Bitcoin Risk Management using Network Valuation to Transactions (NVT)

3/29/2018 Chaster C. Johnson, Director of Data Science

First published in Forbes, a contributor named Willy Woo presented the idea of using NVT (network value to transactions ratio) to identify potential price bubbles in Bitcoin. Likened to a P/E ratio for equities, NVT has proven useful in the past for identifying attractive entry points for the flagship digital currency. We have taken the concept one step further and normalized the NVT value using a 2-year trailing average to establish Low, Typical and High NVT ranges.

bitcoin-nvt-ratio

By adding the historic 6-month forward price movement to the chart (the gain or loss you would have experienced over the next 6 months had you invested in Bitcoin on that day), we are noticing predictive power in the NVT data as shown above. Until NVT falls back within a normal range, Bitcoin’s price may continue on its downward trend.