Using MVRV to Find Out How Close an Asset is to an "Opportunity" or "Danger" Zone
For those of you who checked out our initial study about measuring multiple MVRV timeframes in unison to get the most accurate understanding of a crypto asset's standing on the 'overbought vs. oversold' scale, we've taken the concept of simply seeing whether all MVRV's are in the positive or negative, one step further. If the average traders who initially invested 7 days, 30 days, 6 months, and 1 year are all negative, does this necessarily mean that an asset is ready to pop? Well, that all depends on just how negative each of these MVRV's are.
MVRV is a fantastic way to understand both the sentimental mood surrounding an asset at any given time, as well as mathematically measure the likeliness of future price movement based on probability. Both of these can be answered when we look at the average returns of a trader, and we can really understand how confident a buy vs. sell signal is by seeing how close their values are to their respective timeframes' "Opportunity vs. Danger" zones.
The concept of a danger zone is quite simple. When average trader returns become abnormally high for a certain length of time since their initial investment (or in other words... too high, too fast) this often is a sign that an asset is becoming overvalued due to variables like profit taking from these traders, or due to FOMO buyers providing lucrative temporary exit opportunities for retail and whale investors. Take a look at the recent example below, which has highlighted four instances of Ethereum's price correcting at or shortly after its one-year MVRV rose past +43%.
This exact number of +43% is likely just a temporary one and good for recent illustration, but we do see most assets reach close to their local tops for one-year trader returns around the 40-55% range. How do we know? Well, we actually back-tested to see what the near-high (90th percentile threshold) and the near-low (10th percentile threshold) look like on average for 20 popular crypto assets with at least two years of history to provide a great sample size of results. In other words, we wanted to see where the highest 10% range starts and lowest 10% range starts for crypto traders' returns before MVRV's typically starts to normalize.
And we don't just want to see an overall MVRV combined average is across several assets. Because it's quite typical for traders to be at +25% or -25% at a given point for a one-year investment of an asset in crypto. But if an average trader was +/-25% in just 7 days, that would be an extreme outlier that very rarely happens and would be quite notable. So to really accurately comprehend what a reasonable "extreme" swing for average trader returns looks like, we need to look at the very high range and very low range for each of the 7-day, 30-day, 6-month, and 1-year MVRV's to really understand any timeframe's danger zone (usual sell point) and opportunity zone (usual buy point). Here are the results that we've found from this sample of 20 assets:
The tops are 90th percentile thresholds of returns, and the bottoms are 10th percentile thresholds. If we go higher than 90th or lower than 10th, we start digging into extreme outlier ranges that just don't happen enough to be statistically useful, so this was a good high and low range to target.
Notice that the longer the timeframe, the more the range between the tops and bottoms away from the normal 0% "resting state" of MVRV can be. It's interesting to see that the extreme zone percentages don't peak much higher at the 1-year mark than they do at the 6-month mark. And also notice that the negative numbers for all of these timeframes are a bit lower on the negative side than they are on the positive side. From what we've seen for most assets, it's because there are a few more days on average that rest in the "negative average trader return zones" for MVRV overall, likely because... well, most active traders lose money to a small amount of profitable traders. Therefore, profitable average trader return days are a bit more short-lived, even with MVRV's built to average right at 0% for all timeframes and all assets historically.
With a basic concept of what extremes look like for each timeframe, we can now simply take a look at the current day MVRV's on the 7-day, 30-day, 6-month, and 1-year timeframes (since initial investment) based on how they appear from the time of this writing on October 26, 2020.
Notice that negative numbers are in green (indicating average traders are down money, and is typically a better than average entry point), and positive numbers are in red (indicating average traders are up money, and typically a worse than average entry point). On the surface, these all just look like numbers though. And it's tricky to decipher whether something like REN's 30-day MVRV of +8.4% is just slightly better than average for a 30-day timespan, or in an actual high-end "danger zone" that will likely see an imminent price correction.
This is why we need to compare this table of MVRV's, and look at how each individual asset's 7-day, 30-day, 6-month, and 1-year timeframes compare to our universal "danger" and "opportunity" zones that we've backtested as fair ranges to be considered major enough outliers to indicate easy buy and sell spots. To do so, we can simply look at REN's +8.4% over 30 days, and compare to the "30-day Top" 90th percentile number (since +8.4% is positive, indicating it's closer to a "top" than a "bottom") that we calculated by comparing two years of data for 20 popular assets.
So in other words, we're dividing REN's 30-day +8.4% MVRV by the 90th percentile universal 30-day threshold of +16.7%. And while we're at it, let's automatically calculate all of these individual timeframes to these universal top or bottom "danger" and "opportunity" zones with a few Google Sheets formulas. Here's how the new table looks:
We've now gotten our answer. Ren's 30-day divergence is about -50.3%, since its +8.4% MVRV is right about smack-dab at the halfway mark to the +16.7% universal danger zone. As for the rest of the table, it still looks like a variety of various numbers, mostly ranging from -100% to +100%. But this range is made by design. Anything below -100% is indicative of that asset's timeframe's MVRV being a lower number than the universal MVRV "danger zone", which sits right at -100% (and is very bearish). Conversely, anything higher than +100% is indicative of that asset's timeframe's MVRV being a higher number than the universal MVRV "opportunity zone" (and is very bullish).
Try not to get tripped up by the fact that positive numbers are now in green, while negative numbers are in red now. This is because MVRV's by nature are more bullish the lower the number, and by calculating the way we do, we're actually showing divergences vs. extreme bullish and bearish signs now. So it is intentionally flipped to make positive numbers more bullish, just as one would expect when looking at a positive divergence (high) vs. negative divergence (low).
Anyhow, now that we have an awesome table full of divergences indicating how close any asset's MVRV timeframe is to the danger zone (-100%) vs. opportunity zone (+100%), it's simply a matter of graphing it on an auto-updating model (Santiment's specialty):
Note that each asset has 4 bars (represented by the 7-day, 30-day, 6-month, and 1-year timeframes that we just looked at in table format), now illustrated in chart format. There is also an overlaying large red, yellow, or green translucent bar for each coin that is representing the average number of all four of these bars, giving us a combined average of the four timeframe divergences combined.
Also, notice the green dashed line representing the "Opportunity Zone" and red dashed line representing the "Danger Zone". With many altcoins getting beaten down for various timeframes over the past year, due to either Black Thursday or simply minor corrections over the past week and/or month, it's no surprise to see that there are many green "Underbought" wide bars on this model right now. We can see that 0x ($ZRX) is nearly scraping the "Buy Opportunity" bar right now, and is objectively the most undervalued of these assets according to MVRV divergence alone.
On the flip side, we can see that both Maker ($MKR) and Chainlink ($LINK) are actually well into the "Danger Zone". This is likely due to the fact that they have had incredible average trader returns over the long-term timeframes, and this is weighing their averages down big time, and will continue to do so until those 6-month timeframes neutralize a bit.
It's also worth mentioning that the curriculum for the yellow "Neutral" bars are assigned to any average MVRV divergences that fall between -50% and +50%, meaning they are less than halfway toward either the "Opportunity Zone" or "Danger Zone". If they are more than halfway to either end of the spectrum, or have crossed it, that's what qualifies their signals as being either green or red.
This model will likely be tweaked and innovated to become more and more accurate over time, potentially with more timeframes added. One major modification that may soon be in the works is the concept of using individual historic MVRV thresholds based on only that asset's historical "Opportunity" and "Danger" zones, instead of universal ranges based on 20 or more assets. But since nearly all assets fall pretty close to the ranges that were back-tested and used, one might argue that making the ranges based on each asset's own history would do nothing but ruin the great sample sizes of historical data used, and create strange and unnecessary outliers.
Do keep in mind that MVRV is only one of many great leading indicator metrics that Santiment offers. Combining the signals that you see on this debut model, along with others like our DAA Divergence, NVT Token Circulation, and Top Holders Supply models can register the best results. MVRV is a powerful metric, but should not be considered end-all, be-all investment advice. Assets can simply be abandoned and have MVRV's that could look appealing, when in reality, they're simply a result of a dying coin. So for the purposes of this model, we will be trying to keep it up to date and continue innovating with only assets that have fair to excellent prospects of longevity and active development activity.
This model is being made available to all Sanbase PRO members, so ensure that you have an account. This model and the others we've made on Sansheets, along with the great metrics available on Sanbase, have been referred to as metrics that very quickly pay for themselves. And yes, you can use code SIGNALS25 now to get 25% knocked right off the price of your first month of membership: