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Jul 13, 2020

Bitcoin Valuation using Dynamic Range NVT Signal

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NVT Signal, or Bitcoin’s “PE Ratio”, is one of the best metrics for identifying over-valuation. However, the drastically changing nature of the Bitcoin network, and movement off-chain, could make traditionally high NVT Signal values relatively less expensive in the future. Using a Dynamic Range NVT Signal allows for continued maturity in the Bitcoin network and ongoing identification of relative over- and under-valuation.

What is “NVT Signal?

NVT Signal (credit: to Willy Woo and Dmitry Kalichkin) is akin to a “PE ratio” for Bitcoin. It can be used to identify when Bitcoin is overbought (expensive) or oversold (cheap). It does this by calculating the ratio of Bitcoin’s market capitalization to its daily on-chain transaction value. The power of NVT is in its ability to put a price against the value that the Bitcoin Network delivers — secure, immutable transactions.

As defined by Dmitry, NVT Signal is calculated as follows:

NVT Signal = Circulating Market Cap / 90 Average On-Chain Transaction Value

However, just having the NVT Signal value isn’t enough. What level indicates Bitcoin is expensive or cheap?

In 2018, Willy Woo proposed NVT Signal values above 150 as overbought and under 45 as oversold. Historically, these figures worked well at identifying local peaks and troughs in Bitcoin’s Price. However, due to the changing nature of the Bitcoin network, a fixed fair value range of 45–150 may not be appropriate in the future.

Bitcoin is Constantly Evolving, and this Impacts its Fair Value

Establishing a Dynamic Range for the NVT Signal’s Fair Value

Bitcoin’s Dynamic Range NVT Signal Fair Value

NVT Signal with Dynamic Range “Fair Value”


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