The MVRV Ratio: A Tool to Gauge Whether Bitcoin (BTC) Is Overheated or Not

The legendary Bitcoin Market Value to Realized Value (MVRV) Ratio offers insights into whether Bitcoin is currently overheated or not.

The Bitcoin Market Value to Realized Value (MVRV) Ratio is a useful metric for assessing whether Bitcoin is currently overheated. As Bitcoin's latest rally has progressed, so too has this ratio.

One analyst delved into the MVRV Ratio in a recent 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.

As the graph below illustrates, the Bitcoin MVRV Ratio has been on the rise. It had surged to significant levels during the first quarter of the year, around the time Bitcoin breached its all-time high (ATH) in November 2021. While the MVRV Ratio has increased following the new ATH, it is not as high as it was earlier in the year. Historically, Bitcoin has tended to peak around the time this indicator reaches high levels. However, as the analyst notes, the threshold for what is considered ‘high' has decreased over the last few cycles. If the current trendline holds, the cycle might peak when the MVRV Ratio hits around 3. At the time of writing, the metric stands at 2, suggesting Bitcoin may still have some distance to cover before becoming overheated.

The rationale behind Bitcoin's tendency to overheat as the MVRV Ratio rises is that larger gains make it more likely for investors to take profits. At the time of writing, Bitcoin is trading around $74,100, reflecting an almost 8% increase over the last 24 hours. The coin's price has surged significantly over the past day.

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