DeFi's Liquidity Issues and BTC's Market Value to Realized Value

Breaking down the Crypto Sell-Off, the MVRV, and the Ethereum Merge.

DeFi's Liquidity Issues and BTC's Market Value to Realized Value


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Macro Sell-Off Compounded by DeFi Issues

General stats about the current crypto correction:

Amidst mounting DeFi volatility, ETH has been underperforming and has driven the ETH/BTC ratio to its lowest level in a year.

Most of this negative price performance has been driven by a general risk-off sentiment in the market (Bitcoin is a high volatility asset, and we’re seeing the downside of it now after seeing the upside during 2020 and 2021), driven by strong macro headwinds for most asset prices, such as:

So, to be clear, the bear market is, first and foremost, not just a crypto-specific issue, but a general financial market’s one. When the Nasdaq is down more than 30% YTD, what would you expect the returns of a much more volatile and speculative asset class (that is aspiring at achieving dramatic changes in how society works) to be?

Of course, idiosyncratic issues arising in the world of DeFi (TerraUST, Celsius, Three Arrows Capital, the uncertainty about the timing of ETH Merge) should not be dismissed, and we should learn from the mistakes we’re making. And yes, the vast majority of crypto projects are worth less than the paper their protocol is written on, but as in every bubble, what we should focus on is not curtailing innovation or playing the “I told you so” game, but rather, ensuring that, as an industry, we’re actively trying to learn, grow and evolve, by experimenting and debating, at the least cost to society. This means that we should all make a proactive effort to support entrepreneurs, innovators, and investors that are taking calculated risks to push the industry forward, and simultaneously call out scammers, promoters, and speculators whose agenda is only based on self-interest… until a reasonable regulatory framework is implemented, it’s incumbent upon market participants to self-regulate the space.

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Market Value to Realized Value

We’ve done a bit of a look around to try and scout for indicators (some of which are more technical than others) that might give us some perspective in terms of where price might be headed. We take most of them with a healthy amount of skepticism, especially given the fast-changing nature of the crypto industry, the polarizing agendas of crypto believers and crypto skeptics, and the industry’s correlation with risk-on assets within traditional financial markets.

Through this research, one indicator that stood out for getting a ton of attention from crypto market participants is the Market Value to Realized Value (MVRV), which basically divides the current Market Cap of BTC (the price of each BTC x total BTC already mined) by the Realized Value of BTC (the price of each BTC the last time it moved from one address to another x total BTC already mined).

According to the inventors of the indicators, the logic behind calculating the Realized Value is that it “seems to suggest the final layer of people’s cumulative cost basis”, which in laymen’s terms means that all you’re doing is comparing the current value of the Bitcoin network to the total value stored in the asset.

With that:

Just over a week ago, it broke below 1 for the first time since the pandemic. This matters because the MVRV rarely falls below 1, and one can intuitively understand why: throughout its history, Bitcoin has tended to generate more profits for investors than losses.

There have been several periods when MVRV fell below 1 and stayed there for quite a bit (for over a year between 2014 and 2015, which if it were to happen again today, would be enough time to break Tim’s spirit, forcing him to cut his hair and go back at a corporate job clocking in 100 hours a week). That said, independently of how long it took to bounce back, when MVRV breaks below 1, it has usually signaled a good “accumulation level” for BTC. Will this time be the same? No idea… but there’s some color we would like to add around this indicator.

Since the last bear market, the industry has matured, putting together a good deal of technical indicators that try to assess when BTC is “overvalued” and “undervalued”. There are also many more institutions within the ecosystem now (this is on a relative basis versus previous bear markets, as overall adoption is still not very significant), all of which employ really smart people that also have access to the MVRV indicator. The fact that the indicator has broken below 1 could potentially mean one of three things:

This might be an oversimplification, but it should give a good foundation on how to think about these things. It will be interesting to see how successful this indicator is going forward, so keep an eye on it as it’s one of the preferred macro indicators for industry participants (similar to a Cyclically Adjusted PE Ratio for traditional finance people).

The Ethereum Merge

The most important event within the world of DeFi is the upcoming Ethereum Merge, where the goal is to move the Ethereum blockchain from Proof-of-Work (like Bitcoin) to Proof-of-Stake consensus mechanism.

Explaining the mechanics of it is beyond the scope of this update (but we recommend you start here), so just keep in mind the following:

Independently of how technical you want your understanding of the developments of the Merge to be, this is something everyone with an interest in crypto (especially in DeFi) should be following closely.

Thanks for reading through! Obviously, none of this is investment advice.

If you missed our Q&A with Doomberg last week, make sure you give it a listen here. There's a ton of great stuff there.

As always, we'll see you out there...

"When I grow up, I want to buy a house in Tuscany." - Forte dei Marmi, Italy
Published in: Markets
Diego Tremiterra

Co-founder and Editor-in-Chief. Covers Markets, Business, and Thematic Oversight. Currently a hedge fund Jr. PM, ex-Goldman Sachs capital markets and startup COO.

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