Here's Bitcoin's legendary market value to realized value (MRVRV) ratio that tells whether Bitcoin is currently overheated or not.
Bitcoin MVRV Ratio Has Increased Alongside Latest Price Surge
In a CryptoQuant Quicktake post, an analyst discussed Bitcoin’s MVRV Ratio. “MVRV Ratio” is an on-chain metric that tracks the ratio between Bitcoin’s market cap and realized capitalization. Market capitalization here is simply the total valuation of BTC’s circulating supply at current spot prices. The other metric, realized capitalization, is also a capitalization model for the asset, but it doesn’t work quite as simply.
Unlike market capitalization, this model does not set the same price for every coin in circulation; instead, it assumes that the last price a token traded at is its 'true' value.
The previous transaction of any coin is likely to represent the last point at which it was transferred, so the actual cap will essentially take the total cost basis of all tokens in circulation.
One way to look at this model is as a measure of how much capital investors in general have invested in cryptocurrencies. Conversely, market capitalization represents the value that these holders currently hold.
When the MVRV Ratio is greater than 1, it means that the market capitalization is currently higher than the actual capitalization. Such a trend indicates that investors are generally in a net profit position.
On the other hand, an indicator below this level implies that the average holder is currently at a loss because they are holding their coins at a price lower than the price they bought them at.
As shown in the chart above, Bitcoin’s MVRV Ratio spiked to a significant level when BTC broke its all-time high (ATH) in November 2021 in the first quarter of the year. A surge in the metric also followed the new ATH break, but the metric clearly has not reached the highs seen at the beginning of the year.
Historically, cryptocurrencies have topped whenever the indicator has risen to a high. However, as the quant has marked on the chart, the 'high' MVRV level has been declining over the last few cycles.
If the trend line drawn by the analyst holds, the current cycle will peak around the time the MVRV Ratio reaches a value of around 3. Currently, the indicator is at 2, so it may still be some time before Bitcoin gets too hot.
As for why assets tend to overheat as the MVRV Ratio spikes, the reason is because investors are increasingly likely to engage in profit-taking as their profits soar.
