Is Bitcoin Undervalued Or Overvalued? Here’s What NVM Ratio Says
March 27 2023 - 11:00AM
NEWSBTC
The Bitcoin Network Value to Metcalfe (NVM) ratio has hit a high of
0.75 recently. Here’s what this tells us about the current BTC
market. Bitcoin NVM Ratio Has Been Riding An Uptrend Recently As
pointed out by an analyst in a CryptoQuant post, the NVM ratio is
currently at a 7-month peak. The “NVM ratio” is an on-chain
indicator that measures the ratio between the log of the Bitcoin
market cap and the square of the asset’s daily active addresses.
The “daily active addresses” here is a metric that measures the
total amount of unique BTC addresses that are taking part in some
kind of transaction activity on the blockchain each day. This
indicator includes both senders and receivers in this calculation.
The NVM ratio is based on Metcalfe’s law (hence the “Metcalfe” in
its full form), according to which the value of any network is
proportional to the square of the active users. In the case of the
NVM, the active addresses metric plays the role of active users.
When the value of this ratio is high, it means the current price of
the asset is relatively high compared to the active addresses, and
hence, BTC may be overvalued right now. Related Reading: Why This
Economics Professor Thinks Bitcoin Is Worthless On the other hand,
low values suggest there are a high number of users participating
on the blockchain, but the price isn’t reflecting this at the
moment. During this trend, the asset may be considered undervalued.
Now, here is a chart that shows the trend in the Bitcoin NVM ratio,
as well as its 100-day exponential moving average (EMA), over the
last few years: Looks like the value of the metric has been on an
overall uptrend recently | Source: CryptoQuant As displayed in the
above graph, the Bitcoin NVM ratio had been at values greater than
0.6 throughout the year 2021. Tops in the price coincided with the
indicator registering sharp spikes, with the current all-time high
price overlapping with the metric surpassing a value of 2.
Interestingly, a spike higher than even the aforementioned ATH was
observed in the middle of the May-July 2021 mini-bear period.
According to the quant, this large surge in the indicator took
place because of the special circumstances caused by China’s mining
ban. In 2022, however, as the bear market arrived, the Bitcoin NVM
ratio started to go down and breached below the 0.6 mark. During
this downtrend, the metric also dropped below its 100-day EMA. But
things changed fast with the latest rally in the price, as the
indicator quickly jumped from a low value of 0.26 to 0.6. The
uptrend in the ratio has continued along with the rally recently,
and the metric has now hit a 7-month high of 0.75. Related Reading:
Elon Musk Points Out ‘Most Serious Looming Issue’ In Banking,
Bitcoin To Moon? While the metric may have broken out of the
undervalued zone of below 0.6, it doesn’t mean that the asset is
now overvalued. From past instances, it’s clear that the tops have
taken place at far higher values than what the NVM ratio has
displayed recently, suggesting that the rally may have some
potential to go further still. BTC Price At the time of writing,
Bitcoin is trading around $27,900, up 1% in the last week. BTC has
gone stale in recent days | Source: BTCUSD on TradingView Featured
image from Kanchanara on Unsplash.com, charts from TradingView.com,
CryptoQuant.com
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