What tools can we use to understand Bitcoin market cycles? The transparent nature of the blockchains, makes possible a new arsenal of investment tools.
“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”
In this post you’ll learn about crypto native indicators and bitcoin market cycles. We’ll take a closer look at these tools and you can use them to grasp the market cycles of crypto.
Tools to Understand Bitcoin Market Cycles:
Stock to flow
The MVRV Ratio
What did people pay for their coins and what is the price now?
This ratio maps the market value of bitcoin (Network Value) against a more conservative valuation (Realized Cap), based on what people paid for their coins.
What is Realized Cap?
Realized cap, introduced by Coinmetrics, is the cumulative value of all bitcoin (utxos) based on the price of the coin, when it last moved on the blockchain. The result is an estimate of what was paid for all bitcoin in existence. Realized cap is a conservative valuation of the Bitcoin network. The “break even” point for bitcoin holders, is another way to understand it.
What is the MVRV Ratio?
Right after the creation of Realized Cap, Murad Mahmudov & David Puell used this innovative metric to create the MVRV ratio.
The product is a ratio that indicates how close the current market value of the bitcoin network is to what bitcoin holders paid for it. In other words: how close are we to “Bitcoin Holder Breakeven”.
When the ratio is 1, bitcoin market value = realized value (what was paid (assuming realized cap approximates this) for those coins).
When the current value of all bitcoin drops below the value paid it (proxy: price when last moved), it seems to coincide with bottoms in the market cycle.
Note: the most robust way to use these crypto indicators, seems to be in a subtractive manner: be extra carefull when the ratio is high.
Besides being an awesome looking chart, HODL Waves gives insight into the age distribution of bitcoins (utxo). Could the age of coins help us understand bitcoin market cycles? It sure seems to be indicating peaks and bottoms.
How can the age of coin help us? In times of bubbles and mainstream media attention, old coins is getting active (presumably to get sold on exchanges). You can spot this phenomenon on the chart. The blue/green areas shrinks and the red/yellow areas gets larger. Old coins (blue) is transformed to new coins (red).
Peaks in the transfer from old to new coins, seems to coincide with bitcoin market cycle tops.
Bitcoin is a scarce digital commodity. Its supply is capped at the famous 21 million mark, hard coded and mathematically restricted in the core rules of the Bitcoin protocol.
It’s comparable to gold in monetary characteristics and use cases. This is what got many of us interested in Bitcoin in the first place.
Twitter personality @100trillionUSD aka PlanB, made a cool model of Bitcoin scarcity with stock-to-flow, a metric also used by gold investors.
What is Stock to Flow?
Stock to flow is a metric to measure the scarcity of an asset. Stock is the current stockpiles of the asset. The total value of Bitcoin or gold already mined. Flow is the yearly production. The value of Bitcoin mined each year.
Stock to Flow = Stock / Flow.
The thesis is that monetary assets such as gold, derives its money status from its scarcity. Stock to Flow measures scarcity. The higher the SF, the more scarce the asset.
Gold has the highest Stock to Flow of 62. The current stocks of gold is only inflated by 1.6% annually. Bitcoin Stock to Flow is currently at 25.7 SF or 3.8% supply growth.
The calculation is 18.000.000 / 700.000 = 25.7.
How is Stock to Flow Related to Bitcoin Market Cycles?
Hard-coded into Bitcoin, is the rule that mining rewards (Flow), halves every fourth year. This halvening of coin supply (flow) is likely to have an affect on the Bitcoin market cycle. In fact, the only two halvenings in the history of bitcoin, coincided with early stage bitcoin bull markets.
Today we mint 12.5 bitcoins every 10 minutes. In May 2020, we will see the 3rd halvening in Bitcoin’s history. Overnight we go from 12.5 bitcoin minted every 10 minutes to 6.25. We go from a Stock to Flow of 26 to 52! Gold is at 62.
While halvenings might effect the bitcoin price and marketcycle, how do we know that this isn’t already priced in? After all, the supply schedule of bitcoin as well as all future halvening events is hard coded into the Bitcoin protocol. Tough question.
What is absolutely certain, is that Bitcoin has a high Stock to Flow ratio. A gold like Stock to Flow. Bitcoin is super scarce! If the price of Bitcoin moons, you can’t just increase the production like any other asset. You can’t mine more. This is the property of gold-like scarcity.
The NVT + NVTS Ratio
NVT Ratio Calculation – Bitcoin Market Cycles
The NVT ratio is the first crypto-native indicator, created by Willy Woo. It models Network Value against value transacted through the blockchain as a proxy for demand and investment. For a super detailed walk-through of the NVT Ratio mechanics, check out this interview with its creator.
The inputs in the NVT ratio is: Network Value and Transaction Value.
Network value: The market value of the Bitcoin network.
Transaction Value: the USD value of transactions running through the bitcoin blockchain per day. Used as a proxy for investment in and use of the bitcoin network.
The NVTS Ratio (NVT signal) is an upgrade of the NVT Ratio. It tweaks the transaction data of the NVT Ratio with a 90-day moving average to “make it more predictive”. It stabilizes the input representing value (transaction value, as shown in blockchain data).
Bitcoin NVTS Chart
Is the NVT useful in the study of Bitcoin market cycles? Mapping use of, and investment into the bitcoin network to the market price, sounds great in theory. You might find it useful in practice, just be aware that some factors could mess with the transaction data:
Layer 2 tech such as: Liquid Sidechain and Lightning.
Increased use of closed system bitcoin transfer: custodial wallets.
What the above factors have in common, is that they take transaction value off the bitcoin blockchain, potentially disturbing the signals from the NVT ratio.
A simple ratio between the price of bitcoin and the the 200-day moving average of the price. Created by Bitcoin OG Trace Mayer and The Investors Podcast.
Mayer Multiple dips and hovers below 1 seems to occur with bottoms in the Bitcoin market cycle.
How useful are these indicators? Study them and decide for yourself. One thing is sure: combining blockchain data and market data, is a new and innovative disciplin, only possible in the brave new world of cryptocurrencies. It’s an exciting space to watch!
Please share your thoughts in the comments.