Bitcoin Cycle Predictions With MVRV: Insights From Market and Realized Caps
Using MVRV to Predict Bitcoin's Cycles | Credit: Derek Fenech
Key Takeaways
- Bitcoin’s (BTC) MVRV Indicator shows neither overbought nor oversold values.
- In every previous Bitcoin market cycle top, the indicator reached overbought territory.
- How can we use the indicator to forecast the next Bitcoin market cycle top?
Bitcoin (BTC) market cycles often display similar characteristics during market cycle tops. One interesting feature is the difference between market and realized capitalizations. Notable disparities between the two have historically been indicative of market tops, while rare instances when the realized capitalization is higher than the market one marked the market bottoms.
With that in mind, we will analyze the MVRV Z-score indicator to underline the characteristics of previous market cycles. Then, we will use these insights to estimate the end of the current cycle.
What is the MVRV Z-Score Indicator?
The MVRV Z-Score is an on-chain indicator determining whether an asset is over- or undervalued. It does this by comparing the market value to the realized value.
The market value is the price of BTC multiplied by its supply, while the realized value is the same calculation with the exception that instead of the current price, the price at the time of the last transaction is used.
When the market value is considerably higher than the realized value, the MVRV Z-Score indicator signals a market top. On the other hand, times when the market value is lower than the realized value are indicative of market bottoms.
To arrive at the actual values for the indicator, the MVRV Z-score first takes the ratio between market and realized values. Then, it subtracts the mean from this ratio before dividing the entire thing by the standard deviation.
Historically, values above 7 have been considered overbought, and are shown by a red region, while those below 0 are considered oversold, shown in green.
The MVRV Z-Score can be divided into the long-term holder (LTH) and short-term holder (STH) MVRV, based on whether the UTXO lifespan is above or below 155 days.
MVRV Z-Score in the Previous Market Cycle
The MVRV Z-Score indicator has fallen below 0 four times since 2013 (green arrows). All of them have marked the Bitcoin market cycle bottoms. This means that until now, the on-chain indicator has perfectly predicted each market bottom.
The data and forecasts regarding the top are not as clear as those for the bottom. This is because while the indicator did cross 7 in each previous cycle, the actual values for the top varied wildly. More precisely, MVRV reached highs of 12.52 and 11.05 in 2013, 11.01 in 2017 and 7.55 in 2021.
In 2013 and 2021, the indicator generated a bearish divergence during the top (black lines). This did not happen in 2017.
The LTH MVRV has similarities and differences with the regular indicator. To elaborate, the similarities are that the indicator reached the overbought zone in the 2013 and 2017 highs. It also generated bearish divergence (black) in 2013 and 2021. Also, both indicators have generated lower highs in each successive Bitcoin price high.
However, the main difference lies in the fact that the LTH indicator did not reach the overbought zone in 2021 (red circle).
So, the MVRV Z-Score indicator always reached the overbought zone in the previous Bitcoin market cycles. The actual high for the top varied. The LTH MVRV Z-Score did not, since it failed to do so in the 2021 high. Both indicators have consistently made lower highs throughout Bitcoin’s price history.
Predicting the Current Bitcoin Market Cycle
The MVRV Z-score indicator dropped below 0 in June 2022 and remained there for more than six months. However, it has increased since, culminating with a high of 3.17 in March.
MVRV has fallen since and is currently at 1.60. This is not unlike the 2019 decline, with the caveat that the indicator fell back into oversold territory at that time, while it has not done so in the current cycle.
Since we established that the indicator has historically made lower highs each cycle, it is possible to draw a descending resistance trend line to connect the most recent ones.
Even if we do so, there is still room for the on-chain indicator to grow before the top. More precisely, the resistance trend line is at 4, allowing room for another Bitcoin price and indicator high.
An almost identical reading is visible in the LTH-MVRV.
As a result, if previous history is followed, the price of Bitcoin will reach another high, which will also coincide with a new indicator high. However, this high will not be in overbought territory, rather will be close to 4.
Bitcoin Uptrend Not Finished, Another High Likely
The MVRV Z-score indicator has perfectly predicted each market bottom but has been less accurate in Bitcoin cycle tops. Currently, it implies the price of BTC will reach another high. However, since each successive high has been lower than the previous one, the high will likely not reach overbought territory.
The MVRV resistance is at 4, while the current high is at 3.17. If the Bitcoin price mirrors MVRV, the following high will not be much higher than the current all-time high.
