MVRV Ratio is calculated by dividing the market capitalization of Bitcoin by its realized capitalization.
Market Capitalization = Current Price x Circulating Supply
Realized Capitalization = Sum of the price at which each bitcoin last moved
MVRV Ratio = Market Capitalization / Realized Capitalization
A high MVRV Ratio indicates that Bitcoin's market price is significantly higher than the price at which bitcoins were last exchanged, suggesting a potential overvaluation and an increased likelihood of a future sell-off. Conversely, a low MVRV Ratio suggests that the market price is closer to, or below, the historical exchange price, signaling undervaluation and the possibility of a price increase.
VRI analyzes historical MVRV Ratio data to identify patterns and norms, situating the current ratio within these historical contexts to gauge market conditions. This historical comparison enables the VRI to produce a Price Indicator, which ranges from -100 to 100, reflecting the potential direction of Bitcoin's price movement. A score towards -100 implies a belief in an upcoming price increase, suggesting undervaluation, while a score towards 100 indicates expected price decline, hinting at overvaluation.
The VRI also incorporates machine-learned mathematical operations to refine the Price Indicator, enhancing its accuracy by accounting for current market dynamics against historical data. This adjustment process better ensures the Price Indicator remains relevant and reflective of both historical trends and present conditions.