 set new all-time records compared to April, but with significantly lower MVRV peaks.
Why is the total unrealized profit multiple lower despite a higher price? The answer is that Bitcoin closed at a higher cost on average in November compared to April.
This creates a negative divergence in the MVRV ratio on a macro level.
During the second rally from July to November, a large number of Bitcoins that were previously acquired at low prices (such as during the May-July sell-off) took the opportunity to exit liquidity and transfer them to new, less experienced "top buyers". Bitcoin was revalued from the lower actual price and transferred to speculators and price-sensitive buyers, who now have a much higher base cost (closer to ATH).
The following chart shows how this phenomenon manifests itself in two indicators:
Realized profits reached a level of about $1.5B per day in October-November as Bitcoin was acquired at a cheaper price.
It was transferred to a new buyer at a more expensive price.
As a result of this profit-taking behavior, realized market capitalization experienced a second move higher.
We can see that the 2022 bear market has resulted in a downward trend in the Realized Cap as losses are realized, taking the metric back to July levels. This represents a write-off of all the speculative premium that was added between July and November 2021.
If we zoom in on the peaks from January to May 2021, we can actually see the MVRV ratio forming a similar negative divergence on a smaller scale. Price was making successive new highs, but MVRV was quickly falling to lower highs.
Unrealized profits in supply are decreasing, a result of the massive sell-off, with profits converting from unrealized (paper gains) to realized (locked-in).
We can see a similar event happening between the two peaks in 2013, where the price increased by 392%, but the MVRV ratio was actually lower, falling from 5.74 to 5.43. We can see in the green markers below that a similar decay occurred before the final peak of $1,133.
This situation also occurred during the bull cycle in late 2017. As the MVRV exceeds our defined extreme level of 2.4, we begin to see higher price peaks, but the growth of the MVRV ratio tapers off.
Note that in August 2017, the SegWit upgrade was soft-forked into Bitcoin, and many of the locked Bitcoins were moved to leverage BCH for the hard fork, which would partially affect this cycle observation.
What to do if you lose your Bitcoin?
MVRV does have a net bias upward due to the huge unrealized profits held by Satoshi, early miners, and lost Bitcoins. There are several ways to calculate lost Bitcoins, a simple way is to discount Bitcoins that have not been used for at least 7 years.
The chart below calculates the adjusted MVRV, minus the unrealized profits of long-dormant Bitcoin, all of which finally became liquid at very low prices. The result is that we have a higher realized price after adjustment, more accurately reflecting the average acquisition price of "active supply". This in turn results in a lower MVRV ratio (smaller profit multiple), providing a better perspective on liquidity and circulating Bitcoin supply.
Summary and Conclusion
The MVRV ratio is a very complex indicator that contains information about the dynamics of the Bitcoin market and investor behavior patterns. MVRV is much more than just a long-term cyclical oscillator, and the list of derivatives and methods above only scratches the surface of this simple structure.
Mastering the MVRV ratio is an essential step in analyzing Bitcoin and once understood, it opens the door to new iterations, derivatives, and variants.