The Bitcoin RVT Ratio, A High Conviction Macro Indicator

Useful Resources

If you are new to on-chain analysis and looking for somewhere to start or prefer video format, I cover everything regarding the NVT and the RVT ratios as part the Ready Set Crypto Bitcoin Masterclass Ep-3.

  • The NVT and RVT ratio charts are presented by Willy Woo at woobull.com. Please note that Willy calculates RVT and NVT as the inverse ratio to this paper (Transactions / Valuation) and plots against log axis. As such, high values and ascending trends in this paper, equate to low values and descending trends in Willy’s charts.
  • All data presented in this paper is sourced from the Coinmetrics.io community dataset.
  • This chart at Coinmetrics is setup with all NVT, RVT and Pricing models considered in this paper for readers to experiment themselves.

Part 1 — Transaction Flow Metrics

The utilisation of Bitcoin as a transfer and savings mechanism carries an on-chain signature as coins are transferred between addresses. Since we can monitor these on-chain transactions, it is possible to evaluate:

  • The Volume of BTC that is being transferred over the network
  • The Value in USD transferred by assigning a price at the time of the transaction
Visual correlation between on-chain transaction flow and network valuation models

The NVT Ratio

The NVT ratio provides a gauge as to whether the current demand for Bitcoin block-space justifies the present market valuation. Studying historical data we can identify periods of over or under valuation of the network via fractal signals in the NVT ratio.

  • The 28 day MA is useful as a macro view over a market cycle (2–3 years)
  • The 90 day MA is useful as a macro view over Bitcoin’s full history
  • The NVTS or RVTS takes the average of only transaction volume making it more sensitive to movements in price. Thus is it best applied as a lower time-frame trading indicator and tends to adhere to typical technical analysis patterns.

The RVT Ratio

The RVT Ratio is based off the same principles as the NVT Ratio however utilises the Realised Cap rather than the Market Cap in the numerator.

  • The NVT provides a noisy but fast indicator subject to market sentiment and intra-day movements
  • The RVT provides a slower but high conviction indicator more native to the blockchain for long term trends and calibration of the NVT

Mental Framework for the NVT and RVT Ratio

A useful mental framework for studying these ratios is presented here.

  • An NVT of 25 means every 25 days, Bitcoin transacts its entire market cap in value.
  • An RVT of 10 means every 10 days, Bitcoin transacts its entire realised cap in value.
  • High or increasing Ratios are a bearish fractal (Decreasing relative demand)
  • Low or decreasing Ratios are a bullish fractal (Increasing relative demand)
  • As more transactions move off-chain (exchanges, lightning, sidechains) the ratio levels considered ‘high’ or ‘low’ will change although the fractals in trend direction remain valid.

Part 2 — NVT and RVT Market Fractals

By studying market history, we can determine fractals in the NVT and RVT ratio pair which present high conviction market opportunities.

Confirming Bull Markets

During sustainable bull markets, the value flowing through the blockchain is reasonably expected to increase both as the value of bitcoin inflates and as awareness increases for more market participants. This manifests as relatively low NVT and RVT ratio with consistent sideways trading suggesting demand growing in line with price appreciation.

  • NVT and RVT breaking below 18 indicating increased demand for Bitcoin block-space relative to market value.
  • Strong bullish signal where the NVT and RVT break below 10.
  • Consistent sideways trading of the RVT below 10 and a range-bound NVT below 18 indicate sustainable bullish demand for block-space with appreciating network value.
NVT and RVT fractals confirming a sustainable Bull Market
Shifting Bitcoin volume dominance between on-chain transactions to exchange based trading in 2019

Signalling Weakness in the Bull

In general, the strongest NVT and RVT signal for a weakening Bull is a transition from sideways trading into a distinct uptrend. This is driven by over-valued price (numerator) and/or under-utilisation of block-space (denominator).

  • The NVT breaks convincingly upwards from the 5 to 18 range signaling market valuation is beginning to exceed transaction utility.
  • Early warning of bearish conditions on NVT break above 10.
  • Confirmation of bearish conditions on RVT break above 10.
NVT and RVT fractals signalling a transition into a Bear Market

Capitulation and Accumulation

The capitulation and accumulation phase at the end of Bear markets have two key mechanisms at play;

  1. Weak hands puking out assets.
  2. Heavier investment by smart money.
  • Capitulation generally occurs following NVT and RVT ratios reaching high values (above 18 to 27) suggesting the network is heavily under-utilised (disgust phase).
  • A strong downtrend in the NVT and RVT ratio suggests a change in market character due to the combination of depressed prices, weak hands selling and smart money accumulating.
  • The steeper the downtrends in the NVT and RVT, the more bullish the signal.
NVT and RVT fractals during the capitulation and accumulation phase

Concluding Remarks

Bitcoin is optimised for securely transferring value. The NVT and RVT ratios offer insight to the network valuation normalised against demand for block-space. Given the fixed supply of bitcoins, increases and decreases in demand for block-space have shown to have a corresponding effect on the macro market trends.

Limitations and Notes on the Future

The NVT and RVT Ratios rely on on-chain transactions and as the Bitcoin market continues it’s exponential evolution, volumes occurring on-chain will similarly evolve over time.

Acknowledgements

A huge thanks to Doc, Mav and the whole community at ReadySetCrypto for exploring these ideas as it happened.

References

[1] Willy Woo — Is Bitcoin in a Bubble? Check the NVT Ratio, 2017

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