NVT Ratio: On-Chain Valuation Explained Simply

What is the NVT ratio? It divides the market value of all bitcoin by the dollar value moved on the blockchain each day. Willy Woo called it "bitcoin's price-to-earnings ratio" in 2017: when the price rises much faster than the network's use, the NVT ratio is high and bitcoin may be overheated. As a valuation signal it is weaker than its reputation, because a growing share of trading no longer happens on the blockchain at all.

Most valuation models look only at the price. The NVT ratio was one of the first metrics to look at the blockchain instead and ask: is the network used as heavily as its price claims? That puts it in the family of on-chain metrics, together with MVRV, SOPR, HODL Waves and Dormancy Flow. For an overview of all well-known price models, see Bitcoin price models compared.

What the NVT ratio measures: bitcoin's P/E

With a stock you compare the price with the earnings. A price-to-earnings ratio of 40 means you pay 40 years of profit for the company. If the P/E is much higher than usual, the market either expects strong growth or the stock is too expensive.

Bitcoin has no earnings. What it has is a network over which value is transferred. Willy Woo, an Australian on-chain analyst, therefore used the daily transaction volume as a stand-in for earnings:

• Network Value (N) is the market value of all bitcoin, that is, price × coins in circulation.
• Transaction Value (T) is the dollar value of all bitcoin that change hands on the blockchain in a day.

The idea behind it: the value of a payment network should, in the long run, grow with the value it carries. If the price runs away from the volume, the market is buying expectations rather than use. If the volume runs ahead of the price, the network is used more heavily than its price reflects.

Where the metric comes from: Woo, Burniske, Kalichkin

Woo first mentioned the metric on Twitter in February 2017 and explained it in autumn 2017 in a Forbes contribution titled "Is Bitcoin In A Bubble? Check The NVT Ratio". Around the same time, Chris Burniske worked with a similar ratio, using the velocity of money to value crypto assets.

Woo's observation: in the bubbles of 2011 and early 2013, the NVT ratio shot well above its usual range, and large corrections followed. In price rises carried by growing use, it stayed within the normal band.

In February 2018, Dmitry Kalichkin of Cryptolab Capital published "Rethinking Network Value to Transactions (NVT) Ratio". His criticism: the original metric often shows a bubble only after it has burst. The reason lies in the formula. In a crash, volume jumps briefly because everyone sells, which pushes the ratio down exactly when it should warn. Kalichkin's fix, the NVT Signal, smooths the volume with a 90-day average. Woo later adopted this variant for his own charts.

How to calculate the NVT ratio

The calculation itself is simple. The hard part is getting a clean transaction volume, more on that shortly.

These figures are an example, not current readings. Which value is "normal" today depends heavily on how a data provider cleans the volume.

NVT Ratio and NVT Signal: what is the difference?

The original NVT ratio reacts to every swing in daily volume. A single day of large exchange movements can halve it. That makes it noisy and, as Kalichkin showed, quiet at the wrong moment.

The NVT Signal divides today's market value by the average volume of the last three months. Because the denominator is slow, it reacts faster to a rising price. If the price climbs steeply within a few weeks without use keeping up, the signal fires early. For the question "is the price running away from use right now?", the signal is therefore the better choice.

The cost: it also fires in healthy rallies when volume catches up with a delay. A high reading is a hint, not a sell signal.

What the NVT ratio can do

It measures overheating from an independent source. Most valuations use only the price. The NVT ratio brings in a second data series: actual use. If price and use rise together, a rally is better founded than one on an empty network.

It showed the early bubbles clearly. In 2011 and 2013 the price ran far ahead of use, and the ratio made that visible. In those years the blockchain was also where almost all trading happened.

It is easy to understand. Price against use needs no assumptions about holders, coin age or cost basis.

What the NVT ratio cannot do

It sees only part of the trading. Today most bitcoin trading does not happen on the blockchain at all:

• When someone buys from another customer on an exchange, the exchange merely updates an entry in its database.
• Since January 2024, US spot ETFs have held large amounts of bitcoin. Trading ETF shares moves no coins. More on this in the article on bitcoin spot ETFs.
• Payments over the Lightning Network only appear on the blockchain when a channel is opened or closed.

It also counts what is not trade. Part of on-chain volume is change sent back to the sender, internal exchange transfers and moves between one's own wallets. Data providers try to remove this, with different methods and different results. How a transaction with change is built is shown in Bitcoin transactions explained.

Its normal range drifts. Bitcoin has changed from a payment tool for early adopters into a savings asset. Savings are rarely moved. More value with less movement pushes the NVT ratio up over the years without making bitcoin more expensive. Apply a threshold from 2017 to 2026 and you will almost always read "overvalued".

It says nothing about timing. A high value can persist for months while the price keeps rising. A low value is not a bottom.

The NVT ratio next to the Power Law zones

This site values bitcoin with the Power Law model: the price is compared with a trend that depends only on the time since the genesis block. From it come the five valuation zones from Floor to Euphoria. The NVT ratio measures something fundamentally different.

The combination is what makes it interesting:

• Price in the Hot or Euphoria zone and the NVT Signal at its highest in years: two independent measurements say "expensive". That is a stronger hint than either alone.
• Price near the floor, yet the NVT ratio high: this points to structurally lower on-chain volume rather than a bubble. The price against the trend is then the more reliable statement.
• Price in the Fair zone, NVT falling: use is catching up. That is the healthiest picture the two metrics can show together.

Where the idea that network value and use are linked comes from is explained in Metcalfe's law and bitcoin. It is also one possible explanation of why the price follows a power law in the first place.

Where the zones are today:

How to use the NVT ratio as a long-term holder

For someone who buys every month and holds for years, the NVT ratio is not a tool for week-to-week decisions. Three uses make sense:

1. As a cross-check in euphoric phases. When everyone talks about new records, a metric that ignores the price helps. An unusually high NVT Signal is a reason not to add purchases on credit.
2. As a reminder of what bitcoin is today. Falling on-chain use with a rising price does not necessarily mean a bubble; often it means more savers and fewer spenders.
3. Not as a selling rule. An exit plan should depend on goals and valuations you set in advance. What that looks like is shown in Bitcoin exit plan.