NVT Ratio

Network Value to Transaction (NVT) Ratio describes the relationship between market cap and transfer volumes.

Indicator Overview

Network Value to Transactions (NVT) Ratio describes the relationship between market cap and transfer volume. Per Willy Woo, its creator, NVT can be considered analogous to the PE (price to earnings) Ratio used in equity markets.
Another viewpoint for NVT is that it is the inverse of monetary velocity, comparing two of Bitcoin's primary value propositions:
• Store of Value: Market Cap
• Settlement/Payments Network: Transfer Volume
Via the NVT Ratio, users can witness the relative balance between these two components , with trends and extreme values providing insights via the following general framework:
• A high NVT Ratio (or uptrend) indicates that investors are pricing Bitcoin at a premium, as Market Cap growth outpaces utilisation of on-chain transaction volume and value settlement. High NVT Ratio values have historically coincided with market tops and periods of overvaluation.
• A low NVT Ratio (or downtrend) indicates that investors are pricing Bitcoin at a discount, as on-chain Transfer Volume and network utilisation outpaces Market Cap growth. Low NVT Ratio values have historically been periods where it is advantageous to accumulate, and often coincide with market bottoms and trending bull markets.
• A constant NVT Ratio (or sideways trend) indicates that the current growth trend of both Market Cap and Transfer Volume are in equilibrium, suggesting the current market trend is sustainable. Such states are often reached during the early to mid phases of a bullish or bearish trend where the market direction is well established.

How is it measured?

NVT is calculated by dividing market cap (in USD) by daily transfer volume (in USD).
\begin{align*} \textrm{NVT Ratio} &= \frac{\textrm{Market Cap}~{\color{gray}{[\textrm{USD}]}}}{\textrm{Transaction Volume}~{\color{gray}{[\textrm{USD}]}}} \\[0.5em] &= \frac{ \textrm{value} \cdot \textrm{price}~{\color{gray}{[\textrm{USD}]}}~{\color{gray}{\textrm{(of all UTXOs)}}} }{ \textrm{value} \cdot \textrm{price}~{\color{gray}{[\textrm{USD}]}}~{\color{gray}{\textrm{(of all spent outputs)}}} } \end{align*}

User Guide

NVT was one of the first developed metrics in on-chain tooling, and ties together two basic pieces: value and utility. Bitcoin is not only a store of value, but also a payments and value settlement network. The NVT Ratio attempts to model the balance and divergences between network value assigned my the market, and the utility it brings to users in transactional throughput.
An important note in interpretation of the NVT is related to how the Bitcoin network usage and market pricing has and will continue to change over time. As technology advances (e.g. lightning network), narratives shift, and coin price rises over time, direct comparison of NVT values in 2013 to those in 2021 are unlikely to be one-to-one. As Bitcoin experiences monetisation and adoption, the prevalence of coin holders using it as a payment network versus a long term store of value has changed. It is therefore advised that absolute values of NVT be compared to market cycles of similar maturity, and that the trend direction be assigned greater weight in analysis than the absolute value.
As a result, it is often advantageous to apply a moving average to NVT to observe broader trends. The chart below demonstrates how despite a rising floor value of NVT over time (which is theoretically bearish) requires additional context of the changing Bitcoin market dynamic to fully appreciate.

Indicator Signals

The signal NVT provides is generally easy to appreciate, and this simplicity has made it a staple within the on-chain space. NVT values naturally vary on a daily basis, but the focus within will be solely on high and low NVT values:

High Values and Uptrends:

• Signal: Bearish, declining fundamentals
• Description: Network valuation is outpacing value transferred on-chain. When value outpaces utility, it suggests declining user demand for value settlement, and a potential overvaluation.

Low Values and Downtrends:

• Signal: Bullish, improving fundamentals
• Description: Value transferred on-chain is outpacing network valuation. When utility leads value appreciation, it suggests more users are entering, larger value is being settled, and may signal undervaluation.
• Signal: Market continuation, sustainable equilibrium
• Description: Growth in network valuation and value transferred on-chain is in equilibrium and growing at an equivalent pace. This generally signals the prevailing market trend is sustainable and likely to persist.

Variations

NVT Signal

NVT Signal (NVTS) is a modified version of the original NVT Ratio. It uses a 90 day moving average of the daily transaction volume in the denominator instead of the raw daily transaction volume.

Velocity

Velocity is a measure of how quickly units are circulating in the network, and is calculated by dividing the on-chain transaction volume (in USD) by the market cap (i.e. the inverse of the NVT Ratio).

Coined By

Willy Woo (February 2017)

Further Resources

Willy Woo - Bitcoin NVT Ratio