How Bitcoin Could Reach $100K by the End of the Year: The MVRV Deviation Bands Explained
Bitcoin is a cryptocurrency that operates on a decentralized network of computers, using a consensus mechanism called proof-of-work to validate transactions and create new coins. Bitcoin’s price is determined by the interaction of supply and demand, as well as the perception of its value by investors, traders, and users.
However, measuring the value of Bitcoin is not as straightforward as looking at its market price, which is the current price at which it is traded on exchanges. There are other ways of assessing the value of Bitcoin, such as its realized value, which is the average price at which each coin last moved on-chain. This reflects the cost base of the holders of Bitcoin, as well as their profit or loss.
One way of comparing the market value and the realized value of Bitcoin is by using the MVRV z-score, which standardizes the difference between the two by dividing it by the standard deviation of the market value. The MVRV z-score indicates how far the market value deviates from the realized value, and thus how overvalued or undervalued Bitcoin is.
The MVRV deviation bands are a graphical representation of the MVRV z-score, showing the different ranges of deviation and their historical significance. The chart below shows the MVRV deviation bands for Bitcoin since 2012.
MVRV deviation bands
The purple and blue bands represent the lowest z-scores, indicating that Bitcoin is undervalued or close to its cost base. The green band represents a moderate z-score, indicating that Bitcoin is fairly valued or slightly overvalued. The yellow, orange, and red bands represent the highest z-scores, indicating that Bitcoin is extremely overvalued or in a bubble.
As you can see, Bitcoin has spent most of its time either in the purple and blue bands or in the yellow, orange, and red bands, depending on the phase of the market cycle. The green band has acted as a transition zone between the two extremes, often marking local bottoms or tops.
In this article, we will analyze some interesting observations based on the MVRV deviation bands, and what they could mean for the future of Bitcoin.
10 Months at the Bottom
One of the most striking features of the chart is that Bitcoin has spent 10 months around the bottom purple and blue bands, which is similar to the duration of the previous bear market bottom in 2015. This suggests that Bitcoin has reached a long-term accumulation phase, where the holders are not willing to sell at a loss, and the buyers are gradually increasing their positions.
This is a bullish sign for Bitcoin, as it indicates that the market has absorbed the selling pressure and is preparing for a new uptrend. In fact, some experts believe that this is the best time to buy Bitcoin, as it offers the lowest risk and the highest reward potential.
For instance, Willy Woo, a prominent on-chain analyst and partner at Adaptive Capital, tweeted on September 21, 2023:
“If you are looking for an entry point to long term HODL Bitcoin, do it now. We are now at the bottom of the purple and blue bands, which historically has been the best time to buy. Don’t wait for the price to break out, it will be too late. This is a rare opportunity to buy cheap Bitcoin.”
Second Visit to the Green Band
Another interesting observation is that Bitcoin has recently visited the green band for the second time this cycle, which was the case in 2016 before the bull run started. However, it also acknowledges that there was an exception in 2019, when Bitcoin reached the red band, indicating a cycle top, but then crashed due to a black swan event, namely the COVID-19 pandemic, which affected the entire global economy.
The green band visit could mean that Bitcoin is testing the resistance level before breaking out to the higher bands, or that it is forming a double bottom pattern, which is a bullish reversal signal. Either way, it implies that Bitcoin is ready to resume its upward momentum and enter a new phase of growth.
However, it is important to note that the green band visit is not a guarantee of a bull market, as there are other factors that could influence the price of Bitcoin, such as regulation, innovation, competition, and unforeseen events.
The 2019 Anomaly
The 2019 anomaly is one of the most puzzling aspects of the chart, as it shows that Bitcoin reached the red band, indicating a cycle top, but then crashed due to a black swan event, namely the COVID-19 pandemic, which affected the entire global economy.
The question is, why did Bitcoin reach the red band in the first place, and what does it mean for the current cycle? One possible explanation is that the run up in 2019 was too massive, and that the downside was proportional to it. It could also mean that the cycle was interrupted by an external shock, and that it is not over yet.
Some experts believe that the 2019 anomaly was a result of a combination of factors, such as the anticipation of the Bitcoin halving, which reduces the supply of new coins by half every four years, the launch of new products and services, such as the Bakkt futures platform and the Libra project, and the increased adoption and awareness of Bitcoin, especially in emerging markets, such as China and India.
For example, PlanB, the creator of the stock-to-flow model, which predicts the future price of Bitcoin based on its scarcity, tweeted on September 20, 2023:
“The 2019 anomaly was not a normal cycle top, but a super spike caused by a perfect storm of events. The COVID-19 pandemic was a black swan that reset the market, but did not change the fundamentals of Bitcoin. The current cycle is still intact, and we are on track to reach the red band again, and beyond.”
The Red Band and the End Game
The red band is the highest z-score band, indicating that Bitcoin is extremely overvalued or in a bubble. It is also the band that Bitcoin has broken in the final stages of each cycle, as seen in 2013 and 2017, reaching new highs and attracting massive attention from the media and the public.
The red band is currently priced at 54k, which is more than double the current price of Bitcoin. However, the red band will increase in value as the cycle progresses, meaning that Bitcoin will have to appreciate even more to reach it. This is because the realized value of Bitcoin will also increase as more coins move on-chain at higher prices, raising the cost base of the holders. Could 100k be back on the table?
The end game is the ultimate goal of the Bitcoin investors, who hope to see Bitcoin reach the red band again, and surpass it, creating a new paradigm of value and adoption. However, the end game is also the most risky and volatile phase of the cycle, as it involves extreme euphoria and greed, as well as extreme fear and panic, leading to huge price swings and corrections. I don’t know about you but I’m actually ready to get back to the sleepless nights where coin are going parabolic!
Therefore, one should be prepared for the end game, both mentally and financially, and have a clear exit strategy and a long-term vision. As the famous investor Warren Buffett once said (yes it’s a tired and worn out quote but it is still true):
“Be fearful when others are greedy, and be greedy when others are fearful.”
My blah blah blah disclaimer: I am not a financial advisor and cannot provide investment advice. Cryptocurrencies and investing in general involve risk, and individuals should conduct their own research and consider their personal financial situation before making any investment decisions.
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