Bitcoin Finds Defeat At Historical Level: More Pain Ahead?

On-chain data shows a Bitcoin ratio has found rejection at a historical level, a sign that the asset’s downtrend may continue.

Bitcoin MVRV Ratio Has Rebounded Back Down Off The 2.0 Level

As an analyst in a CryptoQuant Quicktake post explained, the BTC Market Value to Realized Value (MVRV) ratio has recently touched a two-year high. The MVRV ratio is an indicator that tracks the ratio between Bitcoin’s market cap and realized cap.

The “realized cap” here refers to a capitalization model for BTC that assumes the true value of any coin in circulation is not the current spot price but the price at which it was last transferred on the blockchain.

The last movement of any token on the network can be assumed to have led to a change of hands, so the realized price essentially accounts for the cost basis of every investor in the space.

In other words, the realized cap measures the capital the holders have invested in the cryptocurrency. This means that the investors make a net profit when the market cap is higher than this model.

When this happens, the MVRV ratio, which compares the two models, naturally assumes a value greater than 1. Similarly, when the average investor is carrying some loss, the indicator’s value dips under the 1 mark.

Now, here is a chart that shows the trend in the 30-day moving average (MA) Bitcoin MVRV ratio over the past few years:

The value of the metric seems to have been turning around in recent days | Source: CryptoQuant

As displayed in the above graph, the 30-day MA Bitcoin MVRV ratio touched a two-year high recently as the cryptocurrency observed its sharp rally. During this surge, the metric had approached the 2.0 level, which implied the market cap had risen to twice that of the realized cap.

In the chart, the analyst highlighted what happened historically when the cryptocurrency came from the accumulation zone (where the MVRV ratio assumes a value less than 1.0) and rallied to this 2.0 mark.

The indicator found resistance at the line and turned around during the instances marked by the quant. The last time the pattern occurred was at the top of the April 2019 rally, and the asset could not start its next bull run until the indicator dipped back into the accumulation zone.

In the cycle before that, the 30-day MA MVRV ratio didn’t have to revisit the territory, but it did near it before bullish momentum returned for the cryptocurrency.

The asset likely finds resistance at the line because investors’ profits grow substantially at this level, making them more likely to participate in a selloff.

The metric has recently started to turn towards the downside after nearing the line, so a similar pattern may also play out this time. If history repeats, then more downtrends could be ahead for the coin before bullish momentum can return.