MVRV ZScore To Help In Determining Crypto Stock Potential

I think we have seen some good performance from some of the crypto stocks yesterday (23 Sep). I have posted an article yesterday Why MicroStrategy Not Coinbase When Bitcoin Build Its Rally

MicroStrategy was up 3.50%, but how would we know whether Bitcoin is currently undervalued ot overvalued and whether we can trade MicroStrategy or not?

The Bitcoin MVRV ratio is a metric that compares the market value of all circulating bitcoins with the realized value of those coins.

Market value refers to the current price of Bitcoin, multiplied by the number of coins in circulation. Realized value, on the other hand, calculates the average price at which all the bitcoins in existence were last transacted.

Essentially, the MVRV ratio provides an indication of whether the market value of Bitcoin is overvalued or undervalued relative to its realized value.

It helps investors gauge the level of investor enthusiasm or fear in the market and can serve as a tool to identify potential buying or selling opportunities.

Market Value to Realized Value (MVRV) Z-Score is used specifically for cryptocurrencies, in particular, Bitcoin. It is crucial for determining whether Bitcoin is currently undervalued or overvalued compared to its historical 'realized' price.

Bitcoin MVRV ratio is derived by dividing the Market Capitalization by the Realized Capitalization (The ratio of MC to RC (MVRV Ratio = MC / RC)).

Market Capitalization (MC) represents the total dollar market value of Bitcoin's circulating supply. It is calculated as the current price of Bitcoin multiplied by the number of coins in circulation.

Realized Capitalization (RC): Unlike MC, which values all coins at the current market price, RC is computed by valuing each coin at the price it was last moved or traded. Essentially, it is a summation of the value of all bitcoins, priced at the time they were last transacted.

The MVRV ratio is typically presented as a line chart, with a value of 1.0 representing a fair valuation of Bitcoin.

When the ratio is above 1.0, it suggests that the market value of Bitcoin is higher than the realized value, indicating a potentially overvalued market.

Conversely, when the ratio falls below 1.0, it implies that the market value is lower than the realized value, signaling a potentially undervalued market.

Additionally, extreme spikes or dips in the MVRV ratio can provide insights into market sentiments.

For example, a sudden surge in the ratio may indicate excessive greed and speculative activity, potentially foreshadowing a market correction.

Conversely, a sharp drop in the ratio might suggest widespread fear and panic selling, possibly indicating a buying opportunity.

The Z-Score is a statistical measure that indicates the number of standard deviations an element is from the mean. For this strategy, the MVRV Z-Score is calculated as follows:

This formula quantifies Bitcoin's deviation from its 'normal' valuation range, offering insights into market sentiment and potential price reversals.

In this example, I have the following parameters set for my own strategy, you can use your own values.

Z-Score Calculation Period: 252 days (Approximately one trading year, capturing a comprehensive market cycle)

Long Entry Threshold: 0.3, this Indicate moderate undervaluation

Short Entry Threshold: -0.3, this indicate moderate overvaluation

If we were to look at the chart below, we could see that a long (buy) signal is generated when the spread Z-Score crosses above the long entry threshold, indicating that Bitcoin is potentially undervalued.

Alternatively, A short (sell) signal is triggered when the spread Z-Score falls below the short entry threshold, suggesting overvaluation.

So as of now, the z-score is 1.328 which is way above the long entry threshold, so this would mean that Bitcoin is significantly undervalued.

But the current price might not be a good price target to go in.

If we were to use the signal from Bitcoin MVRV z-score, we could see that MicroStrategy is experiencing an upside movement with a price target close to $171, this should give confidence to investors to plan their trade accordingly.

But I would be doing the following:

I will continue to monitor the Bitcoin MVRV z-score and see whether it does signal that Bitcoin is overvalued.

Since MSTR correlate positively with Bitcoin, I would be closely looking at how Bitcoin price would move over the weekend and prepare for Monday trade.

As we know that MVRV z-score signals can help us to make informed decisions about opening or closing positions in the Bitcoin market. This can help us to identify high-probability entry and exit points based on historical valuation norms.

Using these metrics, we can apply it to how we would want to look at crypto stocks.

Appreciate if you could share your thoughts in the comment section whether you think MVRV z-score can be useful, and help to identify opportunities in crypto stocks.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.