Historically, the bitcoin MVRV Z-Score has been one of the most effective tools for identifying the highs and lows of the bitcoin market cycle. Today, we are pleased to share an improvement to this metric that makes it even more insightful for today's dynamic market conditions.
What is bitcoin MVRV Z Score?
He MVRV Z-Score is obtained by analyzing the relationship between bitcoin's realized limit (the average acquisition cost of all bitcoin in circulation) and its market capitalization (current valuation of the network). By standardizing this relationship using bitcoin price volatility (measured as standard deviation), the Z-Score highlights periods of overvaluation or undervaluation relative to historical norms.
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Spikes in the red zone indicate overvaluation, suggesting optimal profit-taking opportunities. Lows in the green zone indicate undervaluation, which often marks strong accumulation opportunities. Historically, this metric has been remarkably accurate in pinpointing major extremes of the market cycle.
While powerful, the traditional MVRV Z-Score has its limitations. In previous cycles, the Z-Score reached values of 9 to 10 during market highs. However, in the last cycle, the score only reached around 7. This may be due to the rounded double peak cycle instead of the sharp peak we normally experience. Still, there is a need to take into account the changing dynamics of the market, with increasing institutional participation and a change in investor behavior.
Improved MVRV Z-Score
The MVRV Z-Score standardizes the raw MVRV data using bitcoin's entire price history, which includes the extreme volatility of its early years. As bitcoin matures, this early data may distort its relevance to current market conditions. To address these challenges, we have developed the MVRV Z-Score 2 consecutive years. Instead of using bitcoin's entire price history, this version calculates volatility based solely on data from the previous two years.
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This approach better represents bitcoin's growing market capitalization and changing dynamics and ensures the metric adapts to the latest trends, offering greater precision for contemporary market analysis. It still excels at identifying market cycle highs and lows, but adapts to modern conditions. In the last cycle, this version captured a higher high value than the traditional Z-Score, aligning more closely with 2017 price action. On the downside, it continues to identify strong accumulation zones with high accuracy.
Raw MVRV Ratio
Another complementary approach involves analyzing the MVRV ratio without standardizing volatility. By doing so, we can see that the MVRV ratio from the previous cycle reached a high of 3.96, compared to 4.72 in the previous cycle. These values suggest less deviation, potentially offering a more stable framework for projecting future price targets.
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Assuming a realized price of $60,000 (taking into account the current projected increase over the next six months) and an MVRV ratio of 3.96, a potential price ceiling could be close to $240,000. If diminishing returns reduce the ratio to 3.0, the maximum price could still reach $180,000.
Conclusion
While the MVRV Z-Score remains one of the most effective tools for timing the peaks and troughs of the market cycle, we must be prepared for this metric to potentially not reach highs similar to those of previous cycles. By adapting this data to better account for the changing dynamics of the bitcoin market, we can account for reducing volatility as btc grows.
For a more in-depth look at this topic, watch a recent YouTube video here:
bitcoin MVRV Z-Score Improvement
For more detailed bitcoin analysis and access to advanced features such as live charts, custom indicator alerts, and detailed industry reports, see bitcoin Pro Magazine.
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Always do your own research before making any investment decisions.
