The Bitcoin NVT signal data shows perspectives that are in contradiction with one another over what may occur to the current BTC price range.
As one gauge reaches its greatest levels in seven months, the price action of bitcoin may have reached “unsustainably high” levels.
Data from an on-chain analytics company called Glassnode indicates that on December 21, the network value to transaction (NVT) signal for bitcoin hit levels that had not been observed since April of this year.
Bitcoin transactions may not be able to maintain a price of $17,000 per BTC.
Willy Woo, a statistician, is responsible for the creation of NVT, which quantifies, in essence, the proportion of on-chain activity to the price of Bitcoin.
Instead of using raw data, the NVT signal alters its readings by using a 90-day moving average of daily transaction volume. Glassnode claims that this “improves” NVT and enables it “to better perform as a leading indicator.”
The NVT signal reached 18.58 on December 21, a level that had not been seen since the closing days of April, when Bitcoin was falling in price. At that time, the Bitcoin to US Dollar exchange rate was little over $40,000.
To cut a long story short, here we are at the end of the year, and NVT is sounding the alarm. Despite the fact that Bitcoin is currently valued at less than half of what it was in April, network volume has decreased to such an extent that even the present valuation of $16,800 may not be sustainable.
On his analytics website, Woo explained the following in a discussion of the NVT ratio:
“When Bitcoin’s NVT is high, it indicates that its network valuation is outstripping the value being transmitted on its payment network. This can take place when the network is experiencing rapid growth and investors are valuing it as a high return investment, or it can take place when the price is in an unsustainable bubble.”
A comparison of the NVT signals in question
NVT, on the other hand, comes with one major caveat. Because of the dynamic structure of the Bitcoin network, which is continually shifting, more and more transactions are taking place off-chain, as has been pointed out by a number of observers, including Woo.
In related news, the price of bitcoin is unable to retake $17,000 as the market is “not prepared” for a downturn.
This, in conjunction with a number of other occurrences, has an effect on the data of on-chain transactions, to the point that NVT may offer an unduly pessimistic picture of value-to-transactions.
This problem is solved by adding a new component to the indicator known as the dynamic range NVT (DRNVT). DRNVT is a method that was developed by Charles Edwards, the Chief Executive Officer of the asset management company Capriole. It measures the amount that NVT varies from the mean by use standard deviations. In addition to this, it provides value zones that make it much simpler to locate entry points depending on the information that it reads.
Data from TradingView demonstrates that DRNVT is currently within that value zone, which is a significant departure from the predictions of the usual model.
Nevertheless, in an introduction to the indicator that was published in 2019, Edwards issued the following caution: “The NVT Signal with a dynamic fair value range must be utilised with care.”
As is the case with all markets, the price of an item may remain “expensive” or “cheap” for extended periods of time, and it may even go on to become even more expensive or cheaper.
