The legendary Bitcoin Market Value to Realized Value (MVRV) Ratio offers insights into whether Bitcoin is currently overheated or not. Recently, this ratio has increased alongside Bitcoin’s latest rally.
An analyst discussed the MVRV Ratio in a CryptoQuant Quicktake post. The MVRV Ratio is an on-chain metric that tracks the ratio between Bitcoin’s market cap and its realized cap. The market cap is the total valuation of Bitcoin’s circulating supply at the current spot price. In contrast, the realized cap is a more nuanced capitalization model. It doesn’t assign the same price to every coin in circulation; instead, it considers the last transaction price of each token as its ‘true’ value. This approach assumes the previous transaction of any coin represents the last point it switched hands, summarizing the total cost basis of all tokens in circulation.
One way to interpret the realized cap is as a metric of the total capital investors have put into the cryptocurrency. The market cap, on the other hand, represents the current value of these holdings. When the MVRV Ratio is greater than 1, it signifies that the market cap is presently above the realized cap, suggesting investors, on average, are at a net profit. Conversely, if the indicator is below this mark, it implies the average holder is underwater, holding their coins at a value lower than their purchase price.
The Bitcoin MVRV Ratio has been rising lately, as shown in the graph. It had surged to significant levels when Bitcoin broke the all-time high (ATH) in November 2021 during the first quarter of the year. Although the MVRV Ratio has increased following the new ATH, it’s still not as high as earlier in the year. Historically, Bitcoin has peaked whenever this indicator has reached high levels. However, as noted by the analyst, the threshold considered a ‘high’ level has been decreasing over the past few cycles. If the current trendline holds, the cycle might peak when the MVRV Ratio hits around 3. Currently, the metric stands at 2, so Bitcoin might still have some distance to cover before becoming overheated.
The reason Bitcoin tends to overheat when the MVRV Ratio rises is that larger gains increase the likelihood of investors taking profits. At the time of writing, Bitcoin is trading around $74,100, which reflects an almost 8% increase over the last 24 hours. The coin’s price surged significantly over the past day.
