Setting the table
A week ago, noted cryptocurrency analyst, Willy Woo, put out an article stating that he expected bitcoin to slide from its current level to between $5500 — $5700. The reason provided was that the NVT ratio was still too high and that an increase in blockchain transaction volume (in $USD) was needed to justify the current price, or a commensurate market price decrease was needed to reconcile the difference.
On the contrary, a few days later, Fundstrat’s Managing Director, Robert Sluymer, voiced his optimism for BTC’s resumed bull trend sooner rather than later due to BTC’s strong support and oversold RSI levels around the $7000 level.
Does NVT Measure Valuation or Velocity?
As mentioned in our post, Measuring Token Velocity: NVT Ratio, we assert that if the Quantity Theory of Money equation is sufficient for valuing blockchain networks, then the NVT Ratio is identical to token velocity. Furthermore, we asserted that when velocity spikes (like in 2018) it usually precedes a bear market, which is needed to purge the “irrational exuberance” from the previous bull market.
Assuming historical norms hold, using a 30 day moving average, the “normal” range for BTC’s NVT Ratio (velocity) is between 10 and 20. Anything above 20 is getting frothy and anything below 10 is approaching undervalued(*unless it is coming off the back of an exuberant bull market).
Additionally, what makes the NVT Ratio (velocity) useful is that it can be broken apart via basic arithmetic to scenario test potential price ranges for each variable — network value (market cap) and blockchain transaction volume blockchain (in $USD).
Unpacking the NVT Equation
Using the NVT formula, we performed three scenario analyses to triangulate the potential range of prices for BTC assuming that the current “gap” between market cap and blockchain transaction volume will need to close towards a historically “normal” range. This adjustment will need to occur via market cap decreases or blockchain transaction volume increases.
Our scenario analysis uses blockchain transaction volume and market cap from June 3, 2018 — $4.4B and $130.3B, respectively. The equations used are:
NVT = Market Cap (MktCap) / Transaction Volume (TxVol)
TxVol @NVT Scenario = Current MkCap / NVT Scenario
TxVol Gap = Current TxVol — TxVol @NVT Scenario
MkCap @NVT Scenario = Current TxVol * NVT Scenario
MktCap Decrease = MktCap @NVT Scenario — Current Market Cap
Price per BTC = MktCap @NVT Scenario / Current Supply
Using the following scenarios of the NVT Ratio equaling 10, 15, and 20, we see that transaction volume would need to increase markedly to justify BTC’s current price ($8.5B, $4.2B, and $2.0B, respectively).
Or, BTC’s current market cap would have to shrink demonstrably to reach “normal” NVT Ratio levels of 10, 15, and 20 ($85.5B, $63.1B, and $40.7B, respectively).
- The most conservative NVT Ratio of 10 and subsequent worst price scenario for BTC is $2,618.51.
- The medium NVT Ratio of 15 and second worst price scenario for BTC is $3,927.76.
- The least conservative NVT Ratio of 20 and best price scenario for BTC is $5,237.02.
There are two major caveats to this analysis:
- Market cap and blockchain transaction volume are circular feedback loops, thus influence one another. So, this framework is inherently flawed and hard to quantify with high confidence.
- New BTC coins are issued daily, so the hypothesized price per BTC under our scenarios will constantly be changing, which again limits quantifiable confidence.
However, using the analysis tools available, we agree with both market commentators given each perspective appears to be validated from the NVT Ratio (velocity) mathematics and price charts. However, given the fundamentals tend to win out over the long term, price must make a solid push upward sooner rather than later, with significant buying volume, in order to positively influence blockchain transaction volume growth, sufficient to close the NVT Ratio gap and lower the NVT Ratio within a “normal” range.
Disclaimer: This analysis has been designed for informational and educational purposes only. Readers are advised to conduct their own independent research into individual assets before making a purchase decision.