Market cap, price, and volume are all widely known metrics used to interpret the current state of the cryptocurrency market. There are more reliable ways to interpret the reasons for the prevailing Bitcoin price, and these methods include the use of on-chain data. On-chain metrics are essentially indicators that use blockchain data to estimate the health of a network.
NVT or Network Value to Transactions ratio is an indicator developed with data straight from the Bitcoin blockchain. It was developed by Willy Woo and Chris Burniske, two very well known crypto-asset analysts. The ratio is derived by dividing the total value of the network i.e. market cap by the daily transaction volume on the Bitcoin chain. It is equivalent to the price to earnings (PE) ratio seen in equity markets.
This indicator is incredibly useful in determining whether Bitcoin is currently overvalued or undervalued. A high NVT indicates that the Bitcoin price is overvalued and vice versa. It has established itself as a reliable tool for cryptocurrency analysts, and has been replicated by other blockchain analysts for other assets that fit the bill.
In order to take away valuable insight from this metric, one should ensure to compare the NVT ratio and Bitcoin price over time for a relative analysis. NVT alone is not a good measure of analysis, but it serves as a great indicator for the current state of the Bitcoin network. The more Bitcoin is being used, the lower the NVT is, and the lower the perceived value is.
Coin Days Destroyed (CDD) is another important on-chain tool that measures the time each Bitcoin has sat idle since it was last transacted with. A high reading of this indicator signals that the market is HODL-ing their coins, while a low reading means people are frequently moving their coins.
Hoarding and HODL-ing are the same thing. It is important for traders and investors to know what market sentiment looks like. Generally, during a correction, CDD will signal two huge readings, which indicates the end of the correction. During this cycle, we got the first signal when Bitcoin price was around $9,000. This is what led me to believe that price will go further downward, other than general price action signals.
The main premise of this ratio is to figure out when a supply crunch will show up in the market. If more people are hoarding their coins, there will be less market supply. If demand is constant during this scenario, then Bitcoin price will see a natural incline.
On-chain indicators alone are not enough for traders and investors, but they are the closest thing to fundamental data that exists in this space. In order to extract maximum value from these data points, one should integrate the insights from these two readings to market sentiment and price action.
It wouldn’t be a stretch to say that these two indicators are more effective than traditional indicators like RSI, MACD, and moving averages (for crypto).
If you can learn to read insights from these two on-chain indicators correctly, you will be able to better forecast the future trajectory of Bitcoin’s price.