Is Bitcoin’s Rally Overstretched? This Key Indicator Says No
A historically reliable fundamental analysis indicator suggests bitcoin’s rally has scope to continue after its rapid rise to new 2020 highs, contradicting signals on the technical charts.
While bitcoin’s “market value to realized value” (MVRV) Z-score is hovering at two-year highs at 2.12, according to data source Glassnode, that’s still well below the 7.0 score at which an asset is considered near a top.
The MVRV Z-score measures the deviation of market value from realized value, and is used to assess undervalued and overvalued conditions.
Put simply, the cryptocurrency is slightly overvalued but still has plenty of room to extend the run of gains from the low of $3,867 seen since mid-March.
The indicator backs up billionaire hedge fund manager and philanthropist Paul Tudor Jones’ recent comments that bitcoin’s rally has just begun.
Historically, an MVRV Z-score below zero has marked bear market lows, while a reading above 7 has marked major bull market tops.
The Z-score fell below zero, indicating undervalued conditions following the March 12-13 crash, which saw prices fall as low as $3,867.
Since then, the cryptocurrency has largely stayed on an uptrend.
Conflicting signals
Bitcoin’s 14-week relative strength index (RSI), a popular gauge of price momentum, has crossed above 70.00 on the charts.
According to the technical analysis (TA) theory, an above-70 figure is a sign an asset is overbought.
The 14-day RSI, too, is flashing a similar signal.
TA studies, however, are lagging indicators as they are based on price and relatively less reliable.
“In a trending market, indicators such as the RSI can remain in an ‘overbought’ or ‘oversold’ state for extended periods of time,” trader and analyst Nick Cote told CoinDesk.
Bitcoin’s current uptrend looks strong because it’s backed by increased institutional participation and expectations for mainstream adoption.
Online payments giant PayPal recently announced support for bitcoin and other cryptocurrencies.
The overbought signal does not imply a bearish reversal, but may yield a minor pullback or consolidation similar to those seen in May and August.
“For bitcoin, institutionalization is the primary driver for growth in this next bull market. As such, it’s better to observe on-chain metrics,” Cote said.
At press time, bitcoin is trading lower near $13,520, having narrowly missed breaching the June 2019 high of $13,880 during the Asian trading hours.
Disclosure: The author holds small positions in bitcoin and litecoin.
Also read: Bitcoin Hits 16-Month High Despite Sell-Off in Global Stocks
