On Tuesday (October 13), prominent on-chain crypto analyst Willy Woo pointed out that, according to the metric “Network Value to Transaction” (NVT), Bitcoin is undervalued at “levels equivalent to the COVID19 white swan price bottom.”
Cypto analytics firm ByteTree calls the NVT Ratio “one of the most important metrics in valuing public blockchain networks,” and says that it “measures the value of the network relative to its utility as a payment network.”
ByteTree says that the NVT Ratio is calculated using the following formula:
NVT = (Price * Adjust Supply) / Transaction Value in USD
ByteTree goes on to say:
“The network value can be likened to the market capitalization in the traditional equities space. The NVT ratio is often referred to as the price to sales ratio for crypto-assets and is one of the most direct metrics to determine a fair value for a crypto-asset network.”
Some people like to think of the NVT ratio as Bitcoin’s PE Ratio since it is a ratio of Bitcoin’s network value, or its market cap, to the transaction volume that goes through the Bitcoin blockchain in a 24-hour period.
A low NVT Ratio, therefore, could be seen as a signal that Bitcoin is undervalued, and a high NVT Ratio would suggest that Bitcoin is overvalued.
As for Woo, he tweeted earlier today to his over 150K followers that the NVT ratio “measures Bitcoin’s ratio of investor activity to capitalization, and that he finds it very bullish that “presently NVT is at undervaluation levels equivalent to the COVID19 white swan price bottom.”
He then went on to say:
- “‘Investor activity’ is predicated on on-chain volume. This is because when BTC moves between wallets between two different participants, we assume there was a payment for it off-chain (fiat or alt-coin). It’s an imperfect measure but approximates what’s going on.”
- “As more volume continues to trend off chain into layer-2, NVT drifts higher as investment activity becomes invisible to the chain. I tried many methods, the best was simple long term moving averages to track the new zones of buy and sell. It works if the L2 trend is gradual.”
- “In early and mid phases of a bull market NVT signals very strong investor activity (low NVT) as price continues to climb. You keep buying, as it’s this activity that is driving up price. It starts to weaken (high NVT) as we approach the top of the bull market.”
Finally, Woo noted that “cross referencing” with other metrics is “important because “all the metrics change over time as on-chain behaviour and technology evolves.”
Last Friday (October 9), Woo commented on major Bitcoin purchases by MicroStrategy and Twitter in the past couple of months, saying that this was just “tip of the iceberg”:
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.