The MVRV (Market Value - Realized Value) ratio is a newly proposed method for estimating a crypto asset’s real, or ‘fair’ value.
What is Realized Value?
Realized Value presents the total acquisition cost of all tokens in circulating supply.
Let’s say there’s a wallet with 30 REP (Augur’s native coin). They came into this wallet in 3 different transactions:
- 10 REP was bought at $5
- 5 REP was bought at $15
- 15 REP was bought at $10
The realized value is found by calculating the acquisition cost of all REP located in a wallet. In this case, the realized value of the above REP tokens is (10∗5)+(5∗15)+(15∗10)=$275
To get the average acquisition price of these 30 tokens, we just divide the realized value by the total number of tokens: $275/30 = $9.16. In other words, the wallet’s owner paid an average of $9.16 per REP.
If the current price of REP is less than $9.16, then the holder paid more for acquiring these assets than what they’re currently worth. If the current price of REP is >$9.16, the value of the tokens is now greater than what the holder originally paid for them.
Say the tokens currently cost $10 to buy. These 30 REP tokens are now worth $300 on the market; if the holder was to sell, he’d pocket a $25 ($300-$275) profit.
We can then compute this acquisition cost, or ‘realized value’ across the whole REP network. This number gives us an estimate of the total acquisition cost, or the total amount of money the users of a network spent to acquire their tokens, and is called realized cap or realized value.
The MVRV ratio is calculated by dividing the market cap (market value or MV) by realized cap (total realized value or RV), and aims to show whether an asset is overvalued or undervalued.
The definition is:
An MVRV above 1 indicates an ‘overvalued’ asset, while historical MVRV trends may indicate when an asset is deemed ‘overvalued’. For example, Bitcoin is considered overvalued by some when its MVRV ratio exceeds 3.7.