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The MVRV-Z Score: a reliable top and bottom indicator

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“Fair Value” is a term that is not often used in the crypto market, but it can help investors position their trades to make the most of market volatility. Knowing the “fair value” of a crypto asset allows investors to know if an asset is overvalued at its current price.

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The ratio showing the difference between the market and realized capitalization of an asset is called the MVRV-Z indicator. The score also shows the standard deviation of all historical market capitalization data.

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Historically, MVRV-Z has been used with impressive reliability to mark the tops and bottoms of bitcoin market cycles. A high MVRV-Z would typically indicate a market top, while a low MVRV-Z would indicate a market bottom followed by a rally.

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In the chart below, the price of bitcoin is perfectly correlated with the market tops predicted by the MVRV-Z valuation. Overheated market cycles have pushed the MVRV-Z Score bitcoin deep into the red and have always led to aggressive price drops. On the other hand, when the market value falls below the realized value, it has historically indicated a market bottom.

MVRV Z-Score by Glassnode annotated by CryptoSlate
MVRV Z-Score by Glassnode annotated by Cryptooshala

In June, the MVRV-Z fell significantly and entered the green zone, indicating a potential price bottom during this bear market.

According to previous MVRV-Z Bitcoin estimates, the latest cycle bottom occurred in March 2020 when the onset of the COVID-19 pandemic sent global markets crashing as investors rushed to cash out.

The MVRV Z-Score correctly named the last four bear market lows. The chart above shows that the MVRV-Z Score spent 212 days in the green zone in 2012. In 2015, the MVRV-Z Score spent over 300 days in the green zone. In 2019, the low MVRV-Z lasted 133 days, and in 2020 it spent only 20 days in the green. The green zone on the MVRV Z-Score chart shows when bitcoin is “undervalued.”

However, the MVRV-Z score is not reliable.

The ratio cannot predict how long an asset will remain undervalued or overvalued and does not show a noticeable repeating pattern. The length of time points stay in the green or red zones can also vary significantly, since the ratio does not take into account macroeconomic factors that affect price movements.

Take, for example, the global market crash in March 2020. Spurred on by the start of aggressive economic measures to combat the COVID-19 pandemic, the crash wiped out trillions from the global economy, wiping out the cryptocurrency market. Bitcoin’s MVRV-Z valuation dropped sharply at the time, indicating that the asset was significantly undervalued. However, it remained undervalued for only 20 days as much of the stimulus provided by central banks around the world went directly to the crypto market, most notably bitcoin.

After spending 37 days in the green zone, Bitcoin’s MVRV-Z increased and showed that the asset is no longer undervalued. While this may indicate a resurgence of bullish sentiment in the market, investors should remain cautious as this is not the first time Bitcoin’s MVRV-Z reading has briefly moved out of the green.

Until global macroeconomic sentiment changes and demand for Bitcoin returns to pre-crisis levels, Bitcoin may continue to fall into and out of the “undervalued” category.

MVRV Z-Score by Glassnode annotated by CryptoSlate
MVRV Z-Score by Glassnode annotated by Cryptooshala





Credit : cryptoslate.com

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