Introducing Willy Woo's NVT Ratio (Bitcoin's PE Ratio)

[Wind_FURY]

Willy Woo is a Bitcoin trader who resides in Asia, now in Bali I believe. I have been following him through his site, http://woobull.com for almost two years and I suggest everyone to read all of his blogs and articles.

I hope it helps you to become better traders and help you in producing more engaging topics in the forum.

If you "buy the dip", like me, then you will love his NVT Ratio idea.

Here is an introduction.

The idea behind NVT Ratio
In traditional stock markets, price-earnings ratio (PE Ratio) has been a long standing tool for valuing companies. It’s simply the ratio of a company’s share price to its equivalent earnings per share. A high ratio describes either over valuation or a company in high growth.

What would be the equivalent in Bitcoin-land? We have a price per token, but it’s not a company so there are no earnings to do a ratio. However since Bitcoin at its essence is a payments and store of value network[2], we can look to the money flowing through its network as a proxy to "company earnings”.



As you can see the value transmitted on the Bitcoin blockchain is closely tied to its network valuation. The idea that we can use the money flowing through the network as a proxy for network valuation is valid.

We can express this as a ratio. I call it NVT Ratio, short for Network Value to Transactions Ratio. Below is a historic chart of Bitcoin’s NVT ratio. A live and interactive chart is available on my site at Woobull.com.

http://woobull.com/introducing-nvt-ratio-bitcoins-pe-ratio-use-it-to-detect-bubbles/

[exstasie]

we can look to the money flowing through its network as a proxy to "company earnings"

Is that realistic, though? This kind of money flow has a relationship to network size (re Metcalfe's Law), but it's not direct. I'm not sure I see the direct relationship to "network value." His metric can also be misleading. It's easy to game..... a large Bitcoin holder can easily inflate the money flow at fairly low cost, particularly during periods with low fees.

As you can see the value transmitted on the Bitcoin blockchain is closely tied to its network valuation.

I'd be curious to graph this data myself to see how curve-fitted this is, but I don't know where it's pulled from.

You can also see when comparing the market cap with the smoothed indicator, there's lots of periods of negative correlation, so I'm doubtful of it's value for short-term analysis. As for the long term, look at when it peaked in 2014..... I think we can do better than that with classic TA.

[Jet Cash]

It's an interesting idea, but, as Bitcoin moves to being a store of value rather than a payment system, I don't see how velocity/capital value can indicate the direction of a price movement. I guess it could indicate the strength of the price move, but not a potentil direction.

[Wind_FURY]

we can look to the money flowing through its network as a proxy to "company earnings"

Is that realistic, though? This kind of money flow has a relationship to network size (re Metcalfe's Law), but it's not direct. I'm not sure I see the direct relationship to "network value." His metric can also be misleading. It's easy to game..... a large Bitcoin holder can easily inflate the money flow at fairly low cost, particularly during periods with low fees.

Yes it can be gamed, but after millions of transactions and finding the mean, the data can be accurate, arguably.

As you can see the value transmitted on the Bitcoin blockchain is closely tied to its network valuation.

I'd be curious to graph this data myself to see how curve-fitted this is, but I don't know where it's pulled from.

I know a person who is obsessed with blockchain data in Bitcoin. I will ask him what site he finds them then get back to you. This might be an interesting topic to get into.

You can also see when comparing the market cap with the smoothed indicator, there's lots of periods of negative correlation, so I'm doubtful of it's value for short-term analysis. As for the long term, look at when it peaked in 2014..... I think we can do better than that with classic TA.

Maybe. But I am willing to be tolerant to Willy Woo's theory. It might be something good to explore.