Introducing Network Value to Metcalfe (NVM) ratio and using it to identify and predict price bubbles
For cryptoasset investors the first quarter of 2018 has been drastically different from 2017. Following a truly remarkable (albeit, not 100% healthy) 60x appreciation in 2017, the crypto market has experienced a strong correction, falling 58.2% from an opening $612bn in total network value on January 1st, to $256bn at the end of Q1. In April, the markets have turned around and regained some of these Q1 losses. Following all this volatility, right now many investors are puzzled by the question as to whether this is the end of price corrections, or just a temporary reprieve.
To answer this question Cryptolab Capital uses a data-driven approach to cryptoasset valuations and looks at the fundamental foundations of asset prices. In our February article Rethinking Network Value to Transactions (NVT) Ratio we shared one of the quantitaive metrics that we use. Today I‘m excited to share with you a summary of our new research on Metcalfe’s Law applications for cryptoasset valuation, and to introduce the Network Value to Metcalfe ratio (NVM).
Our goal was to estimate whether current Bitcoin price is supported by activity on the network. To do this we have built robust upper and lower bounds for Bitcoin Network Value, based on a number of Daily Active Addresses (DAA), using different variations of Metcalfe’s Law. Using these bounds, we have defined bottom-up valuation of the Bitcoin network as a function of DAA.
When we compared this valuation with actual market Network Value across different time periods, we have found that historically overvaluation can be predicted by Network Value to Metcalfe (NVM) ratio:
We analyzed current (as of early May 2018) Bitcoin price using this NVM ratio, and came to the conclusion that despite significant correction in Q1 2018, there might be another bubble (and following correction) on the horizon.
Having said this, while we see a risk of correction, we stay bullish on Bitcoin price in the long run.
Disclaimer: 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.