On-chain data does not bode well for Bitcoin as the NVT ratio shows it is still overvalued.
Bitcoin NVT ratio remains high
As analysts pointed out in a CryptoQuant post, BTC is currently overvalued from an on-chain perspective. The “Network Value to Transactions (NVT) ratio” is a metric that measures the ratio of Bitcoin’s market capitalization to its trading volume (both in US dollars).
This ratio determines whether the current value of Bitcoin (i.e. market capitalization) is fair by comparing it to the network’s current ability to trade the coin (trading volume). If the metric has a high value, it means that the price of BTC is high relative to its volume, so the coin may be in a bubble right now. On the other hand, the low value suggests that BTC may be undervalued due to the chain’s high ability to trade the coin (compared to its market cap).
Here is a graph showing the trend of Bitcoin NVT ratio over the past year.
Looks like the metric's value has been pretty high during recent weeks | Source: CryptoQuant
As the graph above highlights, Bitcoin’s NVT ratio surged following the LUNA crash in May of this year and has remained at roughly the same or higher levels ever since. This meant that the value of the coin was increasingly overvalued due to a sharp drop in trading volume across the market, even though the price crashed multiple times during this period.
Even after the FTX crash, which has dealt another big blow to cryptocurrency market capitalization, the indicator has only risen as it recently hit a high of the year. , suggesting that the market is in dire straits in terms of trading volume.
Quants also note that the number of UTXOs that suffered losses (essentially the amount of wallets/investors that suffered losses) increased consistently throughout the bear period.
The metric continues to ride on a constant uptrend | Source: CryptoQuant
Neither of these signs are in Bitcoin’s favour, and could suggest more pain lies ahead for investors. “An expanding bear market could be seen as a potential risk of adding selling pressure,” the analyst explains.
At the time of writing, Bitcoin is trading around $16,800, down 5% over the past week.
The price action in the asset seems to have been stale in the last few days | Source: BTCUSD on TradingView
Featured image of Maxim Hopman on Unsplash.com, chart on TradingView.com, CryptoQuant.com