The MVRV Z-Score is a market indicator that provides insights into whether Bitcoin is under or overvalued relative to its "fair value". It compares the market value (market capitalization) and realized value (aggregate price at which each bitcoin last moved) of Bitcoin to identify potential market tops and bottoms.
How It Works
The MVRV Z-Score is calculated using the following formula:
- Market Value = total market cap of Bitcoin
- Realized Value = the sum of the value at which each bitcoin was last transacted
The Z-Score is then derived from the ratio between the difference of Market Value and Realized Value to the standard deviation of all historical market values.
Interpretation on Our Dashboard
On our dashboard, the MVRV Z-Score helps indicate whether Bitcoin is overvalued or undervalued. High Z-Score values (above 7) have historically corresponded with market tops (overvalued), while low values (towards 0 and below) have been indicative of market bottoms (undervalued).
Historical Accuracy
The MVRV Z-Score has been effective in identifying extreme valuations in Bitcoin's market history. It has highlighted periods where buying or selling pressure was at a significant extreme relative to the value at which bitcoins were last exchanged.
Limitations
While the MVRV Z-Score is a powerful tool, it should not be used in isolation. Market conditions, macroeconomic factors, and other variables can influence its effectiveness. It's important to corroborate its signals with other indicators and market analysis.
Conclusion
The MVRV Z-Score is a significant indicator for understanding Bitcoin's market value in context. When used alongside other tools and data, it can provide valuable insights into market conditions, aiding investors and traders in their decision-making processes.