Introducing the Bitcoin MVRV Ratio


The MVRV (Market Cap Realized Value) ratio is a newly proposed method for estimating Bitcoin’s real, or ‘fair’ value.

The problem with Market Cap

The concept of realized cap was first introduced by Nic Carter at the recent Honeybadger 2018 conference, as an alternative to market cap’s built-in deficiencies.

“The hidden assumption is that Bitcoin’s current supply is all active - and we all know that’s not the case”, says Carter.

There’s a fair amount of BTC that is now probably lost.

Satoshi’s coins, for one, likely fall into that category. Miners that lost their hard drives and other fringe cases, these all combine to make a not-insignificant pool of valueless assets.

The problem is, they’re all still counted in total market cap:

“There are a couple of million coins that haven’t moved since 2009/2010.”, laments Carter: “It’s possible that they’re in deep cold storage - but it’s also likely that they’re permanently lost”

So how do you offset these inherent imperfections of market capitalization? This is where realized value and realized cap come in.

Realized Value Explained

Let’s say there’s a wallet with 30 tokens. These coins came into the wallet in 3 different transactions:

  • 10 tokens were bought at $5
  • 5 tokens were bought at $15
  • 15 tokens were bought at $10

The realized value is found by calculating the acquisition cost of all assets located in a wallet.

In this case, the realized value of the above address is (10∗5)+(5∗15)+(15∗10)=$275

To get the average acquisition price of these 30 tokens, all we need to do is divide the realized value by the total number of tokens: $275/30 = $9.16

So what this tells us is that if the current price of the token is less than $9.16, then the holder paid more for acquiring these assets than what they’re currently worth.

On the other hand, if the current price of the token is >$9.16, the value of the tokens is now greater than what the holder originally paid for them.

Say the tokens currently cost $10 to buy. These 30 tokens are now worth $300 on the market; if the holder was to sell, he’d pocket a $25 ($300-$275) profit.

What’s interesting is that we can compute this ‘realized value’ for the whole network, simply by summing up the individual realized values of all wallets currently holding tokens.

This number gives us an estimate of the total amount of money the users of a network spent to acquire their assets, and is called realized cap.

In this way, realized value helps us eliminate some of the lost, unused or otherwise unclaimed coins from our market value calculations.

MVRV Ratio

The MVRV ratio is found by dividing the market cap (market value or MV) by realized cap (total realized value or RV), and it provides us with a solid estimate of just how overvalued or undervalued the current market cap is.

Pictured: Santiment’s MVRV ratio dashboard

Here’s an example:

Let’s say the current Market Value is $8b, while the current Realized Value is $4b. The MVRV ratio would be 2 ($8b/$4b).

That means that, on average, each network participant would double their initial investment if they were to sell their tokens. The more this ratio increases, the higher the sell pressure, as people want to cash out and claim profits.

Far on the other side of the spectrum, say the current Market Value is $3b, while the Realized Value is still $4b. At this point, most people will be realizing losses if they were to sell their holdings, creating FUD. For those that believe the market will bounce back, however, this can also be an opportune time to accumulate new tokens.

On its own, market cap is a desperately flawed metric, and Nic Carter knows this: ”The measure of market cap is extremely inferior, especially in cases where there are coins that aren’t circulating”

So what MVRV ratio does is provide additional context to total market capitalization. It gives us an idea of how both holders and speculators are actually reading the market value, which in turn gives us a better idea of how they’re likely to react to it.

The dashboard for Bitcoin’s MVRV ratio is currently being tested, and will soon be up live on the Santiment platform. If you haven’t gained access to our Dashboards yet, now’s the perfect time to do so.