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Bitcoin

Is Bitcoin Undervalued Or Overvalued? Here’s What NVM Ratio Says

Hououin Kyouma by Hououin Kyouma
2 months ago
in Bitcoin
Reading Time: 3 mins read

The Bitcoin Network Value to Metcalfe (NVM) ratio has hit a high of 0.75 recently. Here’s what this tells us about the current BTC market.

Bitcoin NVM Ratio Has Been Riding An Uptrend Recently

As pointed out by an analyst in a CryptoQuant post, the NVM ratio is currently at a 7-month peak. The “NVM ratio” is an on-chain indicator that measures the ratio between the log of the Bitcoin market cap and 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 are taking part in some kind of transaction 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 the “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 the NVM, the active addresses metric plays the role of active users.

When the value of this ratio is high, it means the current price of the asset is relatively high compared to the active addresses, and hence, BTC may be overvalued right now.

Related Reading: Why This Economics Professor Thinks Bitcoin Is Worthless

On the other hand, low values suggest there are a high number of users participating on the blockchain, but the price isn’t reflecting this at the moment. During this trend, the asset may be considered undervalued.

Now, here is a chart that shows the trend in the Bitcoin NVM ratio, as well as its 100-day exponential moving average (EMA), over the last few years:

Bitcoin NVM Ratio

Looks like the value of the metric has been on an overall uptrend recently | Source: CryptoQuant

As displayed in the above graph, the Bitcoin NVM ratio had been at values greater than 0.6 throughout the year 2021. Tops in the price coincided with the indicator registering sharp spikes, with the current all-time high price overlapping with the metric surpassing a value of 2.

Interestingly, a spike higher than even the aforementioned ATH was observed in the middle of the May-July 2021 mini-bear period. According to the quant, this large surge in the indicator took place because of the special circumstances caused by China’s mining ban.

In 2022, however, as the bear market arrived, the Bitcoin NVM ratio started to go down and breached below the 0.6 mark. During this downtrend, the metric also dropped below its 100-day EMA.

But things changed fast with the latest rally in the price, as the indicator quickly jumped from a low value of 0.26 to 0.6. The uptrend in the ratio has continued along with the rally recently, and the metric has now hit a 7-month high of 0.75.

Related Reading: Elon Musk Points Out ‘Most Serious Looming Issue’ In Banking, Bitcoin To Moon?

While the metric may have broken out of the undervalued zone of below 0.6, it doesn’t mean that the asset is now overvalued. From past instances, it’s clear that the tops have taken place at far higher values than what the NVM ratio has displayed recently, suggesting that the rally may have some potential to go further still.

BTC Price

At the time of writing, Bitcoin is trading around $27,900, up 1% in the last week.

Bitcoin Price Chart

BTC has gone stale in recent days | Source: BTCUSD on TradingView
Featured image from Kanchanara on Unsplash.com, charts from TradingView.com, CryptoQuant.com
Tags: bitcoinBitcoin NVM RatioBitcoin OvervaluedBitcoin Undervaluedbtcbtcusd
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Hououin Kyouma

Hououin Kyouma

Kyouma is currently a senior writer at NewsBTC and has been attached to the website since June 14, 2021. Kyouma has been writing for many years, first as a hobbyist and later as a freelancer. He obtained a bachelor's in physics in 2022 and is planning on starting a master's in the same field in the near future. Kyouma is enthusiastic about the cryptocurrency industry and holds an active interest in on-chain analysis. His hobbies include gaming, anime, and football. You can find Kyouma on Twitter at @Kyouma29.

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