Become an On-Chain Savant 003 - Composite Market Valuation Models (MVRV, MVRV-Z etc)
Become an On-Chain Analyzooor, shit on people's price action posts by citing fundamentals, cure your date's insomnia by explaining MVRV vs MVRV-Z. The Possibilities are endless!
This is part three of my On-Chain Masterclass series. You can find the other parts here:
Composite Market Valuation Models (This article)
What is MVRV Ratio?
Market Value to Realised Value (MVRV) is, as the name suggests a direct comparison between BTC’s Market Cap (MCap) and its Realised Cap (RCap). We can compare these two data points to get an idea of where price is in relation to fair value. MVRV provides insight as to the market’s profitability, with large divergences between Market Value and Realised Value useful to identify cycle tops and bottoms. When MVRV is at the extremes of its range, this tells us that there are large unrealised profits, or losses hanging over the market.
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How to Trade MVRV
MCap represents the value of an asset
RCap represents the value stored in an asset
Market pumping with high MVRV: Market Value is quickly increasing beyond its Realised Value (the price at which Diamond Handed Dave bought his BTC). This high value tells us that across the whole market, thousands of Daves are sitting on a shit-ton of unrealised profit, and are probably beginning to browse listings for Feadships and mail-order brides. Historically, MVRV values higher than 3.5 have been the point at which the Daves of the world take profit.
Market dumping with low MVRV: Market Value has dropped around Realised Value (Bitch Handed Bob’s entry price). Low values tell us that the market as a whole is at, or close to breakeven, so price is either undervalued, or there is very weak demand. Historically, MVRV values less than 1.0 are typical of capitulation or pre-bull run accumulation. This is where you jump in, despite the fact that the chart looks like it’s going to zero, and anime twitter accts driven by 16yr old paid group leaders swear it’s going 3K.
MVRV Trade Signals
In the above chart we can see that if you bought when MVRV dipped below 1.6 you’d have won every single time, with the green zone being a generational buy signal.
MVRV-Z is an upgraded version of MVRV which often confuses people. The point most stumble on is the Z-Score part. This is because most on-chain analysts explain things in the most complex manner possible, in order to make themselves seem smarter by confusing the reader.
Standard deviation (SD) is a measure of how much variation exists in a set of data. This variation is generally measured from an average or mean.
Your body weight has a low SD as it would oscillate around your average weight, possibly trending in a direction, but slowly and gradually with no crazy swings
Your debit card spends probably have a high SD, as you use it to buy everything from coffee to flight tickets
If your body weight has a SD of 0.5KG (i.e. it fluctuates on average by 0.5KG), and you woke up this morning 1Kg lighter, that value is two standard deviations from the mean.
Z-Score is simply the number of standard deviations from the mean a particular value sits at, so If:
Average = 10
SD = 1
Value = 13
Z-Score = 3
Value = 9
Z-Score = 1
In simple terms MVRV-Z score can be thought of how far apart MCap and RCap are from each other. This tells us when Bitcoin is over or undervalued.
If at this point you still don’t get it, I recommend placing your money in a Vanguard fund and going back to licking windows.
The Concept Behind MVRV-Z
As markets move strongly in one direction or another, rapidly diverging from the mean, the imbalance at play tends to trigger a mean reversion move (AKA pullbacks, throwbacks, retracements, etc).
The further a value diverges from the mean, the greater the probability of a mean reversion move. Think of this like a rubber band being stretched from a central point. The further it’s stretched, the greater the force pulling it back.
Just like the above examples, when the smart money is sitting on large amounts of unrealised profits, they tend to begin distributing, creating a top. Likewise, when the herd is capitulating at the bottom, the smart money is buying and creating a bottom.
We can use MVRV-Z to tell us when these tops and bottoms are happening.
MVRV-Z Score Trading Signals
Whenever MVRV-Z is high (+6.5ish, red circles), this has preceded a cycle top. This is when you sell regardless of how much further you think it’s gonna run.
Whenever MVRV-Z is low (around zero, green circles), this has indicated a bottom. This is when you go all in.
MVRV emphasises the market’s swings between fear and greed.
MVRV-Z Score tells us how over/undervalued the market is.
Buy when number small. Sell when number big.