Is Bitcoin Undervalued or Overvalued? Here is what the NVM ratio says
The Bitcoin Network Value to Metcalfe (NVM) ratio has reached a high of 0.75 recently. Here’s what this tells us about the current BTC market.
Bitcoin NVM ratio has been on the rise lately
As pointed out by an analyst in a CryptoQuant post, the NVM ratio is currently at a 7-month high. The “NVM ratio” is an on-chain indicator that measures the ratio of the log of the Bitcoin market value to 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 participate in some kind of transactional 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 “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 NVM, the active address calculation plays the role of active users.
When the value of this ratio is high, it means that the current price of the asset is relatively high compared to the active addresses, and therefore BTC may be overvalued right now.
On the other hand, low values suggest that there is a high number of users participating on the blockchain, but the price does not reflect this at the moment. Under this trend, the asset can be considered undervalued.
Now, here is a chart showing the trend of the Bitcoin NVM ratio, as well as its 100-day exponential moving average (EMA), over the past few years:
Looks like the value of the metric has been on an overall uptrend recently | Source: CryptoQuant
As shown in the graph above, the Bitcoin NVM ratio had been at values greater than 0.6 throughout the year 2021. Peaks in price coincided with the indicator registering sharp peaks, with the current all-time high price overlapping with the metric exceeding a value of 2.
Interestingly, a peak higher than even the aforementioned ATH was observed in the middle of the mini-bear period of May-July 2021. According to the quant, this large increase in the indicator occurred due to the special circumstances caused by China’s mining ban.
However, in 2022, as the bear market arrived, the Bitcoin NVM ratio began to decline and broke below the 0.6 mark. During this downtrend, the metric also fell below its 100-day EMA.
But things changed quickly with the latest rise in price, as the indicator quickly jumped from a low of 0.26 to 0.6. The rise in the ratio has continued along with the recent rally, and the metric has now reached a 7-month high of 0.75.
Although the calculation may have broken out of the undervalued zone below 0.6, it does not mean that the asset is now overvalued. From previous cases, it is clear that the tops have taken place at much higher values than what the NVM ratio has shown recently, which suggests that the rally may have some potential to go even further.
BTC price
At the time of writing, Bitcoin is trading around $27,900, up 1% in the past week.
BTC has gone stale in recent days | Source: BTCUSD on TradingView
Featured Image by Kanchanara at Unsplash.com, Charts by TradingView.com, CryptoQuant.com
