So, is this bitcoin (BTC) breakout for real? That’s what everyone in crypto is asking at the moment following the 20% leap in the price of the leading cryptoasset.
One key metric could answer that question – the NVT Signal.
It’s been somewhat overlooked in the cold depths of the crypto winter, but the indicator is flashing green right now.
This key reading of the health of the bitcoin network and the relation to coin price could provide the confirmation that potential investors are looking for.
If the monster rally wasn’t enough to whet the appetite, the NVT Signal could be the metric that tips the balance for the savvy investor looking for the right time to buy bitcoin.
Yesterday the BTC/USD market saw the cryptocurrency retrace somewhat from near-term highs at $5,200 to lows of $4,800.
Although that may have poured a little cold water on the bulls’ party, profit-taking alone and an overbought position on the RSI (14-day) meant it was expected.
That wobble shouldn’t be taken as a reassertion of bearish momentum, and the NVT Signal indicates why.
Why the Network Value to Transaction ratio still matters
Standing back from the price technicals, it is refreshing, and arguably more solid ground, to look instead at the fundamentals upon which metrics such as the NVT Signal are founded – that’s to say based on actual on-chain usage of the bitcoin network.
The current reading (see chart below) adds strong encouragement to the view that we have seen the worst of the damage the prowling bear market has inflicted.
So for those who don’t remember, or have never heard of, NVT and the Bitcoin NVT Signal (NVTS) derived from it, here’s a quick explainer.
Bitcoin NVT Signal predicts bull market
Willy Wo is credited with popularising, if not inventing, the network value to daily transactions ratio commonly known as NVT.
This ratio is now an established metric for measuring the value of the bitcoin and other blockchain networks.
Its validity rests on Metcalfe’s Law, which states that the effect (let’s say value) of a telecommunications network is proportional to the square of the number of connected users.
In February last year Dimitry Kalichkin, chief research officer at Cryptolab Capital, created the Bitcoin NVT Signal to help traders to see ahead.
As its name indicates, it is derived from the NVT but has been tweaked. Kalichkin reworked the NVT which is a lagging indicator to create an altogether more useful beast (from a traders stance), by creating a metric that is a leading indicator for traders.
Instead of dividing network value by daily transaction value, the NVTS uses the 90-day moving average of daily transaction value as the divisor of the network value (market capitalisation) denominator.
Turns out that the NVT Signal is showing an interesting fractal formation that can be interpreted as strongly bullish.
In November 2013 the bitcoin price hit an all-time high of $1,084.
The price eventually bottomed at $176 in January 2015. That represented an 83% correction.
In the period the NVT Signal bottomed twice, with the ascent from the bottom of the second trough reaching position 3, signalling the start of the next price upswing.
This is shown in the chart below annotated by David Puell, head of research at Adaptive Capital.
Now if we look for the most recent all-time high (December 2017 – the second number 1 in the chart above) we see a similar chart pattern, with two troughs.
We have climbed from the bottom of the second trough and are at peak 3.
If the signal holds (with the chart pattern repeating to confirm the fractal), we should see the NVTS ratio start to drop as it did in 2015 (the first number 3 in chart above) and the price of bitcoin rise – bear in mind this is a log chart.
Generally speaking, a high NVT value would indicate that investors value the network at a premium to actual transaction value. This could also mean (but not necessarily) that he price is subject to unsustainable speculative appreciation.
Relative Strength Index on 3-day chart confirms breakout?
And for further confirmation that the NVTS is flashing buy, take a look at the second chart below, kindly brought to our attention by CryptoWolf.
He highlights the overbought state (a reading above 70) of the RSI on the 3-day chart for the Brave New Coin Liquid Index for Bitcoin as a prelude for the bull runs initiated in 2012 and 2015… and 2019 if his forecast holds.
Bitcoin (BTC) Fair Value is $14,000 says Lee
With a lot of cash sitting on the sidelines, waiting for the right time to pounce, there could be more momentum building for crypto.
Thomas Lee, the founder of Wall Street analysts FundStrat, certainly thinks so: “Finally, we had a big move on April 1st. It wasn’t clear what caused it, but it was a real evidence that there is a lot of dry powder. The crypto community kept a lot of cash and was waiting for Bitcoin to break $3,000.”
Although he has given up on tying a date to his price targets, he told CNBC’s Squawk Box that fair value for bitcoin right now is $14,000.
Exactly when we get to that level is another question.