NVT ratio: how to detect a bubble in Bitcoin?

Bitcoin NVT ratio (Network Value to Transactions Ratio, for its acronym in English); it is an indicator developed by Willy Woo. This indicator measures the dollar value of the transaction activity of a criptoactivo in relation to the value of your network. The ratio of the value of network transactions, or “NVT”, provides us with information on how to assign the fair value to an asset like Bitcoin. Currently, this indicator has become a key reference that investors and analysts are using to evaluate and properly assess the criptoactivos. NVT is a numeric and chart form to compare equivalent values, the intrinsic unknown of the cryptocurrencies. The relationship NVT tracks the dollar value of the transactions in the chain of blocks of Bitcoin and compares it with its market value. In general terms, a market value-to-transaction “under” denotes an asset that is valued more economically per unit of volume of transaction in the chain. The value network consists of the total market value of all the tokens in circulation. The element of transaction is an estimate of the value of the transaction activity chain extracted from explorers of blocks and blockchains. According to Willy Woo, a close relationship exists between the value transmitted in the chain of blocks of Bitcoin and its assessment of the network. For this reason, NVT ratio, uses the money that flows through the network as an estimate for the valuation of the same.

How do you calculate Bitcoin NVT ratio?

Value of the network and the daily volume of transactions. To determine THIS ratio, you only need two variables. It is calculated by dividing the value of the network (market capitalization) by the daily volume of transactions in USD through the chain of blocks. If we observe, that if in the expression, we remove the dollars, NVT , is the equivalent to the supply of tokens of Bitcoin divided by the value of BTC daily transmitted through the chain of blocks. That is to say, it is technically a rate expression monetary reverse. Its expression is the following: it should Be noted that the daily transaction Volume in NVT ratio takes into account only transactions in a chain. All commercial activity that occurs in the exchanges and is, for the most part, speculative, it is not included in this volume.

How to interpret and use the value of THIS ratio?

When the NVT ratio of Bitcoin is high, it indicates that the valuation of your network is exceeding the value that is transmitted within the same payment network, this can happen when the network is in high growth and investors value them as a high-return investment, or alternatively when the price is in a bubble unsustainable. That is to say, a high market value, far value that is transmitted within the network, it could indicate that its value is immersed in a speculation of the price. The high growth can create a high-relationship NVT in The above chart, in the first years of the network Bitcoin, the growth was very pronounced. This gave as a result that the markets valued the network at high in comparison with the actual value of the transaction that flows through the network. This means that we are seeing a network that grows in an explosive manner and then demand a valuation premium based on the potential future. From there then depreciate on a correction pronounced, seeking to adjust to the real value and not speculative. When NVT is high, could be indicative of a speculative bubble As can be seen, the peak in THIS ratio was back to the bubble with a considerable delay of a few a few months. The maximum of THIS ratio coincides with the half of a period of correction. With this, the maximum of the ratio NVT cannot accurately determine a bubble before time. However, it is very useful to discern between a collapse or a consolidation after the price has reached its maximum point. The use of THIS ratio allows to detect the difference between the consolidation and the bubbles are very visible. If the relationship NVT is maintained within a normal range, it indicates that we are not in the territory of the bubbles. If it rises above the normal range, it is a sign that the transactional activity is not keeping the new valuation, and we can expect a long price correction.

When to buy or sell using NVT ratio?

Like any indicator, the relationship NVT can provide valuable information that could affect your decision-making process. Some analysts suggest that Bitcoin is in the territory of the bubble when the ratio of NVT is 90 or higher. The relationship will be high, the market cap of Bitcoin must overcome substantial volume of transactions (90 times). This could indicate that the price is inflated unreasonably. So, it could be time to sell. Since then, the opposite may also be true. That is to say; if the intention is to buy, the best option is to have a higher volume of transactions compared with the market capitalization. This would indicate that there is an amount of convincing and significant transactions that are currently in use in the world through the blockchain of Bitcoin. To do this, it has been observed that the level of THIS close to 50 is an ideal time. Remember, there are several theories about when the NVT is indicative of the state of the market and the best way to use it, but ultimately, the decision is yours. Therefore, we recommend that you should be considered in conjunction with a full analysis of the market. The following two tabs change content below. Engineer, lover of economics and technology; Convinced that Blockchain will empower them to future generations, giving them freedom and sovereignty to each individual.

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About the author

Caroline W.

Caroline W.

Caroline is passionate about learning languages, cultures and the Internet. She has years of experience working at international online advertising projects. Growing interested in Bitcoin and cryptocurrencies in late 2018, she joined CurrencyMarket24 as a writer.

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