NVT Ratio Signals Overvalued BTC
The network value to transaction (NVT) ratio of Bitcoin, which has been staying at a high level since the beginning of the year, has signaled its overvaluation, according to Yonhap Infomax.
However, some argue that this will not necessarily lead to a crypto winter, considering that the nature of Bitcoin as an asset has changed and there is no sign of overheating in other indicators.
Price and NVT ratio correlation
Yonhap Infomax found out that the correlation between the NVT ratio and the price of Bitcoin over the past six years is -0.35. A value of 1 represents a completely positive correlation, while a value of -1 represents a completely negative correlation.
Extending this period to 2010 makes the correlation close to 0, but during the early years, NVT ratios showed high volatility, shooting up to four digits. Such a high volatility doesn’t suggest much correlation. Until 2021, there was a high correlation of up to -0.44.
The NVT ratio is calculated by dividing the market cap by the transacted volume. Conceptually, it is similar to the price-to-earnings ratio for the stock market.
In 2017, when the crypto market was bullish, the average Bitcoin NVT ratio was 7.3. This number became 8.7 in 2021 when the market experienced a similar pattern. In retrospect, single-digit NVT ratios usually hint at bullish markets.
This year so far, Bitcoin has been relatively overvalued, given that the average NVT ratio is 23.6.
BTC price recovery
When the crypto market sentiment lost its confidence due to the FTX bankruptcy last year, the price of Bitcoin went down to $15,000. It later recovered to the near $30,000 level. The Bitcoin price once had reached an all-time high in 2021, surpassing $65,000.
The years that manifested similar patterns as this year were 2018 and 2019. In those years, the Bitcoin NVT ratio plateaued around 20.
Uncertain outlook
The NVT ratio itself could point to a possible crypto winter, but researchers say it’s hard to say.
Jang Kyung-pil, a research analyst at crypto data platform Xangle, said that people now consider Bitcoin as a store of value rather than a means of transactions, pointing out that BTC’s market value to realized value (MVRV) ratio has hit the bottom at 0.84 and now reached 1.4. According to Jang, MVRV values under 1 indicate undervaluation and those above 3 indicate overvaluation.
Jung Seok-moon, head of the research center at crypto exchange Korbit, said that the current NVT ratio signals BTC overvaluation. He added that the Fed is likely to turn dovish in its monetary policy, which would prompt a strong BTC uptrend.
