How to use the MVRV Z-score to tell when Bitcoin is a bargain, with Hedonova

Some investors say bitcoin can be difficult to value: It doesn’t generate cash flow like stocks and bonds. But every single bit of bitcoin information is stored on the public blockchain as “on-chain” data. You can use on-chain data models to track 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 predicted bitcoin’s most important tops and bottoms.

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Understand 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 sentiment towards bitcoin. But sentiment is not the same as spending: 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 it by multiplying the number of coins in circulation by the current bitcoin price.

So far, about 19 million bitcoins have been mined and the current bitcoin price is $20,000. Multiplying these 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 updated market value of bitcoin on CoinMarketCap.com.

The realized value is the sum of the latest selling price of each bitcoin in circulation. You get this by adding the most recent sale price for each 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. As long as it remains in your wallet, the realized value of that coin will still be $5,000. Now imagine you sold that bitcoin a year later for $10,000. The blockchain will show that it moved to another 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 bitcoin.

Keep in mind, the realized value is only an estimate of the sale price – as bitcoin can sometimes be moved to another wallet address without actually being sold. For example, you can move bitcoin from a crypto exchange to your own cold wallet. However, you can think of the realized value as a more practical measure that reflects actual spending – it strips out the emotional, short-term sentiment of the market value.

How the value equation 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) provided great long-term value.

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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:

Subtract 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).

Reduce any outliers or extreme values ​​so you get a smoother graph.

The graph below shows the MVRV Z-score (in orange) and the bitcoin price (in dark grey). When the Z-score drops below zero and enters the green box, it indicates that bitcoin is trading well below its fair value and could be a good buy. When the Z score goes above seven, it enters the red box. At that point, it suggests that 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 would have done very well. You would have bought into bitcoin near the bottom of the 2015 and 2018 bear markets, and near the low of the 2020 Covid crash.

On the other hand, selling when the Z-score landed in the red box (above 7) would have helped you lock in those gains. You may not have always sold at the very top, but you would have been pretty close.

The MVRV Z-score is currently below zero: the current market value is below the realized value. Surely, history may not repeat itself this time. But according to the model, buying bitcoin now would be a bargain in the long run.

What are some other on-chain models?

So that’s the Z-score – but there are a range of other on-chain methods of valuing 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 their bitcoin, or how much conviction they have in the

asset

.N/A (network value to transaction) ratio: like a price-to-earnings ratio for bitcoin – treats transaction volume as a proxy for earnings.

This guide was produced by Finimize in partnership with Hedonova.