Investors and traders often use financial indicators and ratios to determine if the assets they are investing in are a smart choice. Investors use the PE Ratio in the stock market to determine if a stock is over or undervalued. In the case of cryptocurrencies, they use the on-chain metric NVT Ratio.
In this article, we’ll explain what the NVT ratio is and the advantages and disadvantages of using the NVT Ratio.
What is the NVT Ratio
The Network Value to Transactions (NVT) Ratio is equal to the market capitalization divided by transacted volume.
NVT = Market Capitalization / Transaction Volume
The purpose of the NVT Ratio is to determine if a cryptocurrency is undervalued or overvalued. Its creator, Per Willy Woo, says that the NVT Ratio can be compared to the PE (Price to Earnings) Ratio used in the equity markets. NVT Ratio analysis uses the USD amount of daily transaction volume recorded on the asset’s blockchain.
How to use the NVT Ratio
High NVT Ratio indicates that the asset price is overvalued and that the market cap is outpacing the on-chain transaction volume (high network valuation). In the case of Bitcoin, high NVT ratios usually coincide with all-time high values and periods of overvaluation.
Low NVT Ratio indicates that the asset’s price is undervalued and that the on-chain transaction volume exceeds the market cap (low network valuation). In the case of BTC, low NVT ratios coincide with market bottoms.
Constant NVT Ratio indicates that the market cap and the on-chain transaction volume are in equilibrium. Also, a constant NVT ratio suggests a fair value for the Bitcoin network.
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NVT Ratio Advantages and Disadvantages
- It can help you determine undervalued or overvalued cryptocurrencies.
- It’s easy to calculate the Network Value to Transaction Ratio, which solves the problem of introducing the PE Ratio in the crypto markets.
- The NVT value can be used to compare all crypto assets, unlike the PE Ratio, which suffers poor cross-industry compatibility.
- There is still a debate about whether the NVT Ratio is equivalent to the PE Ratio.
- The NVT Ratio is volatile because it’s calculated every 24 hours.
- A high or low NVT ratio, like the P/E ratio, may or may not be a good indicator of an asset’s investment potential.
How to use the NVT Ratio
The NVT Ratio can provide valuable information for your investing strategy. The main goal is to determine whether an asset is undervalued or overvalued. The NVT Ratio can help you decide when to sell or buy the asset. For example, Bitcoin is considered to be in bubble territory when the NVT Ratio is 95 or higher, indicating that it’s probably time to sell the assets because it’s overpriced.
Using the NVT Ratio, you can’t determine a bubble ahead of time, but it can help you identify if the asset is in a downtrend or a consolidation. If the NVT Ratio stays within a normal range, the price is in consolidation. If the NVT Ratio passes the normal range, it’s a sign that the market cap is growing faster than the transaction volume and is due for a lengthy correction. Also, you can use the NVT signal that combines a 90-day moving average with the NVT Ratio to observe broader trends.
The NVT Ratio is a simple on-chain metric that you can add to your investment plan to determine whether a digital currency is overvalued or undervalued. One of the most crucial insights you can gain from the NVT Ratio is whether the market is in a bubble or a correction. Knowing this will help you choose when it is best to enter or exit positions.
Let’s face it, trading any market can often be a difficult and risky endeavor. This is especially true for the crypto market. Day traders, swing traders and long-term investors need all the useful information and tools they can get. Glassnode, the crypto industry’s leading blockchain data and intelligence platform, equips investors and traders with the most comprehensive on-chain insights to help them make better investment and trading decisions.