MVRV Z-score is a useful metric that gives an idea of the value of any cryptocurrency, but is most commonly used for bitcoin. MVRV stands for Market Value to Realized Value and shows whether a cryptocurrency is currently overvalued or undervalued.
When people talk about Bitcoin, one of the most frequently discussed questions is: “How much is it worth?”. Since the value of bitcoin is mainly determined by supply and demand, there is no simple answer to this question. To determine the fair value of bitcoin, several factors need to be carefully considered. MVRV Z-score can simplify all these calculations a bit. How do MVRV Z-scores work? Check out our guide to learn what the MVRV Z-score is and how you can use it to estimate the value of Bitcoin.
What is MVRV Z-Score?
This metric has its origins in the MVRV ratio that Murad Makhmudov and David Pewell created in 2018. The original MVRV ratio simply compared the market value and realized value of bitcoin. It was a great way to track price action, but it didn't provide a deep understanding of Bitcoin's fair value.
MVRV Z-score is a modification of the original Makhmudov and Pewell metric. First created by Awe & Wonder in late 2018, the MVRV Z-score metric adds the mathematical concept of Z-scores to the MVRV metric. Z-score usually measures the number of standard deviations that are above or below the mean. However, the MVRV Z-score replaces the average with the realized value of bitcoin.
Without going into the math, MVRV Z-score allows you to see the difference between Bitcoin's current price and its all-time moving average price. Basically, it allows you to see if the current price of bitcoin is abnormal compared to its past value and price history. This can be a very valuable metric that answers the question “How much is Bitcoin worth?”.
How to Calculate MVRV Z-Score
There are many websites that provide MVRV Z-score charts, so the easiest way to calculate the MVRV Z-score is to find it. However, it is worth taking the time to learn how to calculate it yourself. Knowing how to calculate the MVRV Z-score for Bitcoin reveals a lot about how the concept works.
The basic MVRV Z-score formula simply subtracts the realized value of bitcoin from its market value and divides the resulting value by the standard deviation. Here is how to calculate the MVRV Z-score:
- Get the Bitcoin Market Value. This is simply the total market value of Bitcoin. You can calculate it yourself by multiplying the price of bitcoin by the number of bitcoins in circulation.
- Find the realized value of bitcoin. This is the sum of all Bitcoin values at the time of the last Bitcoin movement. It is usually difficult to calculate it yourself, but you can easily find this data on the Internet.
- Subtract the realized value from the market value.
- Divide this number by the market value you found in step one to get your final MVRV Z-score.
How to use MVRV Z-Score
Since the MVRV Z-score was developed, it has become an important part of investing in bitcoin. Why is MVRV Z-score so useful? It helps to identify market trends and give a more accurate picture of the fair value of bitcoin.
Looking at the current MVRV Z-score gives some indication of whether bitcoin is overvalued or undervalued. If the indicator exceeds 6,9, bitcoin is most likely overvalued. On many charts, this overvaluation zone is displayed as a red or pink "danger zone", which is periodically crossed by the MVRV Z-score line. When the score is below 0,1, bitcoin is undervalued relative to the fair value of bitcoin. This is often shown on charts as a green “safety zone”, which indicates that it is a good idea to buy bitcoin.
The MVRV Z-score is especially useful for determining momentum. People look at market trends to determine how much bitcoin is worth. If the fair value of bitcoin jumps or falls sharply, it attracts attention - and causes even more dramatic changes. The Z-score MVRV shows this momentum, and its data often gives an indication of when the market is about to shift. Historically, if the MVRV Z-score is ﹥ 5 at the close of the week, then the probability of a reversal is 94,36%.
Pros and Cons of MVRV Z-Score
This metric has both advantages and disadvantages. It can be very useful for estimating the fair value of bitcoin, but is not reliable.
Here are some MVRV Z-score benefits you should know about.
- The metric is very easy to calculate and analyze. At a glance, even casual crypto enthusiasts can tell if bitcoin is relatively overvalued or undervalued.
- MVRV Z-scores use data from several months, so they are reliable for identifying large trends that will lead to significant changes in the market. They can predict some trends with up to 94% reliability.
- A change in the MVRV Z-Ratio can help you notice a change in market dynamics even before prices change dramatically.
- This indicator doesn't just tell you if the market is undervalued or overvalued. It also tells you how wrong the current value is.
Keep in mind that there are some potential downsides to the MVRV Z-score.
- Since the calculation takes into account the entire previous price history of bitcoin, previous values with lower prices may be somewhat unfairly estimated. Some believe that a value of 1,0 may indicate that Bitcoin is undervalued.
- More people are becoming aware of this metric, so when bitcoin hits 6,9 – regardless of other market trends – there is a movement.
- Some experts believe that it would be more accurate to use the average of bitcoin price data for the last four years, rather than the average of the data for the entire history of bitcoin.
- The indicator does not directly tell you how much Bitcoin is worth. Instead, it will simply tell you if it is overrated or underpriced.
Is MVRV Z-Score reliable as a Bitcoin price predictor?
How much is bitcoin worth? As just mentioned, the MVRV Z-score will not necessarily tell you the exact value of Bitcoin. Like any other price indicator, the reliability of the MVRV Z-score is subject to slight fluctuations. You can't just sell bitcoin the moment it hits 6,9, because there's no guarantee that the price of bitcoin won't rise higher. However, it gives a very accurate estimate of the fair value of bitcoin.
In addition to helping determine the fair value of bitcoin, this indicator is also quite reliable in identifying potential market movements. Looking at the past of this metric, it was able to accurately predict price drops in April 2013, December 2013 and December 2018 one to two weeks before the market crashed.
Compared to other indicators such as the RSI, the MVRV Z-score provides little additional data. In addition to confirming whether a cryptocurrency is overvalued or undervalued, it also shows by how much. Sharper Z-score peaks give you additional insight into how the market is moving and you can better guess what the fair value of Bitcoin (in this case) will be going forward. Despite the extra granularity, this indicator remains fairly easy to use.
Сonclusion
As you can see, the MVRV Z-factor is very useful. It is not an absolute guarantee, but it is very useful for understanding whether the fair value of bitcoin could be slightly higher or lower than the current market value. Like any other cryptocurrency metric, this metric works best when you combine it with other data to see the big picture.
Overall, while metrics like the MVRV Z-score can provide some insight into the fair value of a cryptocurrency, they should still be taken with a pinch of salt. Given macroeconomic factors such as government regulation and inflation, the price of any cryptocurrency can become extremely volatile, rendering these indicators and charts ineffective.