Eoneren
It is time to start paying attention to Bitcoin (BTC-USD).
There is an indicator in the crypto world called the MVRV Ratio, which is the market value of a given token divided by the realized value of the token. Let’s break down the components:
Market value is simple, it is the market capitalization of a token, which is the total tokens outstanding multiplied by the current price of the token.
Realized value, in this context, is unique to crypto (as opposed to traditional equity markets) since it is only available because of public, on-chain data. Realized value is the aggregation of the price paid for each token when it was acquired multiplied by the supply of the token. Essentially, realized value provides the token’s aggregate cost basis for all token holders.
Below are varying levels of the MVRV ratio and what they indicate, using Bitcoin as an example:
- MVRV < 1: the collective Bitcoin holder is in a loss position. This typically coincides with a crypto bear market.
- MVRV = 1: the collective Bitcoin holder is at a breakeven level. The current bitcoin price equals the weighted average price paid for every Bitcoin in circulation.
- MVRV = 2: the collective Bitcoin holder has doubled their investment
The highest MVRV ratio for Bitcoin ever recorded was 8.08 on June 4, 2011.
The MVRV ratio can be used as a reliable long-term signal to determine when Bitcoin (and the broader crypto market) is overbought or oversold. Below is the chart of Bitcoin price and the Bitcoin MVRV ratio:
Bitcoin Price and the Bitcoin MVRV Ratio (Woobull Charts)
Currently, Bitcoin has sustained an MVRV ratio above 1 for more than 60 days
There have been four previous periods in Bitcoin’s history where the MVRV ratio has broken above 1 and maintained that support level for more than 60 days, similar to the period we are in now. See the orange arrows below:
Instances where Bitcoin broke through the MVRV threshold of 1 and sustained it for more than 60 days (Woobull Charts, OneJournal Research)
For each of these instances, as well as the current time period (in blue), the below chart summarizes Bitcoin’s return over the subsequent 30 days, 60 days, 90 days, 1-year, and 3-year time periods:
Bitcoin return for each instance of MVRV>1 and sustaining that level for over 60 days (DQYDJ, Chart created by OneJournal Research)
The returns speak for themselves. On average, the 90-day return is 84%, 1-year return is 797%, and 3-year return is 2044%.
Now is the point in the article where I have an obligation to state that past performance is no indication of future returns. The upside of Bitcoin today is also lower than it was when Bitcoin was in its infancy, a natural tendency for any maturing technology.
A Note on Technical Analysis
We believe the only technical analysis that is worth paying attention to is long-term focused, and even then it is just a tool. If you’re presented with technical analysis that is on a time scale of days and not months or years, run. Technical analysis can be as much art as it is science, and certain technical analysis trends hold true until they don’t (see the Bitcoin Stock-to-Flow model).
Technical analysis can’t account for the fact that the Federal Reserve continues to raise interest rates by 0.25% even when the global banking system is showing signs of weakness, including two significant crypto banks in Silvergate (SI) and Signature Bank (SBNY). It can’t account for Fed Chairman Jerome Powell noting in his press conference today that it is “the most likely case” that the Federal Reserve would not cut interest rates 2023, sending risk assets into a late afternoon selloff.
However, with something like Bitcoin that has no balance sheet to conduct fundamental analysis, and on-chain data providing new lenses to analyze an investment’s behavior such as the MVRV ratio, technical analysis can help provide signals when Bitcoin stock is overbought, oversold, or in a long-term trend reversal.
Conclusion
With all the disclaimers aside, the recent banking sector turmoil appears to have built upon Bitcoin’s price momentum from earlier in 2023, and the long-term upside of Bitcoin is still significant. The MVRV ratio would indicate that the foundation for the next Bitcoin bull cycle may be forming as we speak.
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