MVRV Z-Score Guide: Decoding Bitcoin’s Value
Want to know if Bitcoin is a good buy or too expensive? The MVRV Z-Score can help. It’s a useful indicator first developed by David Puell and Murad Muhmudov that uses info from Bitcoin’s public transactions on the blockchain to find its “fair value”. In this guide, we’ll learn what the MVRV Z-Score is, how it works, and how to use it to check if Bitcoin is currently a buy or not.
MVRV Z-Score building blocks: Market Value and Realized Value.
The MVRV Z-Score uses blockchain data to decide whether bitcoin is over or undervalued. It does this by comparing two values: Market Value (MV) and Realized Value (RV).
Market Value is the actual bitcoin price (the one you see on a crypto exchange) multiplied by the number of coins already mined by miners. Think of it as the total value of all bitcoins that already exist, bought today, at the current market price. The chart below from Glassnode explains this more. You get the Market Value (black) by multiplying the coin supply (green) by the current bitcoin price (blue). Note that you can also easily look up bitcoin’s market value on CoinMarketCap.
If the market value were the total value of all the tickets made for a football game, Realized Value would be the total value of all tickets actually sold. This number is a bit trickier to work out, but fortunately, data providers like Glassnode or CryptoQuant handle it.
These providers scan the blockchain to see what the price of each bitcoin was the last time it moved from one digital wallet to another. Next, they assume each of these moves is a sale (since a sale usually involves moving bitcoin to a different wallet). And finally, they calculate the Realized Value by adding up the sale price of every bitcoin in circulation. But keep in mind, bitcoin can move to a different wallet without being sold. So, Realized Value is more like a guesstimate, not the actual selling price of each coin.
The Market Value and Realized Value give you the MVRV Ratio.
The MVRV Ratio simply divides the Market Value by the Realized Value. This ratio can tell you how today’s price of bitcoin (on a crypto exchange) compares to its average historical sale price (based on Realized Value). In other words, the ratio is a handy guide to whether bitcoin’s current price is a potential bargain or too pricey. Typically, the lower the ratio, the more of a bargain bitcoin is likely to be. And the higher the ratio, the more expensive (according to the model).
This chart from Glassnode shows the ratio (blue), which now sits at around 1.33. And while it’s been lower in the past, it suggests bitcoin is still fairly cheap right now – especially for long-term investors. Notice how the ratio rocketed higher during major bull runs (when speculators bid the market price much higher than the realized price). But this chart suggests there aren’t too many speculators in the market right now.
What about the MVRV Z-Score?
The “Z-Score” aspect of the model uses statistics to make the MVRV ratio potentially more accurate and easier to interpret. Essentially, it’s better at answering the question of “how” over or undervalued bitcoin is right now.
To get the Z-Score, statistical models do this:
- Subtract the Realized Value from the Market Value to get the difference.
- Divide that difference by the standard deviation of the Market Value (basically, the volatility of bitcoin’s price).
- Use statistical assumptions to get rid of any extreme values.
And what you’re left with is a chart that looks like this, with the MVRV Z-Score in orange:
According to the model, bitcoin bear markets tend to bottom out when the Z-Score is in the green zone. Bull markets, meanwhile, tend to top out when it’s in the red zone (when hype fuels the market price higher).
Looking at the above chart right now, two things are clear to me. First, bitcoin’s bear market low is likely already behind us (regardless of whether the price drops in the short term). And second, there’s a long way to go before it gets to the red sell zone. Of course, the MVRV Z-Score is just one model to use when deciding if bitcoin is a bargain or not. So it’s best to use it as part of your analysis, rather than the be-all end all.
Key points
- The MVRV Z-Score uses blockchain data to determine whether Bitcoin is over or undervalued. It does this by comparing Market Value and Realized Value.
- Market Value is the current price of bitcoin times the number of coins in circulation. Realized Value is the sum of each bitcoin at the price it was last sold for. Realized Value is more of an estimate, not the actual selling price of each coin.
- The MVRV Ratio is a handy tool to evaluate whether Bitcoin’s current price is a potential bargain or too steep. Typically, the lower the ratio, the more of a bargain Bitcoin is likely to be, and vice versa.
- The MVRV Z-Score uses statistical models to make the MVRV Ratio potentially more accurate and easier to interpret. It’s a useful tool for identifying potential market tops and bottoms.
