Market Value = Current Price of Bitcoin * Total Circulating Supply
Realized Value = Aggregated Purchase Price of All Bitcoins
MVRV Z-Score = (Market Value / Realized Value) / Standard Deviation
At its core, the MVRV Z-Score calculates the disparity between the market value (the total current price of all bitcoins) and the realized value (the aggregated purchase price of all bitcoins, adjusted for lost coins and long-term holding strategies). This calculation provides a nuanced view of market behavior by comparing the current valuation to a more stable, long-term investor cost base. Essentially, it measures the extent to which Bitcoin is over or undervalued relative to its historical price behaviors.
A high MVRV Z-Score suggests that Bitcoin’s price is high compared to what holders paid for it historically, indicating potential overvaluation and speculative bubble conditions. Conversely, a low score could indicate that the price is undervalued, potentially making it an opportune moment for investment, as it may signal a market bottom.
The HBI model refines its analysis by incorporating historical MVRV Z-Score trends to identify patterns that have historically signaled turning points in Bitcoin’s price movements. By mapping current conditions against these historical benchmarks, HBI offers predictions on future price movements through its Price Indicator. This output, ranging from -100 to 100, signifies the model’s confidence in the direction of the market movement; values closer to -100 suggest undervaluation (potential for price increase), while values closer to 100 imply overvaluation (potential for price decrease).
To enhance the precision of the Price Indicator, HBI can apply machine-learned mathematical adjustments. These adjustments fine-tune the Price Indicator output based on the intricacies of current market conditions compared to past cycles, ensuring that the indicator remains relevant and accurate.