There is an opinion that technical analysis does not work in cryptocurrencies. Somehow “by the ears” you can pull the wave theory and substantiate it with the theory of bubbles and behavioral factors. But it is difficult to find rigid patterns – it is enough for the next Elon Musk to say something about top coins, and all the patterns are immediately violated. However, developers are trying to find unique models and describe them using existing algorithms. A little modified. For example, take stock market multipliers as a basis and apply them to cryptocurrencies. After all, it is not in vain that regulators are trying to equate military-technical cooperation with securities. The MVRT and NVT indicators are examples of such technical tools.
MVRV and NVT indicators – the essence and application in market analysis
- Indicator NVT. This indicator is called a bubble detection tool. In any market, with a rapid rise in price, an asset sooner or later turns out to be overvalued. And when large “whales” at the peak start to sell it, the price immediately goes down, leaving the “hamsters” with a useless asset. Vivid examples are tulips in Holland or the dot-coms of the 2000s. In the cryptocurrency world, this is an example from 2017-2018.
The idea of the indicator is borrowed from the stock market, where the P/E indicator plays a similar role – the ratio of the current value of an asset to the income received with its help. But military-technical cooperation is not yet a security and there is no concept of “profit received” for it. Therefore, the developers of the indicator replaced it with a value in USD, which passes through the blockchain network.
Formula for calculating NVT – BTC market capitalization / volume of online payment transactions with the coin in USD
Statistical data on current transactions with BTC are pulled from analytical aggregators. In theory, the indicator shows how interesting the coin is to users as a means of payment. If an asset is interesting solely as a speculation, a bubble is formed. If there is a trend towards an increase in the use of BTC for payments within the network, the coin has support.
2. MVRV indicator. This indicator is intended for technical analysis of BTC as the main driver of the market, followed by other coins. It allows:
- Find price highs and lows.
- Determine the main phases of the full cycle – the phases of accumulation and distribution.
- Analyze long-term trends.
The idea of the indicator appeared in 2018 after the BTC passed its first historical maximum. It is based on the struggle between two types of market participants – short-term speculators and long-term investors. The indicator allows you to determine which of these forces is currently in the lead.
MVRV indicator calculation formula is the ratio of market capitalization to realized capitalization.
- Market capitalization is the current value of all BTC coins. It is equal to the product of the price of all the coins in the offer. This indicator can be found on the CoinMarketCap portal website.
- Realized capitalization is a variant of market capitalization that takes into account the value of each BTC at the time of the last transaction in the network. For example, if a coin was moved before a 2-fold increase in the BTC price (that is, it was not used for short-term speculation), its old price is taken into account in the formula.
The indicator has modified versions. For example, one of them does not take into account coins that are lost forever or have been without movement for more than 5 years. According to the authors, these coins do not belong to long-term investments, since most likely they are not used at all and will not be used.
Interpretation of values. If the value of the MVRV coefficient is less than 1, the market is dominated by speculators who will set short-term trends. An increase in the value to the range of 3.2-7 means an increase in speculative mood, which in the short term can raise the value of quotes to a maximum. The predominance of cumulative sentiment, on the contrary, may indicate the transition of prices to lows, at which investors are in no hurry to sell coins, holding until the next growth.
The use of the MVRV indicator has several risks. One of them is data collection technology. So far, transactions take place inside the blockchain, but developing technologies will allow them to be performed outside the main network in order to reduce the load. And then the indicator will receive false data. The second point is that the MVRV indicator does not give signals to buy or sell. He only evaluates the trend. The third point is that the movement of military-technical cooperation does not mean its purchase or sale. The owner of the coin can simply change the wallet address, the transaction will be displayed as speculative in the indicator.
Conclusion. These indicators belong rather to the category of multipliers. They help to assess the prospects of short- and long-term movements, but are only auxiliary. They are based on quantitative analysis and do not take into account the trends of previous periods. They are designed exclusively for cryptocurrencies and work better on long-term periods. They cannot be called accurate, but they can give investment ideas, so they are worth paying attention to.