MVRV: from theory to practice

Investing in financial assets, including digital ones like bitcoin, is a complex and challenging task. With the constantly fluctuating market, it can be difficult for investors to make informed decisions on when to buy, sell or hold their assets. This is where the importance of having tools and indicators to help them make informed investment decisions comes in.

One such tool that has gained popularity in recent years is the MVRV indicator. In this article, we will dive into how this indicator works and how to use it concretely applied to bitcoin.

What is the MVRV Indicator?

A bit of theory

The MVRV (Market Value to Realised Value) indicator is a ratio that compares the current Market Value of an asset to its Realised Value.

 Sounds simple, but what do both terms mean?

• Market Value refers to the current price of an asset, as determined by the market through supply and demand.

• On the other hand, the Realised Value of an asset is calculated by taking the volume weighted sum of all the prices at which it has previously been exchanged until now. Therefore, it represents the total value that has been realised by investors who have already acquired and then sold the asset in the past.

The MVRV indicator divides Market Value by Realised Value to reflect the proportional relationship between the two. A value above one means that the current Market Value is higher than the historical Realised Value—or in other words, the market as a whole is currently ‘in profit’.

By comparing these two values, investors can gain insights into whether investors, on average, are currently sitting on profits or losses. This information can be particularly valuable for investors in highly volatile assets like Bitcoin and other cryptocurrencies, where understanding the current market psychology is crucial for informed decision-making.

What is MVRV helpful for, and how can you interpret its value?

MVRV differs from other popular metrics used in traditional financial analysis, such as price-to-earnings (P/E) ratio and market capitalisation. While the P/E ratio and market capitalisation are widely used metrics in traditional financial analysis, they differ from MVRV in that they respectively measure a company's earnings relative to its share price and the total value of its outstanding shares. MVRV on the other hand measures the current average performance of investors in an asset such as bitcoin.

MVRV is a particularly useful metric for identifying market trends and pivots, including market tops and bottoms. Two cases can be distinguished:

• When the MVRV is high, it indicates that many investors are sitting on large gains on their positions, and may be tempted to take profits. Selling pressure from profit-taking investors can cause price declines until the market reaches a new equilibrium, leading to a correction or even an outright market reversal. 

• Conversely, when the MVRV is low, it indicates that many investors are sitting on losses and, due to the peculiarities of human psychology, tend to be less inclined to sell. This means that current investors are less likely to offer their assets for sale, thereby restricting its available market supply. As smaller volumes of assets are available for sale, its price may increase until a new equilibrium is found, typically at an MVRV level closer to its historical average. This can create a profitable opportunity for those who buy in at the right time.

Interpreting MVRV values can be a bit tricky, as different assets may have different MVRV ranges that are considered historically "normal" or "healthy." For example, an MVRV above 2.0 in a specific asset may indicate a selling opportunity, while an MVRV below 1.0 may indicate a buying opportunity. However, it's important to keep in mind that the interpretation of MVRV values can vary depending on the asset being analysed and other market factors at play.

Using MVRV with Bitcoin

Now that we understand what the MVRV indicator is and how it works, let's take a closer look at how it can be applied specifically to bitcoin.

A look at Bitcoin’s history through the prism of MVRV

Bitcoin is one of the most volatile assets in the market, and as such, understanding its market psychology is crucial for investors. Analysing historical bitcoin price data in conjunction with the MVRV indicator can provide valuable insights into market trends and help identify potential buy and sell signals. Looking at MVRV values from 2015 to today, the indicator helps differentiate various market phases.

Example 1: Knowing when to buy and following an MVRV uptrend (2015 - 2017)

• Accumulation phase, buying opportunity.

During most of 2015, MVRV was below 1, potentially signalling a buy opportunity for investors. It even reached an extreme low of 0.55. While below an MVRV of 1, bitcoin traded between $172 and $315.

• Breakout followed by a bull run, selling opportunity.

MVRV finally broke through the sub-1 level in late-October 2015 to reach an extreme high of 4.85 December 7, 2017, with bitcoin peaking at $17144 on the same day. Such a value demonstrates that the Market Value, meaning the price of bitcoin at this time, was vastly over Realised Value, the historical value at which the average investor may have bought bitcoin in the past. 

At these levels, investors could have performed quite well if they waited to sell bitcoin at least until MVRV went back above 2. We can thereby also see how, as investors increasingly find themselves in profit, they are tempted to sell in increasing volumes, eventually leading to price decline and full-blown bear markets—in turn driving the MVRV back towards and ultimately below 1.

Example 2: Identifying new opportunities and evaluating MVRV downtrends (2018 - 2021)

• Reentering accumulation phase, buying opportunity.

Evaluating whether or not a market is still opportunistic after a downturn of the magnitude bitcoin experienced between 2018 and 2019 (falling from around $20,000 to $3,200, an 84% decrease) can be difficult, with bearish bias justifiably dominating investor sentiment. The end of 2018 to the first quarter of 2019 saw MVRV levels switching back below 1—reaching as low as 0.70—indicating another potentially great moment to buy bitcoin.

• MVRV reentering sub-1 levels, signalling another buying opportunity.

Fast forward to March 2020: Bitcoin saw major volatility and ended up downtrending all the way below $5,000. MVRV reached a sub-1 level yet again, this time at 0.85, a higher-low than the 0.70 reading of 2018. This buying opportunity did not last long, with significant buying pressure quickly recovering the price, and eventually sending bitcoin to new highs above $60,000 in March 2021. The fact that the MVRV stayed below 1 for a brief time, did not drop to its previous low levels and rose above the 1 level again, were further signals that could strengthen investors’ opinion to consider buying.

Using MVRV in the future

We have now seen how MVRV could have helped investors in the past. How might we then apply MVRV to identify future buy and sell signals for bitcoin? 

First, it's important to note that MVRV should not be used in isolation when making investment decisions. It should be used in conjunction with other technical and fundamental analysis tools to get a more complete picture of the market. Additionally, the interpretation of MVRV values can vary depending on the asset being analysed and other market factors at play, so it's important to do your research and use MVRV as just one piece of the puzzle in your investment strategy.

Looking at recent MVRV variations at time of writing (April 2023), the indicator recently broke out of a sub-1 period, with bitcoin also showing strength all the way from $16,000 to $31,000. It will be key to monitor whether MVRV maintains its uptrend or if it pulls back to values below 1. Keeping in mind that past performances do not indicate future results, investors could also want to watch the 2-level on MVRV as a potential sign for selling opportunities.

Conclusion: MVRV in a Nutshell

The MVRV indicator is a ratio that compares the current Market Value of an asset to its Realised Value, calculated by adding all the prices at which it has previously been exchanged. It can help investors understand whether the psychology of current investors makes its available market supply likely to increase or shrink—putting downwards or upwards pressure on the price, respectively. This can provide valuable market insights for highly volatile assets such as bitcoin. An MVRV above 2.0 may indicate selling opportunities, while an MVRV below 1.0 may indicate buying opportunities.

Investors should keep in mind that this indicator should always be used in a holistic overall strategy and that past performances do not imply future results.