Bitcoin’s NVT Ratio Normalised for Inflation in the Circulating Supply
To follow up on the previous article, I have adjusted the Bitcoin’s NVT Ratio (more specifically Woo’s NVT Signal) as to take into account Bitcoin’s inflation of coin supply. The upwards skewing of NVT Ratio is more precisely the results of the long-term differences in the trends of both on-chain transaction vol (BTC), and coin supply in circulation. The trend of the NVT ratio since 2012 had increased by c. 57%, while the coins in circulation by c. 114%. In order to keep the NVT Ratio within the “historical” range as to maintain its usefulness as point of reference e.g. signal, it can be “fudged” / “normalised” by a “dilution factor”:
Arbitrarily, or as I have explained in the previous article, the start of 2012 was chosen as t0. The values generated using this formula produce a line of best fit that is virtually flat. I am confident that skewing / fudging / normalising the ratio in this manner is sensible, because, in addition to the fact that it takes into account the fundamentals of the ratio’s factors, it also generates a line of best fit and standard deviations from the mean that rest very neatly onto key levels of the chart:
How low can we go?
The large volume of on-chain transactions that typically follow a bull market might not appear as obvious as in the previous cycles if Lightning Network adoption continues, regardless of the fact that the net values are settled on chain. As illustrated in the previous article the Lightning Network Capacity does indeed correlate with the on-chain TV, and therefore can serve as a proxy to aid calculating a more inclusive TV. However, it is unclear how exactly this metric can be interpreted/ processed.
The fact the 2017 bull market has seen such an unprecedented diminishing in Bitcoin’s dominance, as well as in the levels of toxicity and deceit within cryptosphere, (something as flagrant as “Bitcooooonect!” finding its way up in top 10 MC) is the most crucial aspect which will continue to influence the current market. Hence I believe that the most pertinent question is rather: “For how long can we go?” And that, is not in terms of speculators getting tired of Bitcoin, but rather people getting squeezed dry by the plethora of scams and unicorns. The pace at which the justice system is going to make a few examples, as to put off / scale down the level of scams, as well as the large sums siphoned by these “enterprises”, that could keep them going, morphing, re-branding, and carrying on shilling is not encouraging. Thus, I consider BTC dominance the most significant factor at play during the coming months rather then the NVT Ratio. Either this has to substantially increase, or we shall be stuck in the doldrums for a while.
Dmitry Kalichkin & Cryptolab Capital
Disclaimer: the content is only to be take as my personal OBSERVATION and QUESTIONS for the purpose to be further considered, answered or discarded, hence this article is far from exhaustive and IS NOT and CANNOT serve as basis for any financial / investment / trading advice.