How to determine a crypto bull or bear market through MVRV?
What are the lesser-known functions of the MVRV indicator?Original Title: Mastering the MVRV Ratio
Written by: Checkmate, Glassnode
Compiled by: Anthony, Daring Think Tank
The MVRV ratio is one of the most popular and widely used on-chain indicators, however, many of its features are rarely utilized. In this article, we will explore how to empower MVRV to identify extreme cycles, determine market trends, and gain warnings for 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 primary Bitcoin analysis tool.
The MVRV ratio is typically used to observe macro oscillations and can be used to explore Bitcoin market cycles, particularly to identify peaks and troughs. However, in reality, the MVRV indicator is more nuanced and information-dense than many analysts realize.
In this article, we will explore the MVRV ratio, starting from the basics and moving to more advanced studies. Our goal is to demonstrate the mechanisms that make MVRV work and explore what makes this indicator such a powerful tool. We will cover three topics:
Exploring MVRV extremes to identify cycle peaks and troughs.
The momentum of MVRV and how to use the indicator to track macro bull/bear market trends.
Distribution differences showing how MVRV can warn of sell-off cycle peaks.
Reintroducing MVRV
MVRV is an abbreviation for Market Value (MV) to Realized Value (RV), which is the ratio between market price and realized price. Since the realized price is the average price at which each Bitcoin was last traded on-chain, MVRV can be seen as a measure of "unrealized profits" in circulation.
An MVRV of 2.2 indicates that the market price is 2.2 times the realized price (120% profit).
An MVRV of 1.0 indicates that the market price equals the realized price (break-even).
An MVRV of 0.8 indicates that the market price is 0.8 times the realized price (20% loss).
The chart below shows the MVRV ratio, roughly indicating the unrealized profits of bulls at the peak of a bull market and the unrealized losses of bears at the peak of a bear market.
High MVRV values (> 2.4) indicate that the market holds a large amount of unrealized profits.
Low MVRV values (< 1.0) indicate that the market is facing unrealized losses.
The average percentage of profits held in the market can be calculated as MVRV - 1.
The chart below shows this oscillating indicator, highlighting when MVRV is below 1, and the average Bitcoin holder's Bitcoin is in a depreciated state, with their average acquisition cost above the current spot price.
Such events are relatively rare and typically occur late in long-term bear markets. These massive unrealized losses often trigger large-scale sell-off events, potentially forming cycle troughs.
Exploring Value Extremes
The next question is, what are the high and low values of MVRV? How do we measure extreme deviations associated with cycle tops and bottoms?
First, we will look at this from an intuitive visual perspective, marking MVRV levels at 0.8 (blue), 1.0 (green), 2.4 (orange), and 3.2 (red). From these markers, it appears that at least initially, they align well with tops and bottoms. However, if we want to accurately grasp MVRV, we will need to make this visual assessment more robust.
One simple method is to calculate the proportion of days in history when MVRV traded below or above specific levels. We can use the Workbench tool to calculate and display this, considering only dates since 2017, aligning with a more mature Bitcoin market. If MVRV was below a specific level on only 10% of trading days, it means it was above that level on the other 90% of trading days.
Now we can better quantify the likelihood of these MVRV levels:
Blue extreme low: MVRV was below 0.8 on about 5% of trading days.
Green consistently low: MVRV was below 1.0 on about 15% of trading days.
Orange consistently high: MVRV was above 2.4 on about 20% of trading days.
Red extreme high: MVRV was above 3.2 on about 6% of trading days.
If we plot the periods when MVRV is above/below these key levels, we can begin to identify cycle tops and bottoms.
Blue: If MVRV is below 0.8 (about 5% of trading days), it typically forms a cycle trough.
Green: When MVRV is below 1.0 (below 15% of trading days), sell-offs begin.
Orange: When MVRV is above 2.4 (about 20% of trading days), the market begins to warm up.
Red: If MVRV is above 3.2 (above about 6% of trading days), the cycle typically peaks.
Now that we have defined a set of "extreme levels" for MVRV, we can visualize them as pricing ranges. If the MVRV ratio equals 2.4, it means the corresponding profit pricing range is 2.4 times the realized price.
Now, this tool 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 likelihood of triggering investor behavior (such as profit-taking or sell-offs), which ultimately forms the basis for the cycle tops/bottoms we are looking for.
For more robust statistical methods, we can also calculate the historical average MVRV and use +/- 1 standard deviation to discover extremes. This provides a more robust and statistically meaningful approach.
MVRV Momentum
The previous section explored how to use MVRV to assess cycle extremes. Next, we will use MVRV as a tool to gauge macro market trends.
The chart below shows the MVRV ratio (orange) moving along the 1-year moving average (blue). Note that periods when MVRV trades above the 1-year moving average typically describe bull markets, while periods below the 1-year moving average describe bear markets. Strong breakouts of MVRV above the 1-year moving average threshold are often characteristic of cycle transition points.
Strong breakout (green) indicates a large base cost of Bitcoin.
Below current price, now in profit state (large BTC accumulated near the lows).
Strong breakdown (red) indicates a large base cost of Bitcoin.
Above current price, now in loss state (large BTC accumulated near the highs).
We can convert this observation into an oscillating range by selecting the ratio between MVRV and the 1-year SMA. This tool is particularly useful for identifying sharp transitions that occur at cycle turning points.
Start of a bear market: A sharp decline (negative value (red)) indicates that the base cost of most Bitcoins is high, and the Bitcoin market is in a loss state. This suggests that a "top-heavy" market may be sensitive to price declines.
Start of a bull market: A sharp increase (positive value (green)) indicates that the base cost of most Bitcoins is low, and the Bitcoin market is regaining profitability. This suggests a "bottom-heavy" market entering an accumulation phase after significant sell-offs.
Key transition points from past cycles are shown as a measure of the extent to which MVRV momentum oscillations respond to macro cycle changes.
Distribution Differences
In the final section, we will explore how to provide early warnings of significant MVRV distributions, which typically occur near market cycle tops. This can happen both macro and micro.
The chart below shows the MVRV ratio throughout the 2020-23 cycle. We can clearly see how prices in October to November 2021 created new historical records compared to April, but the MVRV peak was significantly lower.
Why did prices rise, but the overall multiple of unrealized profits decrease? The answer is that the average acquisition cost of Bitcoin in November was higher compared to April.
This created a negative divergence in the MVRV ratio on a macro level.
During the second rebound from July to November, a large amount of Bitcoin acquired at lower prices (e.g., during the sell-off from May to July) seized the opportunity to exit liquidity and transferred them to new, inexperienced "top buyers." Bitcoin was revalued from lower realized prices and transferred to speculators and price-sensitive buyers, who now had a much higher base cost (closer to ATH).
The chart below shows how this phenomenon manifests in two indicators:
Realized profits reached about $1.5B per day from October to November due to Bitcoin acquired at cheaper prices.
Transferred to new buyers at more expensive prices.
Due to this profit-taking behavior, realized market cap experienced a second rise.
We can see that the bear market of 2022 led to a downward trend in realized cap as losses were realized, bringing the metric back to July levels. This represented the offset of all speculative premiums accumulated from July 2021 to November 2021.
If we zoom in on the peak from January to May 2021, we can actually see a similar negative divergence forming within a smaller range in the MVRV ratio. Prices continuously reached new highs, but MVRV quickly dropped to lower highs.
The unrealized profits in circulation were decreasing, resulting from large-scale sell-offs, with profits transitioning from unrealized (paper gains) to realized (locked in).
We can see a similar event occurring between the two peaks in 2013, where prices rose by 392%, but the MVRV ratio actually decreased from 5.74 to 5.43. We can see in the green markers in the chart below that a similar decay occurred before the final peak of $1,133.
This situation also appeared in the late bull market cycle of 2017. As MVRV exceeded the extreme level of 2.4 that we defined, we began to see higher price peaks, but the growth of the MVRV ratio gradually weakened.
Note that in August 2017, the SegWit upgrade soft forked into Bitcoin, and many locked Bitcoins were transferred to take advantage of the BCH hard fork, which partially influenced this cycle observation.
What to Do with Lost Bitcoins?
Due to Satoshi, early miners holding significant unrealized profits, and lost Bitcoins, MVRV indeed has an upward net bias. There are several methods to calculate lost Bitcoins, one simple method is to discount Bitcoins that have been unused for at least 7 years.
The chart below calculates the adjusted MVRV, subtracting the unrealized profits of long-dormant Bitcoins, all of which last flowed at very low prices. The result is that we have a higher realized price adjusted, which more accurately reflects the average acquisition price of "active supply." This, in turn, leads to a lower MVRV ratio (smaller profit multiple), providing a better perspective for observing liquidity and circulating Bitcoin supply.
Summary and Conclusion
The MVRV ratio is a very complex indicator that contains information about Bitcoin market dynamics and investor behavior patterns. MVRV is far more than just a long-term cyclical oscillator; the series of derived tools and methods above only scratch 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 variations.
