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BTC prices have dipped, but this indicator suggests a buy opportunity

Updated: Nov 16, 2021

CoinTelegraph recently reported that Bitcoin recently surpassed a key milestone: the world’s leading cryptocurrency has achieved a realized market capitalization of $100 billion USD.

To put that number in perspective: if Bitcoin were a corporation, it would rank among the top 100 biggest companies in the world by market capitalization.

A metric derived from Bitcoin’s realized market capitalization indicates that an extended bull run may be on the horizon. Let’s take a closer look.

Measuring the value of the Bitcoin network

Market capitalization– a metric typically applied to companies that issue securities– provides a rough estimate of how much a cryptocurrency is worth.

According to CoinMarketCap, there were 17,898,200 Bitcoins in circulation last Tuesday and Bitcoin was selling for $10,342.35. If you were to multiply those numbers, you would arrive at this market capitalization figure: $185,109,363,444.

A more accurate metric

Simply multiplying the number of Bitcoins in circulation by its price doesn’t take into account lost Bitcoins. Since there is no way to sell a lost Bitcoin, they inflate the real value of the currency.

In 2017, research firm Chainalysis estimated that anywhere from 17% to 23% of all Bitcoins are gone for good. Adding those lost coins to the Bitcoin’s market capitalization value is like saying that you still have $100 in your pocket even though you know that you lost $20 of it somewhere.

Since including the value of missing Bitcoins distorts the currency’s collective worth, valuing the currency requires a different type of value measurement standard. That’s where realized market capitalization– a metric developed by research firm Coinmetrics— comes in.

Since realized market capitalization accounts for lost coins, it provides a more accurate picture of Bitcoin’s value. You can get the specific details about how realized market capitalization compensates for lost coins here.

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This ratio often predicts when Bitcoin price swings are about to happen

MVRV is a metric that compares the ratio of Bitcoin’s market capitalization to its realized capitalization. To calculate MVRV, all you have to do is divide Bitcoin’s market capitalization by its realized market capitalization.

For whatever reason, MVRV is remarkably consistent.

If you compare Bitcoin’s MVRV with its price history, you can see that buying Bitcoin when its MVRV drops below one and then selling as MVRV approaches three seems to be a reliable long-term trading strategy.

Now let’s zoom in and take a closer look at what’s been happening more recently. Bitcoin prices have dipped a bit, but so has Bitcoin’s MVRV. If the MVRV drops below one and historical trends play out again, it could be a very good time to buy, provided that history repeats itself.

Any type of Bitcoin valuation system is only theoretical

Even though realized market cap may be a more accurate system for determining Bitcoin’s current value compared to standard market cap, it’s worth pointing out that both methods are completely theoretical.

According to Aaron Brown, former managing director and head of financial markets research at AQR Capital Management, roughly 40 percent of Bitcoin is held by just 1,000 users.

If even one of these Bitcoin whales cashed out on an exchange, Bitcoin prices would tumble dramatically. Since there’s no way to predict the behavior of the top 1,000 Bitcoin holders, Bitcoin is far more unpredictable compared to other types of securities.

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If you need personalized help reviewing your transactions or preparing your US tax returns, check out our CoinTracking Full Service. CT Full Service is provided by a team of crypto tax professionals led by Sharon Yip, an expert CPA. Follow our weekly AMAs on Twitter where Sharon Yip answers your crypto tax questions.

Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.

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