I once thought I was the fearless captain in the sea of cryptocurrencies until that '312 black swan' caused my ship to sink. A 5 million position was wiped out within half an hour, and the cold touch of my phone screen is still unforgettable.
But despair is often the catalyst for wisdom, leading to a sudden realization: the essence of contracts is probabilistic gambling. With the remaining 800,000 capital and a 'dynamic hedging model', in February this year, I achieved an asset leap to 2.18 million in 60 days, a growth of 272,900%!
Now, I will share this set of 'MVRV indicators' for free - in the crypto space, learning to dance with risk is the true way to survive.
From historical performance, MVRV is an incredibly accurate indicator that can tell you the market's bottom and top from a macro perspective.
Summary: From historical performance, MVRV is an incredibly accurate indicator that can tell you the market's bottom and top from a macro perspective. A series of indicators surrounding MVRV are of significant reference for long-term investors.
Compared to traditional financial markets, the crypto asset space has some unique indicators, stemming from the characteristics of blockchain technology. This is particularly reflected in the utilization of on-chain data, with MVRV being a very distinctive indicator.
The following will provide a detailed explanation of the MVRV indicator starting from the RV indicator, then comparing the performance of BTC-MVRV, LTC-MVRV, and BCH-MVRV in bull-bear cycles, and finally analyzing the three variants of the MVRV indicators: MVRV Z-Score, RVT, and VWAP ratio.
I. What are RV and MVRV?
MVRV is a relative indicator, representing the ratio of circulating market cap (Market Cap, MV) to realized market cap (Realized Cap, RV), first proposed by Murad Mahmudov & David Puell, expressed as:
MVRV = MV / RV
Here, Realized Cap is calculated based on the UTXO model, summing up the corresponding value of all coins 'last moved' on-chain. Compared to circulating market cap (existing circulating amount * market price), RV has the following benefits:
(1) Reduced the impact of parts that have exited circulation (or lost parts).
(2) Considered the market value of each coin when it flows on-chain.
(3) Can indirectly reflect the cost basis of long-term holders.
In the actual data processing, to avoid the impact of dust attacks on UTXO (similar to account balances), RV indicator calculations are more complex, with the following specific treatments:
(1) For the coins that are moved when UTXO balance increases, the value of the incoming coins is calculated at the price at the time of transfer.
(2) For the coins moved when UTXO balance decreases, the transfer will 'activate' all coins within that UTXO; the value of all coins in that UTXO is calculated based on the market price at the time they were moved.
For example, as of today, a certain Bitcoin wallet balance had five transfers in and out in May 2016, April 2017, March 2018, February 2019, and January 2020, with amounts of +10BTC, +6BTC, -3BTC, -5BTC, and +1BTC respectively. The RV calculation value for all BTC in this wallet is as follows:
This means that based on the different attributions of the amount transferred in or out, the realized market cap for that address's balance is $24,000. If not distinguishing between transfers in or out, the corresponding realized market cap would be $64,000 (8 * $8,000). Comparatively, the $24,000 realized market cap after distinguishing transfers is a better reflection of that address’s holding cost than $64,000.
Since RV can approximately measure the long-term cost of all Bitcoin holders in the market (in extreme cases, there may be significant deviations), it is usually lower than MV in the context of growing market demand for Bitcoin. The 'market cap' that results from the difference between RV and MV may represent short-term market supply (selling pressure leading to downward risk) or long-term market floor supporters (or the last ones holding on). Thus, the MVRV ratio indirectly reflects the degree of imbalance between supply and demand for Bitcoin in the secondary market, and can further reflect the extent to which market prices are undervalued or overvalued.
II. MVRV and Bull-Bear Cycles
(1) Bitcoin bull-bear cycles and BTC-MVRV.
Looking at Bitcoin's price trend over the past ten years, it shows a continuous upward trend. From a macro perspective, it can be divided into three bull-bear cycles:
The first cycle, from July 2010 to June 2011, saw Bitcoin's price rise from around $0.05 to $191.81, then quickly drop to $2.29 in November 2011.
In the second cycle, Bitcoin's price rose from around $2.3 in December 2011 to $1,149.14 in November 2013, and then dropped significantly to $203.86 in August 2015.
The third cycle, from August 2015 to December 2018, saw prices rise from around $200 to about $19,500, followed by continuous bottom-finding (or possibly a second bottom).
Over the past decade, the MVRV ratio has generally maintained between 1-3, with its peaks and troughs closely aligned with those of bull and bear markets. Below, we compare BTC-MVRV's different performances during three bull-bear cycles.
During the first cycle, especially before the bull market in June 2011, MVRV was extremely unstable, generally maintaining between 2-8. This was a manifestation of the early immaturity of the Bitcoin market, with a high degree of speculative trading and many Bitcoin movements on-chain showing extreme instability, including many Bitcoins that may have been lost during this period. As Bitcoin's price quickly declined, MVRV also saw a significant drop, reaching a historical low of 0.4.
During the second cycle, MVRV rose along with the price, reaching its first peak at 1.4, but subsequent price declines brought it back down to a low of 0.85. Then it rose all the way up to above 5.6, corresponding to the two price peaks before the end of the bull market. The bear market trough (from January to October 2015) had MVRV mostly hovering between 0.8 and 0.9. MVRV being below 1 for a long time indicates that many long-term holders have already incurred losses, corresponding to the period when the market transitions from bear to bull.
During the third cycle, as Bitcoin's price rose continuously, MVRV showed extreme situations greater than 4 (severely overvalued) near the bull market peak. After that, Bitcoin entered a bear market, with MVRV maintaining between 0.7 and 0.9 during the bear market trough from November 2018 to March 2019. At the beginning of April, it broke above 1, leading to a round of price increase. However, MVRV peaked at 2.57 at the end of June before falling back, especially after the black swan effect of the COVID-19 pandemic, briefly dropping below 1 before quickly rebounding to around 1.3. Although Bitcoin's price is currently at a historically low level, a second bottom-finding scenario cannot be ruled out (MVRV could drop below 1 again).
(2) MVRV performance of Litecoin and Bitcoin Cash.
Litecoin was born in November 2011, nearly three years later than Bitcoin. During 2013, LTC-MVRV behaved similarly to BTC-MVRV in the first cycle, maintaining a higher level (between 1-6), but overall lower than the latter. Moreover, the LTC-MVRV corresponding to the bear market lows in early 2015 and late 2018 dropped to 0.1 and 0.3 respectively. However, the LTC-MVRV at the peak of the bull market at the end of 2017 was close to BTC-MVRV. This situation arises partly because Litecoin has a relatively small market cap, making it more susceptible to market sentiment, resulting in greater price volatility; on the other hand, the market recognizes Bitcoin more, leading to a lower relative valuation of Litecoin, causing LTC-MVRV to show lower levels over the long term.
BCH split from the Bitcoin community in 2017. Before the bull market, BCH-MVRV fluctuated significantly between 2-6, similar to Bitcoin's early performance. After the bull market, BCH-MVRV fell with price fluctuations, dropping to a low of 0.22 at the end of 2018. After a surge in April 2019, it peaked at 1.6 at the end of June that year, similar to LTC-MVRV's performance. However, BCH-MVRV is currently around 0.8, while LTC-MVRV is around 0.6, meaning Bitcoin Cash has a higher relative valuation than Litecoin but is still lower than Bitcoin.
III. Three Variants of the MVRV Indicator.
(1) MVRV Z-Score
MVRV Z-Score was first introduced by Awe & Wonder and is a derivative indicator further optimized based on the MVRV indicator. MVRV Z-Score reflects the degree of deviation between market cap and realized market cap, essentially being the standard deviation between market cap and realized market cap. The calculation formula is as follows:
Here, StdDev(MV) is the standard deviation of market cap. Its usage is similar to MVRV, used to determine whether Bitcoin is severely overvalued or undervalued. Awe & Wonder pointed out in their article that this indicator has an accuracy rate of up to 90% in judging trend direction.
Due to the smoothing effect of standard deviation on extreme short-term changes, MVRV Z-Score is relatively smoother than MVRV. Moreover, it better reflects changes in long-term trends, which improves the accuracy of trend judgments. Additionally, compared to the cyclical changes in the MVRV ratio, the use of MVRV Z-Score is more intuitive. As shown, the green area corresponds to the market bottom zone, while the red area corresponds to the market peak zone.
(2) RVT Ratio
The RVT ratio was first created by David Puell, representing the ratio of realized market cap (RV) to on-chain transaction volume (Transaction Volume). Unlike MVRV, RVT uses realized market cap as the numerator and on-chain transaction volume as the denominator. The calculation formula is as follows:
RVT = RV / TV
Here, TV refers to on-chain transaction volume. Because the crypto asset market in the past decade has primarily been driven by speculative demand in the secondary market, there is a strong correlation between on-chain transaction volume and secondary market cap. Therefore, the RVT ratio and MVRV have similar uses and can be used to judge the market's bottom and top over long periods.
Observing the RVT's performance over the past decade, the RVT value corresponding to the bear market bottom phases in 2012, 2015, and 2019 were generally between 0.010 to 0.013, while several price peaks in 2011, 2013, and 2017 were all above 0.110. Compared to MVRV, RVT is somewhat less effective in judging the macro bull-bear bottom and peak points. However, RVT is more straightforward in identifying some phase-specific highs and lows.
(3) On-chain VWAP ratio
On-chain VWAP ratio (VWAPR) is the ratio of market price to on-chain VWAP, which can be considered a variant of RV. Its calculation formula is as follows:
VWAPR = Price / VWAP
VWAP, or Volume Weighted Average Price, is calculated as the weighted average price based on trading volume over a specific time. The specific calculation method is to multiply the price by the corresponding trading volume, sum them up, and then divide by the total trading volume, resulting in the VWAP ratio. This VWAP differs from the secondary market VWAP and is an on-chain data calculation indicator.
Due to different calculation periods, VWAPR may vary: short periods (7 to 90 days) can use weighted values to judge short-term highs or lows, while long periods are suitable for judging highs and lows on macro cycles. Here, only the 365-day weighted value is compared with MVRV. Observing the VWAPR (365) over the past decade reveals that the values corresponding to the bear market bottoms in 2012, 2015, and 2019 were all below 0.4, while the peaks in 2011, 2013, and 2017 were all above 3.0. It can be seen that the judgment accuracy of VWAPR (365) is extremely close to that of MVRV, but the former becomes more flexible and variable based on the selected period.
Finally! If you're currently trading cryptocurrencies and doubting life due to losses, take 3 minutes to read this article; it might just help you find a way out.
Remember this twelve-character mantra: Cut losses when wrong, hold tight when right, small losses and big gains. How exactly to play?
1. Look at the big trend.
When the 5-day line is above, only long positions are taken; when below, only short positions are taken. Don't go against the trend, or you'll face dire consequences.
2. Trial positions.
Look for positions where the stop loss is only $1, but the potential profit can be tenfold. Usually, at the bottom when the market has just started, if you are wrong, you only lose the cost of a meal.
3. Cut losses quickly.
If a key level breaks, cut it immediately; don’t get emotionally attached to your positions. If the market comes back after you cut, you can re-enter, which is better than facing liquidation.
4. Increasing positions is the key.
Earn the first wave, wait for a pullback to the support level before increasing your position. Remember: increasing your position should be as cautious as opening a position for the first time.
5. Move stop loss.
Every time you increase your position, move up your stop loss. This way, in the end, you only have profits running, allowing you to sleep well.
6. Let profits fly
Don't act like you've never seen money before, running away with just a 10% profit. The real gains are ahead; wait for clear peak signals before dumping everything.
These 6 points seem simple, but 90% of people fail due to execution. If you can control your hands, making money is just a matter of time. When I understood this point, my account balance started to rise like a rocket. Now it's your turn.
The above are ten years of trading insights on cryptocurrency. After many ups and downs, these are heartfelt words of great enlightenment. I hope they are useful to everyone. Quality products come from a good reputation. There are beauties in the crypto space, unique and independent, with a soulful path and skillful management of assets!
Even the most diligent fisherman would not go out to sea during a storm, but would instead carefully guard their fishing boat. This season will eventually pass, and sunny days will come! Follow me, and I will teach you both how to fish and how to fish well. The door to the crypto world is always open; going with the flow is the only way to have a life that flows with fortune. Keep it in mind!