Is Bitcoin price fall over? Seeking for answer in cryptoasset ratio analysis
Crypto asset markets experienced significant correction during last month, with Bitcoin price falling from almost $10,000 on May, 5 to below $7,000 in the last couple of weeks. No wonder, 30% drop in price of the main cryptoasset came as a surprise for many investors. But could this correction have been foreseen?
Cryptolab Capital team has published a number of articles on how ratio analysis can be used to describe and predict cryptoasset price movements. Today we will put these ratios to work applying them to the recent market movement. It turns out that information about future downfall in BTC price could have been revealed prior to the correction by using Network Value to Transaction Volume (NVT) and Network Value to Metcalfe (NVM) ratio.
Both NVT and NVM ratios have been in the red zone prior to correction, indicating Bitcoin price not being fully supported by fundamentals and the market being overheated. Moreover, both ratios are still in the red zone as of mid-June, which leads us to a conclusion that further correction might happen in the near future.
NVT predicting correction
First of all, let us remind everyone how NVT is defined:
Speaking shortly, NVT explains how much current asset price is supported by the underying utility of the network in the form of transaction volume. To make identification of overvaluation easier, we have previously defined yellow and red zones for NVT based on historic data. For many price corrections in the past, NVT entering yellow zone foreshadowed a correction in the near future. How did this indicator look in recent months?
Turns out, NVT (orange line on the chart above) has entered yellow zone on April 21. Soon after this Network Value (blue line) started dropping. Moreover, despite falling a bit in recent weeks, right now NVT is still in the risky zone. Thus, NVT suggests that market might experience further correction in the near future.
Now let’s have a look at the Network Value to Metcalfe (NVM) ratio, and compare the results with NVT analysis.
NVM predicting correction
Let’s start from a quick refresher on NVM. This multiple quantifies relationship between current market Network Value and Network Value as a function of Daily Active Addresses based on Metcalfe’s and Odlyzko laws:
Those unfamiliar with NVM are welcome to read the full article where this ratio has been introduced: Rethinking Metcalfe’s Law applications to cryptoasset valuation
NVM, as well as NVT, has been in the risky zone during May and June 2018. However, while NVT has only entered this zone in April, NVM has stayed in the red zone since February, 12, and is still there right now. Thus, NVM, as well as NVT, suggests that further Bitcoin price correction is not unlikely.
Zooming out: when moon?
We think that NVM describes a longer term “macro-level” network valuation. 2017 bull run still has an impact on Network Value, as suggested by NVM staying in the red zone almost all the time since November, 17. It went out of the red for a couple of weeks in the early February, but returned back again shortly. Based on this, we are far from trend reversal for the Bitcoin. NVT tells similar story on a shorter time frame.
What about other assets? For most altcoins the May-June correction is explained by persisting high correlations between these assets and Bitcoin. Altcoin correlations with Bitcoin are around their all-time-high levels as has been recently highlighted by CryptoRae.
Here’s a short snapshot for selected coins:
Because of this, overall market performance is still driven almost solely by Bitcoin despite its market share (also known as Bitcoin Dominance Index) staying around 35–40%. Altcoins obediently follow Bitcoin during both bull runs and corrections.
Special thanks goes to Cryptolab Capital analyst Roman Skoromniy who did all the number crunching for this note.
None of the statements in the article should be considered investment advice. Due to the various risks and uncertainties, actual performance of the assets may differ materially from that reflected or contemplated in forward-looking statements.