Low bitcoin volume triggers BTC price alert as metric hits ‘value zone’
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Bitcoin (BTC) price action could be “unsustainably high” as a metric hits its highest level in seven months.
Data from an on-chain analytics company glass node confirms that Bitcoin’s network value-to-transaction (NVT) signal reached levels not seen since April on Dec. 21.
Bitcoin activity may not support the $17,000 BTC price
Developed by statistician Willy Woo, NVT essentially measures the relationship between on-chain activity and Bitcoin price.
The NVT signal modifies its readings by using a 90-day rolling average of daily transaction volume instead of raw data, which Glassnode says NVT “improves” and allows it to “act better as a leading indicator.”
On December 21, the NVT signal touched 18.58, a level last seen when it declined in the last few days of April. Back then, BTC/USD was trading at just over $40,000.
Fast forward to the end of the year and NVT displays a warning. Despite bitcoin being worth less than 50% of its April levels, network volume has declined so much that even the current $16,800 valuation may not hold up.
As Woo explained in a description of the NVT ratio on his analytics page Woobull:
“When Bitcoin’s NVT is high, it indicates that its network valuation is outperforming the value transmitted through its payment network. This can happen when the network is growing rapidly and investors view it as a high return investment, or alternatively when the price is in an unsustainable bubble.”
Annotated chart of the Bitcoin NVT signal. Source: Glassnode/Twitter
A history of two NVT signals
However, NVT has a catch. As various analysts, including Woo, note, the ever-changing nature of the Bitcoin network means transactions, for example, are increasingly moving off-chain.
Related: Bitcoin price fails to reclaim $17,000 as market is ‘unprepared’ for a drop
Along with other phenomena, this affects the on-chain transaction data in that the NVT may be trending down but still paints an overly bearish picture of the value for transactions.
This is addressed by an addition to the indicator called Dynamic Range NVT (DRNVT). Developed by Charles Edwards, CEO of wealth manager Capriole, DRNVT uses standard deviations to measure NVT deviation from the mean. It also provides value zones for easier determination of entry points based on its readings.
DRNVT is currently in this value zone, as shown by data from TradingView – a key contrast to the standard model.
“The NVT signal with a dynamic fair value range needs to be used with caution,” Edwards nonetheless warned in a 2019 introduction to the indicator.
“As with all markets, an asset may remain ‘expensive’ or ‘cheap’ for extended periods of time or for extended periods of time and continue to appreciate or depreciate.”
BTC/USD 1-day candlestick chart (Bitstamp) with NVT signal with dynamic range. Source: TradingView
The views, thoughts, and opinions expressed herein are solely those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
