Traders and market analysts use various indicators and ratios to determine the value of the stock, asset, commodity, or currency that they are engaging with. When it comes to Bitcoin, however, things are a tad bit different.
Because of its nature and the fact that it’s the world’s first fully functional digital currencies, there are differentiators which have to be accounted for.
For example, when traders engage the stock market, they take advantage of the so-called P/E ratio, which stands for Price-to-Earning Ratio. It measures the current share price relative to its per-share earnings.
With Bitcoin, however, this is hardly applicable because it’s not a stock. There is something close to that, though, and it’s called the NVT Ratio.
What is Bitcoin NVT Ratio?
Bitcoin’s NVT ratio, which is also known as Bitcoin’s Network Value to Transaction ratio shows whether Bitcoin’s current price is overvalued or undervalued.
The ratio represents the cryptocurrency’s network value (which is its current market capitalization) and the transaction volume that’s transmitted through Bitcoin’s blockchain over a period of 24 hours. That’s perhaps also why some people actually refer to the NVT ratio as Bitcoin’s P/E ratio. It’s because it uses the value which flows through the network as a proxy to “company’s earnings.”
The chart shows both Bitcoin’s current price (top line), as well as Bitcoin’s NVT Ration (lower line). As yo
How to Calculate The Bitcoin NVT Ratio?
It’s actually fairly easy to calculate the NVT ratio of Bitcoin. You have to divide its current market capitalization by the USD volume which is transacted over its blockchain in the last 24 hours.
Keep in mind that you can also use different tracking websites to determine the values but this would probably give you different NVT ratio because the data displayed there could vary.
The one who conceptualized Bitcoin’s NVT ratio is popular independent crypto researcher and analyst, Willy Woo.
— Willy Woo (@woonomic) February 24, 2017
However, it’s also worth noting that Bitcoin’s market cap can vary severely because of its hyper volatility. The volume transacted on the network can also vary and that’s why there’s another ratio which is called Bitcoin NVT Signal or Bitcoin NVTS.
What is Bitcoin NVTS?
Bitcoin’s NVTS is almost the same as the regular NVT ratio but it’s actually more accurate and responsive. In order to get the ratio, all you need to do is divide Bitcoin’s market cap by its 90-day transaction volume that’s transmitted through the blockchain.
The NVTS ratio was conceptualized by the Chief Research Officer at Cryptolab Capital, Dmitry Kalichkin.
Kalichkin, however, acknowledges the limitation of these indicators because they don’t factor the number of transactions or the number of active daily addresses.
How To Use Bitcoin NVT Ratio?
Just like any other indicator, the NVT ratio can provide valuable information which could impact your decision-making process.
As we explained in the beginning, its main goal is to determine whether Bitcoin is undervalued or overvalued. Naturally, the indicator could potentially show you whether it’s time to sell as the asset is severely overpriced and a correction is coming, or to buy because its value is not yet represented in its price.
There are various theories as to when the NVT is indicative of the state of the market and how to use it but, ultimately, the decision is yours.
Some analysts suggest that Bitcoin is in Bubble territory when the NVT ratio is 95 and above. In order for the ratio to be high, the market cap must substantially outweigh the USD volume of Bitcoin transacted through its blockchain, potentially signaling that the price is unjustifiably inflated. Naturally, the opposite can also be true.
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Source: Crypto Potato