The Ultimate Guide to Trading Indicators
In the fast-paced world of crypto trading, mastering the art of reading and interpreting market signals is crucial for success. Whether you’re a seasoned trader or just getting started, understanding the diverse range of trading indicators for you to leverage is essential in guiding your trading decisions.
This guide is your one-stop shop to learning about and implementing the most important trading indicators in crypto:
On-Balance Volume (OBV)
Relative Strength Index (RSI)
Moving Average Convergence Divergence (MACD)
Macroeconomic indicators
On-chain data
By the end of this article, you’ll have a comprehensive understanding of each of the indicators, and how to leverage them on BitMEX, to enhance your trading strategy and make informed decisions in any market environment.
Let’s dive in.
On-Balance Volume (OBV) Indicator
Imagine unlocking the secrets of crypto trading, capturing market moves, and maximising your gains by anticipating trends before they happen. The On-Balance Volume (OBV) indicator is a way to use volume analysis to get ahead of markets.
The OBV indicator uses the cumulative volume of an asset to signal upcoming trend reversals or breakouts. This momentum indicator provides valuable insights into market movements, which can help you anticipate price changes before they become apparent in the price action.
TL;DR
Cumulative Volume: OBV is the cumulative sum of volume flowing in and out of a security, acting as a leading indicator to reveal the actions of large market players (e.g. whales).
Divergences: Discrepancies between OBV and price action can indicate potential near-term price reversals.
False Signals: OBV can produce false signals due to variations in parameters, time periods, and the asset itself.
What is the OBV Indicator?
The OBV indicator, introduced by Joe Granville in 1963, is designed to indicate whether money is flowing in or out of an asset. Known as the “smart money indicator,” it aims to reveal the actions of large players in the market before these actions are reflected in the price action.
This can be particularly useful in the crypto market to identify whale movements.
How to Calculate the OBV Indicator
OBV is calculated by summing the volume based on the closing prices of an asset.
If today’s closing price is greater than yesterday’s: Current OBV = Previous OBV + Today’s Volume
If today’s closing price is less than yesterday’s: Current OBV = Previous OBV – Today’s Volume
If today’s closing price is equal to yesterday’s: Current OBV = Previous OBV
For crypto trading, you can easily pull up the OBV indicator on platforms like GeckoTerminal by selecting the desired liquidity pool, choosing “indicators,” and typing in “OBV”.
Revealing Standard and Hidden Divergences
The OBV indicator can reveal both standard and hidden divergences, signaling potential price reversals or continuations.
Standard Divergences
Bullish Divergence: Occurs when the price reaches a lower low (LL) and the OBV forms a higher low (HL), indicating a potential upward reversal.
Bearish Divergence: Occurs when the price reaches a higher high (HH) and the OBV forms a lower high (LH), indicating a potential downward reversal.
Hidden Divergences
Bullish Hidden Divergence: Occurs when the price forms a higher low (HL) and the OBV forms a lower low (LL), signalling a potential upward continuation.
Bearish Hidden Divergence: Occurs when the price forms a lower high (LH) and the OBV forms a higher high (HH), signalling a potential downward continuation.
Separating the OBV From Other Volume Indicators
Accumulation/Distribution Line (A/D)
The A/D line measures the flow of money into and out of an asset, accounting for both opening and closing prices. It uses the Money Flow Multiplier (MFM) and Money Flow Volume (MFV) to calculate the current A/D line. Unlike the OBV, the A/D line does not reflect price gaps, potentially leading to inaccuracies in reflecting price action.
Ease of Movement (EOM)
The EOM indicator reflects the amount of volume required to move an asset’s price. It is plotted on a line graph with a midpoint of zero and is often smoothed with a 14-day moving average. High values indicate upward price movement on light volume, while low values indicate downward movement on light volume. The EOM is used to confirm signals from other indicators and to determine states of divergence.
Applying OBV to BitMEX Charts
Here’s a step-by-step guide on how to add the OBV to your chart on BitMEX:
Choose Indicators: Select “Indicators” from the chart options.
2. Search for OBV: Type “OBV” in the search bar.
3. Select OBV: Choose the OBV from the list of momentum indicators, and it will automatically apply to your chart.
The OBV indicator offers crypto traders a powerful tool to anticipate market movements by analysing volume flows. By understanding and leveraging OBV, traders can gain insights into potential trend reversals and breakouts, in order to make more informed trading decisions.
While OBV is a robust standalone indicator, its effectiveness is best shown when integrated with other volume indicators like the A/D line and EOM. OBV is the key to better navigating the volatile crypto markets, identifying identifying high-probability opportunities and managing risks effectively.
Relative Strength Index (RSI) Indicator
Accurately identifying overbought and oversold market conditions can be a powerful edge for any trader. The Relative Strength Index (RSI) is one of the most widely-used technical indicators to help traders gauge market momentum and price sentiment.
By understanding how RSI works and how to interpret its signals, you can gain valuable insights into when an asset may be approaching a potential reversal or continuation.
TL;DR
Momentum Measurement: RSI measures the speed and change of price movements, helping identify overbought and oversold conditions.
Divergences: Discrepancies between RSI and price can signal potential reversals.
Wide Applicability: Suitable for various timeframes, from minutes to weeks, making it versatile for different trading strategies.
What is the RSI (Relative Strength Index) Indicator?
The RSI, created by J. Welles Wilder in 1978, is a momentum oscillator that measures the speed and change of price movements. It ranges from 0 to 100 and helps traders identify overbought or oversold conditions in the market. This indicator is widely used by crypto traders due to its effectiveness in predicting price reversals and trend continuations.
How to Calculate the RSI Indicator
The formula for calculating RSI is as follows:
RSI =100-[100/(1+(Average gain of n days the market closed up/ Average loss of n days the market closed down)]
The RSI is typically calculated over a 14-day period timeframe, but this can be adjusted to suit different trading strategies.
How to Read the RSI Indicator
The RSI provides insights into whether an asset is overbought or oversold…
Overbought: RSI above 70 indicates the asset may be overbought and could be due for a price correction.
Oversold: RSI below 30 suggests the asset may be oversold and could experience a price increase.
Applying RSI to BitMEX Charts
Here’s a step-by-step guide on how to add the RSI to your chart on BitMEX.
Choose Indicators: Select “Indicators” from the chart options.
2. Search for RSI: Type “Relative Strength Index” in the search bar.
3. Select RSI: Choose the RSI from the list of momentum indicators, and it will automatically apply to your chart.
When to Use RSI for Crypto Trading
Identify Entry and Exit Points
RSI helps traders determine when to enter or exit a trade.
For example, a trader might wait for the RSI to drop below 30 to buy (indicating oversold conditions) and sell when it rises above 70 (indicating overbought conditions).
For Swing Trading
Swing traders use RSI to capture short-term price movements. They might buy when RSI crosses below 30 and sell when it crosses above 70, taking advantage of price swings.
Identify Support and Resistance
RSI can help identify key support and resistance levels before they become apparent on the price chart. Support is a price level where a downward trend can pause due to a concentration of buying interest, while resistance is a price level where a rising trend can pause due to a concentration of selling interest.
Understanding Divergences and Convergences
Bullish and Bearish Divergence
Bullish Divergence: Occurs when the price makes a lower low, but RSI makes a higher low, indicating potential upward reversal.
Bearish Divergence: Occurs when the price makes a higher high, but RSI makes a lower high, signaling potential downward reversal.
Convergence
Convergence happens when the price and RSI move in the same direction, confirming the current trend.
Historic Bitcoin RSI
Source: Bitbo
Enhancing Trading Strategies with RSI
While RSI is a powerful tool, it should not be used in isolation. Combining RSI with other indicators like Moving Average Convergence Divergence (MACD), Stochastic Oscillator, and trend lines can increase the reliability of trading signals.
This multi-indicator approach reduces the likelihood of false signals and enhances overall trading strategy.
The Relative Strength Index (RSI) is a valuable tool for crypto traders, offering insights into market momentum and helping to identify overbought and oversold conditions. By understanding and applying RSI effectively, traders can make more informed decisions, optimise their entry and exit points, and enhance their trading strategies.
Whether you’re a day trader or a swing trader, integrating RSI into your analysis can provide a significant edge in the dynamic world of crypto trading.
Moving Average Convergence Divergence (MACD)
Crypto trading can be a whirlwind – which is why the identifying the right tools to use is even more important to navigate markets. One such tool, the Moving Average Convergence Divergence (MACD), has been a staple in TradFi for nearly 50 years. Now, it’s making waves in the crypto world, helping traders spot trend changes and maximise their profits.
TL;DR
MACD is a momentum indicator that helps to identify trend direction and strength through three main components: MACD line, signal line, and histogram.
To fully utilise MACD, it’s essentially to spot for crossovers, divergences, and zero-line crossings to identify trends.
For instance, a buy signal occurs when the MACD line crosses above the signal line. A sell signal occurs when the MACD line crosses below the signal line. For advanced traders, the MACD displays hidden divergences.
The MACD indicator is intuitive to use and helpful for spotting trends. However, note that it is a lagging indicator and can generate false signals.
What is the MACD Indicator?
The MACD is a momentum indicator that reveals the current direction and strength of a cryptocurrency’s trend. It consists of two main components: the MACD line and the signal line.
When the MACD line crosses above the signal line, it signals a bullish trend. Conversely, a cross below indicates a bearish trend. A histogram is also part of the MACD, representing the difference between these two lines and quickly showing the trend’s strength and direction.
How Do Crypto Traders Use the MACD Indicator?
Signal Line Crossover
Buy Signal: When the MACD line crosses above the signal line, traders see this as a cue to buy.
Sell Signal: A cross below the signal line suggests it’s time to sell.
Zero Line Crossover
Bullish Signal: When the MACD moves above the zero line, it indicates the shorter-term EMA is greater than the longer-term EMA.
Bearish Signal: A move below the zero line suggests the opposite, signaling a potential downturn.
Bullish and Bearish Divergence
Bullish Divergence: When a token’s price makes a lower low, but the MACD makes a higher low, it indicates the downward trend might be slowing, signaling a buying opportunity.
Bearish Divergence: When the price makes a higher high, but the MACD makes a lower high, it suggests weakening buy pressure and potential for a price reversal.
While MACD is a powerful tool, it’s not foolproof. It relies on historical data and cannot predict future market moves with certainty. Always manage your risks and avoid relying solely on one indicator. Combine MACD with other trading indicators and analysis methods to make well-informed decisions.
Applying MACD to BitMEX Charts
Here’s a step-by-step guide on how to add the MACD indicator to your charts on BitMEX:
Choose Indicators: Select “Indicators” from the chart options.
2. Search for MACD: Type “MACD” in the search bar.
3. Select MACD: Choose the MACD from the list of momentum indicators, and it will automatically apply to your chart.
The MACD indicator is an essential tool for crypto traders. It’s simple yet packed with insights into market momentum and trend direction. By understanding and applying MACD signals—such as signal line crossovers, zero line crossovers, and divergences—you can trade smarter and enhance your crypto trading strategy.
Always remember to manage your risks and seek confluence with other forms of analysis for the best results.
Macroeconomic Indicators
If you’ve been trading crypto for some time, you may have come across the saying “money printer go brrrr”, which refers to the central banks engaging in Quantitative Easing (QE) – the process of expanding the money supply to stimulate the economy.
While humorous, it can be a strong indicator of the impact that monetary policy can have on the financial markets, including crypto.
TL;DR
Macroeconomic data such as interest rates are essential towards crypto as it’s seen as a function of global liquidity.
A growing economy and lower interest rates generally boost crypto investment, while economic decline and higher rates can suppress it.
Rising inflation can increase crypto prices, but excessive inflation might lead to interest rate hikes, dampening demand.
High unemployment and weak consumer spending negatively affect crypto markets, while strong economic confidence supports them.
Monitoring key macro indicators helps traders anticipate market shifts and make better-informed decisions as the market is forward looking.
Cryptocurrency is widely considered to be a function of global liquidity and the macroeconomic environment. Navigating the turbulent waters of the cryptocurrency market can be daunting, but understanding macroeconomic indicators can give you a significant edge.
These indicators, which have long guided TradFi, are now proving essential for crypto traders aiming to make informed decisions and maximise their profits. This part of the guide will break down key macroeconomic indicators to watch and how to utilise them to your trading advantage.
Why Macroeconomics Matters
Macroeconomics focuses on the overall economy’s behavior, offering insights that can prevent panic during market dips and help you prepare for market cycles. Understanding these economic trends allows you to invest wisely, increase profitability, and sleep soundly, even in volatile markets.
Key Macroeconomic Indicators
1. GDP Growth Rate
What is it? GDP measures the total value of all goods and services produced within a country. It’s a snapshot of the economy’s health.
Impact on Crypto? High or growing GDP indicates a robust economy, leading to increased spending and investment in assets like cryptocurrencies. Conversely, a declining GDP can reduce investment and lower crypto prices.
2. Inflation and Consumer Price Index (CPI)
What is it? Inflation is the rate at which prices for goods and services rise, decreasing purchasing power. CPI measures this inflation.
Impact on Crypto? Rising inflation often leads to higher prices for crypto as investors seek assets that hedge against inflation. However, excessive inflation might prompt central banks to increase interest rates, which can suppress crypto prices.
3. Fed Funds Rate and Interest Rates
What is it? The Fed Funds Rate is the interest rate at which banks lend to each other overnight. It’s a key tool for monetary policy.
Impact on Crypto? Lower interest rates encourage borrowing and investing, boosting economic growth and potentially increasing crypto investments. Higher rates can have the opposite effect, making loans expensive and reducing investments in riskier assets like cryptocurrencies.
4. Money Supply (M2)
What is it? M2 includes cash, checking deposits, and easily convertible near money. It’s a measure of the money supply in the economy.
Impact on Crypto? An increasing money supply can boost spending and investment, driving up crypto prices. However, excessive money printing can lead to inflation, diluting currency value and affecting crypto markets.
Source: MacroMicro
5. Unemployment Rate
What is it? The percentage of the labor force that is unemployed and actively seeking work.
Impact on Crypto? High unemployment reduces consumer spending and investment, negatively impacting crypto markets. Conversely, lower unemployment boosts economic confidence and investment in crypto.
6. Retail Sales
What is it? Retail sales measure consumer spending on goods and services.
Impact on Crypto? High retail sales indicate strong consumer confidence and economic health, potentially leading to increased crypto investments. Low retail sales can signal economic trouble, reducing investment in crypto.
7. USD Strength (Dollar Index DXY)
What is it? The DXY measures the value of the US dollar against other major currencies.
Impact on Crypto? A strong USD can make USD-denominated investments more expensive and less attractive, potentially drawing funds away from crypto. Conversely, a weaker USD can boost crypto investments as investors seek alternatives.
Combining All Macro Indicators in One Place
Tracking these macro indicators individually can be cumbersome. Which is why tools like the TradingView Economic Calendar are especially useful, by consolidating all macroeconomic data in one place.
The tool provides real-time updates and historical data, helping you stay informed about economic trends and to help you make better trading decisions – in and out of crypto.
Key Takeaways
Understanding macroeconomic indicators is crucial for navigating the crypto market. By paying attention to these indicators, you can anticipate economic shifts and capitalise on opportunities.
As George Soros famously said, “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” Stay informed, stay prepared, and trade smarter.
On-chain Indicators
Unlike traditional asset classes, crypto transactions on public blockchains are freely accessible – which makes them ideal for data science and machine learning.
Enter on-chain analysis, a gateway to leverage this rich, open-source financial data to provide traders with valuable insights into market trends, investor sentiment, and the behaviour of other market participants.
TL;DR
On-chain analysis leverages blockchain data to provide insights into market trends, investor sentiment, and behavior.
On-chain data is transparent and accessible, making it ideal for identifying emerging market trends and substantial transactions.
Key metrics like active addresses, transaction volume, and supply distribution are crucial for understanding network health and market conditions.
Tools like Glassnode, Dune Analytics, and Nansen offer comprehensive on-chain analytics to enhance trading strategies.
On-chain analysis should complement other forms of analysis for more informed and cautious decision-making.
On-chain data refers to transactions that have been verified and are recorded on a blockchain. This data is openly accessible through block explorers like Etherscan and Solscan, providing a transparent view of blockchain activities. Needless to say, such resources can be key to identifying emerging market trends, substantial transactions, and more.
On-Chain vs. Off-Chain
On-chain transactions are verified and recorded on the blockchain by miners or stakers. They are transparent and accessible to anyone.
Off-chain transactions occur outside the blockchain, often on Layer 2 solutions, offering faster speeds and lower costs.
Comparison of Trading Analytical Methods
Fundamental Analysis
Technical Analysis
On-Chain Analysis
Focus
Market cap, trading volume, utility, and team authenticity to determine an asset’s value.
Past data to predict future market movements.
Blockchain-verified data to detect investment opportunities.
Example
Bitcoin’s scarcity (only 21 million in supply) drives its value.
Patterns like head and shoulders can indicate potential price reversals.
High inflows of Bitcoin to centralized exchanges might indicate selling pressure.
Data Source
Whitepapers, financial statements, market reports, news articles.
Historical price data, trading volume, chart patterns.
Blockchain explorers, on-chain analytics platforms (Glassnode, Dune Analytics, Nansen).
Key Metrics in On-Chain Analysis
Active Addresses
Tracking the number of active addresses helps gauge user engagement and adoption. A rising number of active addresses usually indicates growing interest in the network.
Transaction Volume
This metric measures the total number of transactions over a period. High transaction volumes during volatile market periods can reveal user behaviour trends.
Supply Distribution
Supply distribution shows how a cryptocurrency’s total supply is divided among holders. A more decentralised supply indicates a healthier network.
Total Value Locked (TVL)
TVL measures the total value of assets locked in smart contracts on a blockchain. It reflects the adoption and usage of decentralised applications (dApps). A project’s token should typically correlate with a rising TVL, as it indicates activity and value.
On-Chain Indicators for Market Action
Realised Profits and Losses (RPL)
RPL tracks the gains or losses realised when an asset is sold. A high RPL might indicate selling pressure, while a low RPL can suggest bullish sentiment and potential buying opportunities.
Supply in Profit or Loss
This metric shows the number of coins in profit or loss based on their last moved price. It helps identify potential support and resistance levels in the market.
Realised Capitalisation
Unlike market cap, realised capitalisation values each coin based on its price when last moved, providing a more accurate reflection of the network’s value.
What Are the Top Tools for On-Chain Analysis?
Glassnode
Glassnode offers extensive on-chain indicators and market insights for over 900 assets. It features customisable dashboards, integration with apps like TradingView, and in-depth reports.
Dune Analytics
Dune Analytics allows users to query and visualise blockchain data through SQL queries. It provides a wide range of metrics and visualised charts for easier analysis.
Nansen
Nansen combines blockchain data with labelled wallets to offer comprehensive on-chain analytics. It features customisable smart alerts, real-time data, and in-depth dashboards.
Key Takeaways
On-chain analysis has proven to offer valuable insights that can enhance any market participant’s investment or trading strategies. Leveraging analytics tools like Glassnode, Dune, or Nansen is a great way to make more informed decisions based on real-time blockchain data.
However, as always, relying solely on one tool or indicator is often insufficient – such analytics tools should complement (not replace) other forms of analysis. Use the insights to guide your decisions, but always exercise caution and DYOR.
Stock-to-Flow Model
The Bitcoin stock-to-flow (S2F) model has become a prominent tool for forecasting Bitcoin’s potential future price.
Initially used to predict the value of precious metals like gold and silver, the model’s principles also apply to Bitcoin due to its fixed supply.
TL;DR
The Bitcoin Stock-to-Flow (S2F) model is used to forecast Bitcoin’s future price by assessing its scarcity through the ratio of total supply (stock) to new annual production (flow).
Unlike fiat currencies, Bitcoin’s fixed supply and limited production make it suitable for the S2F model, which predicts increasing scarcity and potential value over time.
The model has shown historical alignment with Bitcoin’s price movements, especially during halving events, but does not account for market volatility or unexpected economic shifts.
Critics argue that the S2F model relies on questionable assumptions and may not accurately predict future prices, particularly during periods of extreme market fluctuation.
While the S2F model offers valuable insights, it should be used alongside other analytical tools for a more comprehensive investment strategy.
As its name suggests, the S2F model evaluates two key elements of an asset to estimate its future value: stock and flow.
The stock represents the total existing supply of an asset, while the flow measures the new supply generated each year. By comparing these two attributes, the model assesses a commodity’s scarcity, which is a crucial factor in determining its price.
Source: PlanB
How the S2F Model Works
To grasp how the S2F model operates, it’s essential to understand the key differences between crypto (like Bitcoin) and TradFi currencies (fiat).
Crypto vs. Fiat
Fiat currencies, issued by central banks, are subject to inflation due to their unlimited supply. Central banks can print more money as needed, which, while ensuring liquidity, often leads to devaluation and inflation. Case in point? Venezuela, which has experienced severe hyperinflation due to excessive money printing.
In contrast, Bitcoin, like precious metals, cannot be replicated or endlessly produced. With a capped supply of 21 million coins, Bitcoin’s scarcity makes it an ideal candidate for the S2F model.
Applying the Stock-to-Flow Model to Bitcoin
The stock in Bitcoin’s case refers to the total number of coins in existence—21 million. The flow is the rate at which new Bitcoin is mined annually. Currently, about 19 million Bitcoins have been mined, representing approximately 90% of the total supply. Each year, Bitcoin’s network produces around 328,500 new coins, as one block is mined every 10 minutes, yielding 6.25 Bitcoins.
By dividing Bitcoin’s existing supply by its annual production rate, we get a stock-to-flow ratio. As of now, Bitcoin’s S2F ratio is around 57.712, meaning it would take approximately 57 years to mine the total supply.
However, this doesn’t account for Bitcoin’s halvings—events that reduce the block reward by half every four years. When halvings are considered, the S2F ratio jumps to 124 years, further highlighting Bitcoin’s increasing scarcity.
Benefits and Limitations of the Stock-to-Flow Model
While the stock-to-flow model provides a compelling framework for understanding Bitcoin’s value, it’s not without its limitations. Let’s dig into the two sides of the coin when using the S2F model.
Benefits:
Price Tracking: The S2F model allows users to track Bitcoin’s price movements through tokenomics and fundamental drivers like scarcity.
Halving Events: The model has historically aligned with price forecasts, particularly during Bitcoin’s halving events.
Supply Focused: It emphasizes Bitcoin’s fixed supply, a critical factor in its value proposition.
Optimistic Outlook: The model offers a positive long-term price prediction for Bitcoin, appealing to bullish investors.
Limitations:
Market Volatility: The S2F model doesn’t account for Bitcoin’s extreme price volatility, which can significantly impact short-term price movements.
Economic Events: It fails to consider unforeseen economic events, such as global financial crises, that could disrupt the market.
Demand Assumptions: The model assumes consistent demand for Bitcoin, overlooking potential fluctuations in market interest.
Despite its advantages, relying solely on the stock-to-flow model is not advisable, especially given cryptocurrency’s inherent volatility. Diversifying your analysis with other models and indicators is essential for a well-rounded investment strategy.
The Flipside: Criticisms Towards the Stock-to-Flow Model
The S2F model has garnered its fair share of critics. For example, Ethereum co-founder Vitalik Buterin publicly criticised the model in June 2022 when Bitcoin’s price failed to align with the model’s predictions.
Other detractors, like Nico Cordeiro, Chief Investment Officer at Strix Leviathan, labeled the model a “chameleon”—a term for models built on questionable assumptions.
The MVRV Z-score
The MVRV Z-score is a powerful metric that provides valuable insights into the valuation of cryptocurrencies, with Bitcoin being its most common application. Standing for “market value to realised value,” the MVRV Z-score helps determine whether a cryptocurrency is currently overvalued or undervalued, offering a clearer perspective on its fair market price.
TL;DR
The MVRV Z-score is a metric that assesses whether Bitcoin is overvalued or undervalued by comparing its market value to its realised value, offering insights into its fair market price.
Developed in 2018, the MVRV Z-score refines the original MVRV ratio by incorporating Z-scores to provide a more nuanced understanding of Bitcoin’s value relative to its historical price performance.
This metric is effective for identifying overvaluation (when the score exceeds 6.9) and undervaluation (when it drops below 0.1), making it a useful tool for spotting buying opportunities or sell signals.
The MVRV Z-score’s strengths include its simplicity, reliability in trend detection, and its ability to indicate the extent of overvaluation or undervaluation, though it may be influenced by historical biases and market awareness.
While the MVRV Z-score is a powerful tool for evaluating Bitcoin’s market position, it should be used alongside other indicators to form a comprehensive investment strategy.
Source: Bitcoin Magazine Pro
Where Did the MVRV Z-Score Come From?
The MVRV concept was originally developed in 2018 by Murad Mahmudov and David Puell. Their MVRV ratio compared Bitcoin’s market value to its realised value, providing a snapshot of short-term price trends. However, while insightful, the MVRV ratio wasn’t able to fully capture Bitcoin’s intrinsic value.
Later that year, Awe & Wonder introduced the MVRV Z-score, a refined version of the original metric. By incorporating Z-scores—a statistical measure of standard deviations—the MVRV Z-score offers a more nuanced view of Bitcoin’s value relative to its historical price performance.
Understanding the MVRV Z-Score
The MVRV Z-score allows investors to assess how far Bitcoin’s current price deviates from its historical moving average, effectively showing whether Bitcoin’s price is behaving abnormally.
This makes it a crucial tool for answering the question, “What is Bitcoin really worth?”
How to Calculate the MVRV Z-Score
While many websites provide pre-calculated MVRV Z-score charts, understanding the calculation process can deepen your insight into the metric’s value.
Market Cap: Start by finding Bitcoin’s market capitalisation, which is calculated by multiplying the current price by the total number of coins in circulation.
Realised Value: Next, determine Bitcoin’s realised value. This is the sum of all Bitcoin prices when they last moved – this is tricky to calculate manually and is readily available online.
Calculate the Difference: Subtract the realised value from the market cap.
Divide by Standard Deviation: Finally, divide the result by the standard deviation of Bitcoin’s historical prices to get the MVRV Z-score.
Applying the MVRV Z-Score
The MVRV Z-score has become an essential tool for Bitcoin investors. It identifies whether Bitcoin is priced fairly, making it easier to spot buying opportunities or potential sell signals.
Overvaluation: If the MVRV Z-score exceeds 6.9, Bitcoin is likely overvalued, often represented as a red or pink “danger zone” on charts. This signals that the market might be overheated, and a price correction could be imminent.
Undervaluation: Conversely, when the score dips below 0.1, Bitcoin is considered undervalued, often shown as a green “safety zone.” This suggests it could be a good time to buy.
Momentum Identification: The MVRV Z-score is particularly effective at detecting shifts in market momentum. Historically, when the weekly close has an MVRV Z-score above 5, there’s been a 94.36% chance of a market reversal. This predictive power makes it a valuable tool for anticipating trend changes.
Benefits and Limitations of the MVRV Z-Score
Like any metric, the MVRV Z-score has its strengths and weaknesses.
Benefits:
Simplicity: The MVRV Z-score is easy to calculate and interpret, making it accessible even to casual crypto enthusiasts.
Trend Reliability: With months of historical data factored in, the MVRV Z-score is reliable for spotting significant market trends.
Momentum Detection: The metric is useful for detecting changes in market momentum before drastic price shifts occur.
Extent of Over/Undervaluation: Unlike simpler indicators, the MVRV Z-score also indicates the degree to which Bitcoin is overvalued or undervalued.
Limitations:
Historical Bias: Since the metric considers Bitcoin’s entire price history, lower historical prices might unfairly skew the score. Some argue that a score as low as 1.0 might already indicate undervaluation.
Market Awareness: As more traders become aware of the MVRV Z-score, movements can be exaggerated when the score hits key levels like 6.9, potentially leading to artificial price shifts.
Data Averaging: Some experts believe that the model would be more accurate if it averaged data from only the past four years instead of Bitcoin’s entire history.
Value Limitations: The MVRV Z-score doesn’t provide an exact price for Bitcoin. Instead, it offers a relative measure of overvaluation or undervaluation, leaving the actual value assessment up to interpretation.
Key Takeaways
The MVRV Z-score is a valuable tool for anyone looking to evaluate Bitcoin’s market position. While it has its limitations, its ability to predict market trends and assess fair value makes it an essential part of any serious crypto investor’s toolkit.
However, as with all indicators, it’s best used in conjunction with other metrics and market insights to form a well-rounded investment strategy.
Short Term Holder Realised Price (STH RP)
The Short-Term Holder Realised Price (STH RP) is a key metric for Bitcoin traders who focus on short-term market movements. It represents the average price at which each Bitcoin was last transacted on-chain within the past 155 days.
Essentially, this metric reflects the ‘on-chain cost basis’ for recent market participants—those who are more likely to react to short-term price fluctuations.
TL;DR
The Short-Term Holder Realised Price (STH RP) measures the average price at which Bitcoin was last transacted by short-term holders (those who have held for less than 155 days), reflecting their on-chain cost basis.
Why is it important? When Bitcoin’s price is below the STH RP, short-term holders are at a loss, potentially increasing selling pressure, while prices above the STH RP indicate profit and create support levels.
The STH RP helps identify support during bull markets and potential resistance during declines, as short-term holders are more sensitive to price changes.
The Short-Term Holder MVRV Ratio (STH MVRV) compares the market value to the realised value of Bitcoin held by short-term investors, indicating profitability or risk of loss.
This metric is essential for understanding short-term market dynamics and the behaviour of recent entrants, aiding in identifying potential buying or selling pressures.
How STH RP Works
STH RP is calculated by taking the average acquisition price of Bitcoin for investors who are considered short-term holders. This group is typically defined by coins that have been held for less than 155 days. The idea here is that these investors are more sensitive to market movements and tend to buy or sell based on short-term price trends.
Source: Bitcoin Magazine Pro
When Bitcoin’s price falls below the STH RP, it indicates that the average short-term holder is now in a losing position, which can increase selling pressure. Conversely, when the price is above the STH RP, these holders are generally in profit, which can create a support level as they are less likely to sell at a loss.
The STH RP and MVRV Ratio
To dive deeper, the Short-Term Holder MVRV Ratio (STH MVRV) compares the market value of Bitcoin held by short-term investors to its realised value. This ratio helps to visualise unrealised profitability:
A ratio of 2.0 suggests significant profits for short-term holders.
A ratio of 1.0 means they are breaking even.
A ratio of 0.85 indicates a 15% loss, highlighting increased risk of capitulation.
Why STH RP Matters
The STH RP plays a crucial role in identifying potential support levels during bull markets. When Bitcoin’s price returns to this average acquisition price, it often acts as a buying signal for short-term holders, creating a base of support that can help propel the price higher.
Additionally, the STH RP provides insights into the sentiment and behaviour of more recent market entrants. Unlike long-term holders, short-term holders are more likely to sell during periods of volatility or price declines, making this metric useful for identifying potential resistance levels or points of increased selling pressure.
Hash Ribbons Indicator
Timing the market is a trader’s elusive dream, especially with crypto’s volatility. Many traders find themselves attempting to “buy the dip” or “sell at the top” — often leading to nursing heavy losses. However, leveraging advanced technical tools can significantly enhance your trading strategy and improve your chances of making well-timed entries.
One such tool is the Hash Ribbons indicator, an advanced technical analysis tool that has gained popularity for its ability to spot strategic entry points for Bitcoin. Developed by Charles Edwards, this indicator has been dubbed “the most powerful signal to buy Bitcoin ever” in his Hash Ribbons & Bitcoin Bottoms article. While no financial forecast is foolproof, the Hash Ribbons indicator has a strong track record of identifying potential market bottoms, making it a valuable tool for traders.
TL;DR
The Hash Ribbons indicator, created by Charles Edwards, uses the 30-day and 60-day Simple Moving Averages (SMAs) of Bitcoin’s hash rate to identify potential market bottoms and bullish trends.
It signals a buy when the 30-day SMA of the hash rate crosses above the 60-day SMA, suggesting that miner capitulation has ended and a recovery may be starting.
Historically, this indicator has been reliable for predicting long-term price rallies, with several buy signals resulting in significant price increases.
To enhance accuracy, adding the 10-day and 20-day SMAs of Bitcoin’s price can help filter out false signals and refine entry points.
The Hash Ribbons indicator is valuable for identifying potential buying opportunities and is a useful tool in a comprehensive trading strategy.
What Is the Hash Ribbons Indicator?
The Hash Ribbons indicator is built on two specific metrics: the 30-day and 60-day Simple Moving Averages (SMA) of Bitcoin’s hash rate. The hash rate is a key measure of the Bitcoin network’s health, reflecting the amount of computational power being used to process transactions. A higher hash rate generally indicates better network stability and security.
Derived from the chart below, there’s a positive correlation between Bitcoin’s price action and the hash rate.
Source: poolbay
The core concept of the Hash Ribbons indicator is simple: it signals the end of miner capitulation and the beginning of a bullish trend when the 30-day SMA (light blue line) of the hash rate crosses above the 60-day SMA (purple line). This crossover is interpreted as a buy signal, suggesting that the worst of the price decline is over and that a recovery is likely on the horizon.
Source: BGeomtrics
How the Hash Ribbons Indicator Works
Miner capitulation occurs when mining becomes unprofitable, often due to a significant drop in Bitcoin’s price. During these periods, miners may be forced to sell off their holdings to cover operational costs, which can put additional downward pressure on the market.
However, once the hash rate begins to recover and the 30-day SMA crosses above the 60-day SMA, it signals that miners are regaining confidence, and the market may be ready to rebound.
Historically, the Hash Ribbons indicator has been reliable in predicting long-term bullish trends. For example, between 2016 and 2020, the indicator flashed several buy signals, each followed by a significant price rally. This makes it a favoured tool among traders looking to time their market entries during periods of extreme fear and uncertainty. As of August 2024, the Hash Ribbons have printed a buy signal.
Source: BGeometrics
Enhancing the Indicator with Price SMAs
To reduce the risk of buying during a false signal, Edwards suggests adding two more moving averages to the analysis: the 10-day and 20-day SMAs of Bitcoin’s price. These additional SMAs can help filter out potential noise and provide more precise entry points.
However, even with just the 30-day and 60-day SMAs, the Hash Ribbons indicator has proven to be a valuable asset in a trader’s toolkit.
Key Takeaways
The Hash Ribbons indicator offers a unique approach to identifying potential market bottoms by focusing on miner behaviour and hash rate trends. While no indicator is perfect, the Hash Ribbons has shown a strong historical track record of signaling profitable buying opportunities.
For those looking to navigate the often volatile Bitcoin market, this indicator is worth considering as part of a broader trading strategy.
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