The ongoing Bitcoin bull market has sparked renewed interest in on-chain metrics to fully understand the bullish trend behind the scenes.
Earlier today, Avocado Onchain, a CryptoQuant analyst, shared his perspective on Bitcoin’s market performance, focusing on the widely-used Market Value to Realized Value (MVRV) ratio.
This indicator is often used to assess Bitcoin’s valuation about its realized cap, which represents the aggregated value of all Bitcoin based on its last movement price.
What Bitcoin MVRV Metric Currently Signals
According to Avocado Onchain, the MVRV ratio provides key insights into market cycles. Historically, when the MVRV ratio dips below 1, it signals a market bottom, while values above 3.7 have coincided with potential market tops.
As Bitcoin approaches new all-time highs, the MVRV ratio’s behavior suggests a shift in market sentiment from skepticism to optimism. This raises critical questions about how investors should interpret these metrics during a bull cycle.
The MVRV ratio, calculated by dividing Bitcoin’s market cap by its realized cap, offers insights into whether the asset is undervalued or overvalued relative to its historical averages.
Avocado Onchain emphasized that the ratio might not necessarily reach 3.7 in this cycle, as seen in prior bull markets, but could still signal overvaluation at lower levels. He noted that the ratio’s peaks and troughs have shown a narrowing trend, with higher lows and lower highs.
MVRV Historical Patterns
Drawing from historical patterns, the CryptoQuant analyst noted:
In past cycles, detailed analysis of historical charts shows that in 2017, the MVRV ratio first reached 3.7, but Bitcoin’s price didn’t peak until six months later. Similarly, in 2021, the peak followed about three months after the ratio hit 3.7.
Avocado Onchain suggested that while the MVRV ratio signals “overvaluation,” it does not guarantee an imminent price peak. Instead, the ratio often lingers around the overvaluation range, reflecting ongoing bullish sentiment with price fluctuations.
To mitigate risks, Avocado Onchain advises against relying solely on the MVRV ratio for investment decisions. He advocates for a gradual selling strategy as the ratio rises, allowing investors to balance potential gains with reduced exposure to market corrections. The analyst particularly concluded, stating:
Asset prices often enter phases of extreme overvaluation that cannot be fully explained by numerical data alone. During a bull market, it’s essential to use not only on-chain metrics but also factors like investor sentiment, macroeconomic trends, and government policies to develop a well-rounded.
Featured image created with DALL-E, Chart from TradingView