NVT Ratio - The On-Chain P/E Ratio
What is NVT Ratio
NVT (Network Value to Transactions) ratio is calculated by dividing a blockchain network's Market Cap (Network Value) by its daily on-chain transaction volume (in USD). It's similar to the P/E (Price to Earnings) ratio used in traditional finance for stocks.
NVT = Market Cap / Daily On-chain Transaction Volume (USD)
Just as P/E ratio shows "how many times the stock price exceeds company earnings," NVT shows "how many times the network value exceeds network usage."
Calculation Method and Components
Network Value (Market Cap)
This is the standard market cap calculated by multiplying Bitcoin's current price by its circulating supply.
Daily On-chain Transaction Volume
This is the USD value of coins moved on the blockchain in a day. Importantly, internal exchange transactions are not included. Only actual transfers recorded on-chain are counted.
Calculation Example
| Item | Value |
|---|---|
| Market Cap | $1,500,000,000,000 |
| Daily On-chain Volume | $15,000,000,000 |
| NVT | 100 |
NVT Interpretation
High NVT
A high NVT means that actual transaction activity is low relative to network value (market cap).
- Market cap excessive relative to volume: Price may have gotten ahead of actual network utilization
- Sign of speculative bubble: Price may have risen from speculative rather than actual usage demand
- Strong HODL behavior: NVT also rises when coins aren't moving and are being held long-term
Low NVT
A low NVT means active trading is occurring relative to market cap.
- Undervalued relative to network utilization: Active usage relative to value
- Sign of healthy growth: Price increase supported by actual usage growth
- Large selling in progress: Volume can spike during capitulation selling, lowering NVT, so context verification is needed
NVT Range Guide
| NVT Range | Interpretation | Action |
|---|---|---|
| Above 150 | Extreme overvaluation | Strong sell signal |
| 100 - 150 | Overvaluation | Caution needed |
| 50 - 100 | Fair range | Neutral |
| Below 50 | Potentially undervalued | Look for buying opportunities |
These values are Bitcoin-specific; other cryptocurrencies may have different ranges depending on network characteristics.
NVT Signal
Limitations of Basic NVT
Daily transaction volume is highly volatile. A single day's abnormal transactions (large exchange movements, whale activity, etc.) can significantly distort NVT.
Introduction of NVT Signal
NVT Signal, developed by Willy Woo, solves this problem by applying a 90-day moving average to transaction volume.
NVT Signal = Market Cap / MA(90, Daily Transaction Volume)
| Comparison | NVT Ratio | NVT Signal |
|---|---|---|
| Volume | Same-day volume | 90-day moving average |
| Response Speed | Fast (noisy) | Slow (stable) |
| Use Case | Short-term fluctuation detection | Trend assessment |
| Reliability | Low due to noise | High |
NVT Signal captures trend reversal signals earlier and more reliably than the original NVT.
Comparison with Stock P/E Ratio
Comparing NVT to stock P/E ratios helps with intuitive understanding.
| Item | P/E Ratio (Stocks) | NVT Ratio (Crypto) |
|---|---|---|
| Numerator | Market Cap | Market Cap |
| Denominator | Net Earnings | On-chain Transaction Volume |
| High Value | Growth stock or overvalued | Speculative or strong HODL |
| Low Value | Value stock or earnings growth | Active usage or undervalued |
| Limitation | Earnings can be manipulated | Volume definition is ambiguous |
However, there's an important difference. While a company's net earnings directly contribute to enterprise value, the degree to which on-chain transaction volume contributes to network value is debatable.
Historical Patterns
2017 Bubble
When Bitcoin reached $20,000 in December 2017, NVT became extremely high. Prices surged but actual network usage didn't support it, followed by a sharp decline.
2020-2021 Bull Market
NVT was relatively low at the beginning of the 2020 bull market. This meant price increases were accompanied by actual network activity growth. As we moved into late 2021, NVT rose and warned of overheating.
Bear Market Bottoms
At bear market lows, NVT can temporarily become very low. This is because large volumes occur during capitulation selling, and can be interpreted as a bottom signal.
Practical Application
Buy Decision
- NVT Signal drops below 50
- MVRV below 1.0
- Exchange reserves in declining trend
- Moving averages approaching golden cross
This combination is a strong buy signal indicating "accumulation is underway in an undervalued network."
Sell Decision
- NVT Signal rises above 150
- MVRV above 3.5
- Exchange inflows surge
- RSI in overbought territory
Limitations and Considerations
Ambiguity of Volume Definition
The definition of "on-chain transaction volume" can vary by platform. Values differ depending on whether change outputs are included or whether internal exchange movements are filtered out.
Distortion from HODL Behavior
As Bitcoin is increasingly recognized as a long-term store of value, on-chain transaction volume tends to structurally decrease. In this case, NVT naturally rises, and applying past NVT standards directly may lead to incorrectly judging the market as permanently overvalued.
Layer 2 Solutions
Transactions on Layer 2 solutions like Lightning Network aren't recorded on the main chain and therefore aren't reflected in NVT. As Layer 2 usage increases, NVT will under-represent actual network utilization.
Single Indicator Limitation
NVT is an indicator showing the macroscopic state of the overall market and is difficult to use alone to capture precise trading timing. It should be used in combination with MVRV, SOPR, technical analysis, and other tools.
Summary
NVT ratio is an "on-chain P/E ratio" that divides market cap by daily on-chain transaction volume to assess whether network value is appropriate relative to actual usage. NVT Signal (with 90-day moving average applied) reduces noise for more stable trend assessment. Due to HODL culture and Layer 2 expansion, baseline values may gradually change, so it's advisable to use it comprehensively alongside other indicators like MVRV and exchange flows.
Next article: SOPR - Realized Profits and Losses