The Bitcoin Market Value to Realized Value (MVRV) Ratio is a crucial metric for assessing whether Bitcoin is currently overheated. This ratio provides insights into the valuation dynamics of Bitcoin, distinguishing between its market cap and realized cap.
The Recent Rise in Bitcoin MVRV Ratio
In a recent analysis on CryptoQuant Quicktake, an analyst delved into the implications of the MVRV Ratio for Bitcoin. The “MVRV Ratio” serves as an on-chain indicator that tracks the relationship between Bitcoin’s market cap and realized cap. The market cap represents the total valuation of Bitcoin’s circulating supply at its current spot price. Meanwhile, the realized cap is another capitalization model for Bitcoin, but it operates differently.
Unlike the market cap, the realized cap does not assign the same value to every coin in circulation. Instead, it considers the last price at which a token was transacted as its ‘true’ value. This method assumes that the previous transaction of any coin likely represents the last point it changed hands. Consequently, the realized cap sums up the cost basis of all tokens in circulation.
This model can be seen as an indicator of the total capital invested by all investors in the cryptocurrency. In contrast, the market cap signifies the present value held by these investors. When the MVRV Ratio exceeds 1, it indicates that the market cap currently surpasses the realized cap. Such a trend suggests that investors are, on average, in a net profit position. Conversely, if the indicator falls below this threshold, it implies that the average holder is underwater, holding coins at a value lower than their purchase price.
The Historical Context of MVRV Ratio Surges
As illustrated in past data, the Bitcoin MVRV Ratio experienced significant surges when BTC broke its all-time high (ATH) in November 2021 during the first quarter of the year. The metric also increased following the new ATH break, although it hasn’t reached the same heights observed earlier in the year. Historically, Bitcoin has peaked whenever the MVRV Ratio reached elevated levels. However, as noted by the analyst, the definition of a ‘high’ MVRV level has been declining over recent cycles.
If the trendline identified by the analyst holds true, the current cycle may witness a peak when the MVRV Ratio approaches a value of around 3. Presently, the metric stands at 2, suggesting there may still be some time before Bitcoin becomes overheated.
Why Does Bitcoin Overheat with Rising MVRV Ratios?
The tendency for Bitcoin to overheat as the MVRV Ratio climbs can be attributed to increased profit-taking by investors. As gains grow larger, investors are more inclined to realize profits, which can contribute to heightened selling pressure.
Current Bitcoin Price
As of the time of writing, Bitcoin is trading at approximately $74,100, reflecting an increase of nearly 8% over the past 24 hours. Monitoring the MVRV Ratio can provide valuable insights into market conditions and potential future price movements.
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