Daily Bit #180: All About the Ratio
By: Daily Bit
Tags: Cryptocurrency, Crypto, Cryptocurrency Investment, Blockchain, Bitcoin

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All About the Ratio

Let’s talk ratios, shall we? Not more relatable ones such as the proper guac-to-chip volume, or even Price-Earnings for our business-minded readers, but rather Bitcoin’s NVT Ratio — otherwise known as Network Value to Transactions Ratio.

First, some formalities. NVT was introduced by data-driven cryptoasset researcher Willy Woo in February 2017. Per Woo’s site, Woobull, the formula “is calculated by dividing Bitcoin’s network value (market cap) by the daily USD volume transmitted through the blockchain.” In terms of bitcoin, the formula represents bitcoin’s total supply divided by daily BTC value processed.

The NVT Ratio (brown) is displayed alongside Bitcoin’s price (yellow) below:

If you didn’t already notice, crypto is *in* a bear market — and millions of folks are wondering where rock bottom is. A number of theories have been pitched by technical chartists and analysts as to when (and where) that will happen… though truthfully nobody knows. Guessing is Fool’s Gold.

However, bitcoin’s NVT Ratio piqued our interest. Take another look at the chart. Notice any patterns, specifically when the NVT ratio is north of 100?

Willy Woo broke it down on Twitter yesterday (peep it here). If you walk away from this email with anything, walk away with these gems:

NVT is late to the party in detecting market tops/corrections (price was falling for several months before NVT peaked).

NVT returns to it’s normal range (~30 to ~98) before the next accumulation phase.

If price action and the NVT Ratio play out similarly to 2014, bitcoin is months away from a bottom.

On NVT, fundamentals, and technical analysis

By traditional standards, ~8 years of data is far from enough information to green light an indicator for a particular trading system. Backtesting usually demands decades of historical data.

Yet… that’s all we’ve got. Folks need to start somewhere when mapping out trading strategies. There are several fundamentals that get investors through the door, but let’s be honest — they’re slapped onto every token whether or not they are deserving of the label.

With fundamental analysis less sturdy, technical analysis (TA) has more weight. Quoting Michael Masters, founder of The Marlin Fund (~86% annual return over 5 years) from Stock Market Wizards, “We use technical analysis not because we think it means something, but because other people think it means something.”

And as Alex Krüger notes, correlations matter — though it will likely take time to take effect:

Yet again… you gotta start somewhere.

And Woo’s NVT Ratio could just be the start of more hardened metrics for valuing cryptoassets. Again referring to Woobull, NVT is similar to the PE Ratio for equities. “When Bitcoin’s NVT is high, it indicates that is network valuation is outstripping the value being transmitted on its payment network”

Woo has several other Bitcoin investment and network charts on his site. Well worth poking around for anyone looking for more data-driven information. And if you’re on Twitter, give Willy a follow here.