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Rehashed - #11 Utilising the Network Value to Transactions Ratio in Cryptocurrencies

Estimated reading: 4 mins

Rehashed - #11 Utilising the Network Value to Transactions Ratio in Cryptocurrencies


The P/E Ratio of Crypto

The Network Value to Transactions ratio (NVT) measures the dollar value of cryptocurrency activity relative to network value. More simply, it is the ratio of the total value of a network (market capitalisation) divided by the value of transactions made within the network (daily on-chain transaction volume). Thus, the metric can be a good way to measure a cryptocurrency’s value relative to its peers.

Often referred to as the P/E (price-earnings) ratio of crypto, a relatively higher NVT for any given cryptocurrency may indicate increased speculative buying, as there is not the accompanying increased utility value from higher transaction volumes within the network. As cryptocurrencies still occupy an immature and inefficient market, the NVT ratio may be more useful in highlighting points of mispricing by the market. A high NVT ratio may indicate that a given cryptocurrency has been overbought and a low NVT ratio may suggest that a cryptocurrency is in the oversold range.

New Zealand’s own, Willy Woo, takes the concept of NVT a step further. He builds off of Dmitry Kalichkin’s refinement of the NVT ratio, something Woo labels as NVT Signal. Applying a small tweak, the calculation of NVT Signal is a cryptocurrency’s network value divided by the 90-day moving average of daily on-chain transaction value (rather than simply daily on-chain transaction value for NVT). According to Woo, NVT Signal can be even more of an effective trading indicator than NVT. For example, when NVT Signal peaks, we usually see network value decline. In the case of Bitcoin, anything above 150 would indicate the overbought zone and an NVT Signal below 45 would indicate that Bitcoin is oversold.

If we look at the current NVT Signal for Bitcoin, although it’s been trending downwards, we can see that it is still very high, currently around 114.


Source: Willy Woo at woobull.com

Bitcoin’s current NVT Signal suggests that we need more on-chain transactional activity for Bitcoin to justify current prices, or the Bitcoin price to drop to reconcile the difference.

Note that due to the fact that the calculation of NVT can be arbitrary, it’s not a perfect indicator for price movement and is simply one tool in the toolkit that investors can employ to evaluate the market. It’s always good to zoom out and consider how factors like NVT may inform us of future price movement across various cryptocurrencies.


Flushing out the Funds

2017’s big bull run left many cryptocurrency holders as newly minted millionaires. And many of these millionaires took their newfound crypto wealth as an indication of their capabilities to run cryptocurrency hedge funds. In a bull market, suddenly everyone becomes a genius! As such, we’ve seen the emergence of multiple cryptocurrency funds, many ill-equipped with teams who lack critical financial and risk management experience to successfully run such ventures. According to Autonomous Next, there are over 250 cryptocurrency funds with around (USD) $3.5-5 billion in assets under management- a non-trivial amount.  

As the euphoria of 2017 quickly turned into the current fizzling market, many funds with “long-only” strategies have been put under serious pressure. In fact, many cryptocurrency funds have been forced to shut down- at least 9 through the year-to-date according to Bloomberg. A prolonged bear market may see further consolidation in the cryptocurrency fund space, in particular for funds with teams that lack traditional finance expertise. 

As some funds die out, we are seeing more seasoned and legitimate players taking the opportunity to enter the market. Crypto entrepreneur and NZ Edmund Hillary Fellow, Fred Ehrsam has announced he will be starting a crypto fund with ex-Sequoia Capital partner, Matt Huang. This is well-timed, particularly as we see more mature products come to market that will allow funds to actively short the market and deploy more sophisticated strategies.


In the News

On Friday, the Visa card network crashed in the U.K. causing a nationwide meltdown. Twitter was quick to point out that the Bitcoin network has never experienced such an outage.

A hospital in the UK has begun offering treatment to cryptocurrency trading addicts. Stay safe out there folks.

Tron, the tenth largest cryptocurrency by market capitalization, has left the Ethereum blockchain to start its own.

Brunei’s B$10,000 note, currently the most valuable single bill in the world, is worth roughly as much as one bitcoin.

Dan Morehead, the founder of Pantera Capital, continues to recommend purchasing cryptocurrencies as they "are very cheap right now".

President Trump’s new tariffs on steel and aluminium could present a hedge opportunity for cryptocurrency investors.

The Global Times, a Chinese newspaper that focuses on international issues, has run an editorial voicing support for bitcoin.

BitPrime and NEM Foundation announce a partnership.

Why the Bitcoin bubble pop may be good for crypto.


Upcoming Dates

June 21 - Blockchain Summit Auckland 2018


Thanks for your company, stay tuned for next week’s edition of Rehashed.
Freddie Archibald


View a neat infographic showing the 10 Years of Bitcoin History

View previous issue: Rehashed #10 Takeovers and Technology Continue to Take Centre Stage

View next issue: Rehashed #12 The State of the Initial Coin Offering (ICO) Part 1

About the author:

Capital markets to crypto convert. From Christchurch →  Boston → New York, Freddie became intrigued by the potential of the digital asset economy after plucking a book on Bitcoin off a New York library bookshelf in 2016. Her parents are thrilled that she is chasing magic money on the internet.


Disclaimer:  The above references an opinion and is for informational purposes only. The opinions expressed by the author do not represent the opinion of BitPrime.

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