Abstract: Digital asset valuation is still an emerging field, but there have been many studies on some specific indicators. MVRV is a powerful indicator that uses on-chain data to measure and determine the top and bottom of the market and provide information about the overall health of digital currency assets.
In this report, we will focus on one indicator: the ratio of market capitalization / market value (hereinafter referred to as market value) to realized capitalization (realized capitalization / realized value), which is the MVRV indicator.
Overview of Realized Capitalization
Realized value is an indicator created by Coin Metrics, which is calculated by each supply unit at the price of the last time it was transferred on the chain (that is, the price of the last transaction). This is different from the traditional market value (traditional market value is based on the current market price uniform assessment of each supply unit)
For example, if the current price of Bitcoin (BTC) is 10,000 USD, the traditional market value will equalize the value of each coin to 10,000 USD. If the current total supply of BTC is 18 million, then the total market value of BTC will reach 180 million US dollars (18 million times 10,000 US dollars).
The realized value is calculated based on the price of each coin when it was last transferred on the chain. Therefore, if the price of BTC was 2500 USD when the last transaction of a coin, then from the perspective of realization value, the price of this coin will be 2500 USD (not the current market price). The realized value is the total value of all coins priced at this price.
Realized value can be considered as an estimate of the total cost of a digital currency asset. This provides a very valuable analytical perspective for understanding the behavior of digital currency investors, and it is not feasible to interpret these behaviors from the perspective of traditional financial markets.
It should be noted that this is only an estimate, not an accurate measure of the cost required by investors. The realization value measures the value of the last time these coins were settled in the transaction, not necessarily the value of the last transaction or exchange. However, since digital currency assets are mainly used for investment / transactions rather than payment (at least for now), the realization value can be regarded as a proxy variable to measure related costs.
Compared with market value, realized value can better measure the value of lost coins. For example, if 100 BTCs were transferred for the last time in 2011, and the BTC price was 1 USD at that time, then there is a considerable chance that these amounts of BTCs have been permanently lost, and the realized value of these coins is 100 USD (100 BTC multiplied by 1 USD), and the value of these coins under the market value method will be measured at the current market price.
Market value and realization value overview
MVRV refers to the ratio of the market value of a digital currency asset to the realized value. It can be used to help measure the top and bottom of the market for digital currency assets, and can also be used to better understand the investor behavior of digital currency assets.
We can think of MVRV as a comparison between speculators and holders' valuation of a digital currency asset. Under this interpretation, market value can be considered as an estimate of the current market value of speculators (assuming that sudden market value changes are mainly driven by speculators). On the other hand, the realization of the market value of the value is a measure of the holder ’s estimate of the value, because it is based on the price of the last transaction and is not affected by the sudden price fluctuations.
Therefore, 1 is an important demarcation point for MVRV. An MVRV higher than 1 indicates that the average market valuation of speculators is higher than that of the holders; an MVRV lower than 1 indicates that the market valuation of the holders is higher than (or once had) the market valuation of current speculators. When the MVRV is lower than 1, the holder will be psychologically tested, because when the MVRV fluctuates below 1, they are less and less likely to be able to profit from selling the digital currency they hold.
MVRV has historically been a good market top and bottom indicator, at least for BTC. The peak of MVRV usually indicates that the market is at the top, while the low point occurs when the market is at the bottom or during the accumulation period.
But so far, most of the research around MVRV has focused on BTC rather than other digital currency assets. BTC's MVRV stays above 1 most of the time (it only briefly fell below a few accumulation periods). However, not all digital currency assets are like this.
In the following chapters, we will analyze the MVRV ratios of various digital currency assets and explore how their different MVRV change patterns can bring about different understandings about them.
Historically, the peak of BTC's MVRV coincided with the peak of BTC's price. Its MVRV soared to above 5.5 in April 2013 and November 2013, and then to over 4.5 in December 2017. The prices of these three periods were at the high levels of the market at that time.
Since 2011, there have been three periods when BTC's MVRV fell below 1, namely September-December 2011, January-October 2015, and November 2018-April 2019. In hindsight, these three periods are the best periods to accumulate BTC.
BTC's MVRV first showed a relatively healthy growth pattern, and then entered the accumulation period. MVRV rebounded to more than 1 after three breaks, indicating long-term support for BTC by holders, and these supports balance cyclical speculation.
In the first few years of establishment, the MVRV of Ethereum (ETH) was much higher than 1, which indicates a period of relative speculation. Driven by its ICO boom, ETH's MVRV surged to 2.94 during the local market peak in March 2017 and June 2017, and reached 3.14 in June 2017. But it has been falling since then, and since it peaked in mid-2017, it has not broken upwards by 3.0.
ETH's MVRV reached its lowest point in December 2018 (below 0.3). Subsequently, it oscillated upward again in early 2019 and early 2020, which indicates that the potential ETH holder group also helps to support the basis of speculative rise. Although ETH's recent MVRV surge has not been as high as BTC, it shows that it now also contains the risk of falling prices.
Similar to ETH, the initial MVRV of Ripple (XRP) is much higher than 1, which indicates that it is a relatively speculative asset. However, in mid-2018, XRP's MVRV suddenly fell below 1, and has not rebounded since then. The failure of XRP's MVRV to bounce back above 1 indicates that XRP's speculative enthusiasm may be waning. If this is the case, holders may increasingly face the risk of being stuck.
Tezos (XTZ) 's MVRV shows the opposite of XRP. XTZ's MVRV remained below 1 for most of its history, and then suddenly rose above 1 in early 2020. This suggests that XTZ may have strong holder support for most of its early days. But its future is not so clear-the sudden rise of MVRV may be a potential signal that XTZ is turning into an ascending channel, or / and entering a period of high speculation.
The MVRV of Bitcoin SV (BSV) has been above 1 since its establishment, which is likely to indicate this relatively speculative market. Although BSV's MVRV always fluctuates up and down, it remains to be seen whether MVRV holder support can have such strength.