Crypto 𝚆̶𝚒̶𝚗̶𝚝̶𝚎̶𝚛̶ Spring
After six months and a $10,000 price rally later, I’m still reading twitter posts tagging “#CryptoWinter”. Has the Crypto Winter actually drawn to a close, or not? Given that market price becomes heavily intertwined with network growth as a protocol matures, I hypothesize that signs of a Crypto Winter’s end may be read through some basic analysis of network statistics:
i) # of daily transactions,
ii) # of unique addresses,
iii) Hashrate.
For simplicity’s sake, and depth of historical data, the focus here will be on Bitcoin.
After some quick number crunching, I was able to summarize how the previously mentioned network statistics changed across three of the largest historic market downturns in Bitcoin’s history.
Network activity sizably diminished alongside the market’s price descent from Jun-2011 to Nov-2011. Unfortunately, Winter periods 2 and 3 did not provide such a clear correlation. Despite a severe drop in price, the span from Dec-2013 to Jan-2015 showed a significant uptick in unique addresses, and hashrate, as well as a minor bump in transaction count while Dec-2017 to Dec-2018 displayed an increase in hashrate alone. Changes in the network’s activity did not hold steady across the three Winter periods, and thus, no clear trend in network statistics may be uniformly identified based on these metrics.
Introducing MVRV:
Most commonly, market capitalization is referred to as a means of assigning a value to the network (ie, Total # of Coins in Circulation * Current Market Price). For Bitcoin, however, it provides a poor view of network value as it fails to discount for supply that has been lost by users. In order to reconcile this discrepancy, CoinMetrics introduced a calculation called ‘realized capitalization,’ which is calculated by assigning a value to coins using the market price at the time that they most recently moved on the blockchain. Popularized by Murad Mahmudov and David Puell, the comparison of the ratio between Market Capitalization (MV — ‘Market Value’) and Realized Capitalization (RV — ‘Realized Value’) provides one of the most compelling views into what is going on as Bitcoin enters and exits a period of Crypto Winter. Using historical data from CoinMetrics, I was able to plot a closer view of the Bitcoin MVRV ratio, and highlight boundaries that coincide with the market tops and bottoms witnessed over the years.
By observing the extrema of Bitcoin’s MVRV over time, one can identify a pattern in levels denoting the boundaries of market tops and bottoms. Here I observed an MVRV ratio of approximately 3.65 (red line), and 1 (green line) as denoting overvalued and undervalued markets respectively. During the time periods of our three previously described Crypto Winters, it is clear that MVRV descends from a value above the ‘overvalued boundary’ (3.65) to below the ‘undervalued boundary’ (1).
To better quantify Bitcoin’s Crypto Winter, it is possible to take the z-score of the MVRV Ratio. Z-score is used in order to show how many standard deviations each point is away from the mean of the data (where the mean is considered a z-score of 0). Plotting the z-score of MVRV makes it possible to identify areas of ‘mean reversion’ as the plot moves above and below its zero line. Similar to the standard MVRV calculation, observing a pattern in the extrema of the z-score reveals boundaries that coincide with all three winter periods. Theses limits are identified as a z-score of 0.65 (red line), and -0.4 (green line). From this we can generally state that a Crypto Winter occurs over the period that MVRV has deviated 0.6 standard deviations above its mean, and then traversed back -0.4 standard deviations below its mean. Further, it looks as though once MVRV returns to its mean (zero line), the market has a clear indication that we have officially exited Crypto Winter.
What Does MVRV actually tell us?
The MVRV ratio allows a market participant to visualize when Bitcoin’s market capitalization has outpaced its realized capitalization. That is, the value of the market accounting for all coins mined since inception outpaces the value of the market for all coins from the time they were last active on the network. It is during these times when MV outpaces RV that we see massive hikes in market price. The opposite holds true when realized capitalization overtakes market capitalization where we begin to see a strong drop in the market price. MVRV ratio allows the ability to quantify and distinguish clear changes in actual market value.
Where are we now?
From late Dec-2018 to Jun-2019, BTC hosted a massive rally off of a low around the $3000 level all the way to ~ $13,800 (Bitstamp), and since then the market has slowly retreated back to a recent low of ~ $7,725. Price aside, Bitcoin’s MVRV ratio clearly reveals Dec-2018 to be an area of interest. The adage , ‘past performance is not an indication of future results,’ echoes clearly in my mind here. If we are to go off what this has been identified historically using the MVRV ratio, it is indisputable that Dec-2018 displayed a clear bottoming signature, and a close to Bitcoin’s most recent Crypto Winter.
The most recent local downtrend (Jul-2019 to present) seems to be nothing more than a natural correction in the market.
Assuming BTC hasn’t already completed this corrective descent, I would expect strength to the upside to resume once the market finds some footing, with a push back towards, and potentially past, our most recent high of $13,800. From the perspective of MVRV, hopes for a new Bitcoin all time high look optimistic. Alongside price action off of the Dec-2018 bottom, MVRV has swiftly moved, and held above, its lower boundary which held as a strong indication of long term upside historically.
As far as my own view is concerned, I believe there is no question that we’ve already kicked off the beginning of the next major market cycle. All of the typical signs of capitulation were present in December 2018: cries that “crypto is dead” strewn across the media, a relentless sell-off down to $3150 (Bitstamp), and large increases in volume around this price level.
It may be too early to break out the streamers for a new all time high at this very moment, but (sticking with the theme here!) it looks as though the seeds are sprouting for the market to enjoy some revitalization of a Crypto Spring.
