Some investors say bitcoin can be hard to value: it doesn’t create cashflows like stocks and bonds. But every single piece of bitcoin information is stored on the public blockchain as “on-chain” data. You can use on-chain data models to follow the money and figure out when bitcoin is a bargain. In this guide, we’ll look at how the MVRV Z-Score model does this, and see how well it’s predicted bitcoin’s major tops and bottoms.
1. Understanding Market Value vs. Realized Value
MVRV stands for “market value to realized value.” So what do these two values mean? The market value tells us about the market’s current feeling towards bitcoin. But sentiment isn’t the same as spend: the realized value is a measure of actual spending on each bitcoin.
The market value is the total value of all the coins that have already been mined. You get that by multiplying the number of coins in circulation by the current bitcoin price.
So far, around 19 million bitcoins have been mined and the current bitcoin price is $20,000. Multiplying those two numbers together puts bitcoin’s current market value at about $380 billion. This number moves around quite a bit, but you can always check the up-to-date market value of bitcoin on CoinMarketCap.com.
The realized value is the sum of the latest selling price of every bitcoin in circulation. You get that by adding up the most recent sale price for every bitcoin already mined – that is, what each coin sold for the last time it moved to a different wallet address.
Here’s how it works: if you bought one bitcoin for $5,000 in 2018, the blockchain will show that one bitcoin moved to your wallet. So long as it stays in your wallet, the realized value of that coin would still be $5,000. Now imagine you sold that bitcoin a year later for $10,000. The blockchain will show that it moved to a different wallet, and the realized value would be $10,000. Companies like GlassNode scan the blockchain in real time to get an up-to-date realized value for each and every bitcoin.
Keep in mind, the realized value is only an estimation of the selling price – as sometimes bitcoin can be moved to a different wallet address without actually being sold. For example, you might move bitcoin from a crypto exchange to your own cold wallet. Still, you can think of the realized value as a more practical measure that reflects real spend – it strips out the emotional, short-term sentiment of the market value.
2. How the value comparison works
So let’s look at the difference between the market value (blue line) and the realized value (orange line). In the past, buying bitcoin when the market value was lower than the realized value (the blue line is below the orange line) has delivered great long-term value.
Bitcoin market value and realized value. Data from Glassnode. Concept of realized value attributed to @nic__carter.
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4. How the MVRV Z-Score helps identify buy/sell points
So now that you know the difference between the two values, let’s look at the MVRV Z-Score. The “Z-score” part is what turns this into a handy chart that can help you decide if bitcoin is trading at a bargain price.
The model takes three steps:
- Minus the realized value of bitcoin from the market value to get number X.
- Divide that number X by the standard deviation of the market value (standard deviation is just a fancy term for volatility – how much the market value moves around).
- Discount any anomalies or extreme values so you get a smoother chart.
The chart below shows the MVRV Z-Score (in orange) and the bitcoin price (in dark gray). When the Z-Score drops below zero and enters the green box, it suggests bitcoin is trading far below its fair value and could be a good buy. When the Z-score gets above seven it enters the red box. At that point, it suggests bitcoin is in a speculative bubble – in other words, it could be a good time to sell.
MVRV Z Score. Source: Glassnode.
If you followed the Z-score model and bought bitcoin when it was in the green box, you’d have done very well. You’d have bought into bitcoin near the bottom of the 2015 and 2018 bear markets, and near the low of the Covid crash in 2020.
On the flip side, selling when the Z-Score got into the red box (above 7) would’ve helped you lock in those gains. You might not have always sold at the very top, but you’d have been pretty close.
The MVRV Z-Score is below zero right now: the current market value is below the realized value. Sure, history might not repeat itself this time around. But according to the model, buying bitcoin now would be a bargain in the long-run.
5. What are some other on-chain models?
So that’s the Z-score – but there are a range of other on-chain methods to value bitcoin, including:
- MVRV Ratio: works like the MVRV Z-Score, but simply divides the market value by the realized value.
- HODL (Hold on for dear life) Waves: to measure how long investors have held onto their bitcoin, or how much conviction they have in the asset.
- NVT (network value to transaction) Ratio: like a price to earnings ratio for bitcoin – treating transaction volume as a proxy for earnings.
- The MVRV Z-Score is based on two values for bitcoin: its market value (price times total bitcoin supply) and its realized value (what each coin was last sold for).
- The Z-score model can tell you when bitcoin is trading below its price – a good buy – and when the price is entering bubble-territory – a good sell.
- The Z-score is currently below zero, which suggests that now is a good time to buy bitcoin according to the model.