COULD THE NVT BE THE BEST INDICATOR OF BITCOIN PRICE DIRECTION TO DATE?

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For those of you who have never heard of the NVT signal or don’t understand it, it stands for Network value transaction and is a calculated ratio of the market cap of bitcoin and the transaction volume on the bitcoin network.

Here’s an example

If the market cap of bitcoin was 100b and the network transaction volume (in a 24hr period) was say 10b, then that gives us a ratio of 10:1 to plot on the NVT scale.

The number by itself doesn’t really mean a lot to anyone, but if we plot this into a scale using historical data we can compare it to any other given day to determine the market’s reaction to these statistics.

Although this is relatively unconventional data to analyze in the crypto space it’s arguably the closest data we can get to finding the “intrinsic value” of a “not for profit” cryptocurrency. This very same method has been used in equity markets for some time now to determine the underline value of an asset or company using what they call P/E ratio or price/earnings.

Here’s another example..

If Company A’s share is valued at $100 USD and the performance or earnings of company A is $100m USD and there is currently 10m shares available, then that means each share earning was $10 or 10:1 P/E ($100 per share / $10 earning).

This data can then be used to determine the shares value using historical data and potentially predict future performance.

Getting a little off track but its to show you the correlation of where this data derives from…

Back to NVT…

Historically bitcoins price reaction to high NVT levels have proven quite accurate to a downfall, significant downtrend or simply kicking off a long term bear market.

The best chart to backtest this strategy on would be BTC/USD Bitstamp using a logarithmic scale as it has the most historical data to work with, go and check for your self using the NVT signal found in the public library of indicators (created by Gliderfund).

The theory is that when the volume of transactions (valued in USD) is low compared to the market cap of bitcoin, we have a high NVT signal signaling an “overvalued” intrinsic value and vice versa at any given market cap of bitcoin. If the value of transactions is really high the ratio will be lower telling us that the bitcoin network is somewhat undervalued and we could see a rise in price.

Anyway, now that you may have your head wrapped around the indicator and what it all means let’s take a look at the Bitstamp charts previous reaction to the NVT signal.

My Personal Interpretation Of This Chart..

Is that it shows that whenever the NVT is above the medium and signals overvalued we are hit with a decent sell-off, followed by a short-mid term bear market, and the same when the NVT is low and signals green or undervalued we are followed with a nice bull market.

Simply following these half a dozen signals would have netted astronomical profits since late 2012.
(note I’m on the weekly charts, however the daily prints the same signals and the 4hr is also very accurate.)

Now, let’s fast forward to the last few years and let’s face it, most of you would be familiar with this chart here.

What Can We See Here?

You can see that we’ve have had a few of the same signals over the last few years all accurately predicting a downturn. But let’s pay a little more attention to the moving avg of the NVT signal and the way I like to interpret the indicator is the high ratio in the red is sort of like the loading of the short cannon, and the lagged cross on the moving average is the trigger to get the market moving.

A few times we have loaded the cannon and although the market has reacted to the high NVT signal it hasn’t kicked off a huge downtrend as the moving average almost acts as a level of support.

However, once we have that lagged cross on the moving avg it’s all over red rover and its time for the bear to come back out of his cave beating his chest.

The cross to the upside also signals a nice uptrend however we haven’t been in the green on the NVT since early Jan 2016…..this tells me that using this ratio bitcoin is still well overvalued on its intrinsic value.

There are lots of other factors that can come into play and quite possibly as Bitcoin matures the NVT signal could drift further and further away from being accurate but as it stands it hasn’t printed a false signal in the last almost 8 years of data we have to work with on Bitstamp.

How do we get a low NVT signal?

It’s simple really and what the NVT is really looking for in its statistic data…adoption, the theory is the more people using the network for what it is (every day P2P transactions) the higher the intrinsic value of bitcoin will be and we can see the price of bitcoin increase while maintaining that NVT ratio, if the price of bitcoin is high and no one is using it, then its worth too much… it’s that simple.

I’ll leave you with one last bit of info and what I currently see on the charts, as I also use a range of trading algorithms and my own trading strategies.

Where to From Here? (That’s the BIG Question…)

We believe the current market is very exhausted and that move from 4000-5000 was not a natural organic move for the market to sustain. 

I’m seeing exhaustion on trends from 4hr charts upwards and don’t think this trend will continue to hold much longer, not to mention all the uncertainty around the Bitfinex/tether scandal going on right now. 

We have already seen bearish divergence on the CCI with declining trading volume and higher price action, not to mention using Bitfinex shorts and longs as reference to overall margin traders sentiment and the shorts are very much in front of longs right now with margin held in BTC. 

For these few reasons alone I’m pretty bearish on the next big move for BTC most likely going to the downside.

I still wouldn’t be surprised if the NVT signal bounces off the moving avg on the weekly and bumps us towards the supply zone around 6000-6400 before seeing a heavy sell-off back down to the last level of demand created just below 4k or lower….. We’ve had targets of 2800-3000 for over 8 months now and we came damn close and I don’t really see them off the cards just yet but not holding my breath trying to catch the bottom.