LEARN NETWORK VALUE TO TRANSACTIONS RATIO (NVT) INDEX IN 3 MINUTES – BLOCKCHAIN 101

The Network Value to Transactions Ratio (NVT) is one of the most important valuation tools in the cryptocurrency field, proposed by early on-chain data analyst Willy Woo in 2017. Its core logic draws inspiration from the traditional financial market’s Price-to-Earnings (P/E) ratio, using a comparison between network value (market capitalization) and on-chain transaction volume to evaluate the extent of a cryptocurrency’s bubble or undervaluation.

Definition and Calculation Formula of NVT

The formula for calculating NVT is:
NVT = Market Cap / Daily Transaction Value

• Network Value: The token circulation multiplied by the current price.
• On-Chain Transaction Volume: The total value of all transactions transferred on the blockchain within a specific time period (usually in USD). To avoid short-term volatility, the 7-day or 30-day moving average is commonly used.

For example, if Bitcoin’s market capitalization is $1.2 trillion and the 30-day average on-chain transaction volume is $20 billion, the NVT value would be 60. The higher the NVT value, the more the market is paying for each unit of on-chain transaction volume, indicating that the asset may be overvalued. Conversely, a lower value suggests the asset may be undervalued.

Theoretical Basis: From Payment Network to Store of Value

The design of NVT is based on Bitcoin’s original positioning as a “peer-to-peer electronic cash system.” If on-chain transaction volume represents the actual utility of the network, NVT can measure the premium paid by the market for that utility. However, as Bitcoin gradually shifted towards the “digital gold” narrative, its on-chain transaction volume began to reflect larger transfers rather than daily payments. As a result, the interpretation of NVT needs to be adjusted dynamically. A high NVT may no longer simply indicate a bubble but could reflect the market’s recognition of Bitcoin’s store of value function.

Application Scenarios and Practical Interpretation of NVT

1. Identifying Market Tops and Bottoms
   Historical data shows that extreme values of NVT are often closely correlated with price turning points:

   • Top Signal: When NVT breaks through historical highs (e.g., Bitcoin NVT > 150), it indicates that market sentiment is overheated, and funds are flowing in much faster than the actual demand for on-chain usage. For example, in 2021, Bitcoin’s NVT reached 220, after which the price dropped by 120%.
   • Bottom Signal: When NVT falls to historical lows (e.g., Bitcoin NVT < 40), it indicates that the price is undervalued and on-chain activity is supporting the price. In 2023, Bitcoin’s NVT dropped to 25, after which a new bull market began.

2. Identifying Divergences in Trends
   Divergences between NVT and price are important warning signals:

   • Bearish Divergence: When the price hits a new high but NVT fails to break through the previous high, it suggests that transaction volume is lagging behind the market cap expansion, indicating weak upward momentum. For instance, in October 2024, Bitcoin’s price broke new highs, but NVT was only 95 (below the previous high of 120), and the price soon corrected.
   • Bullish Divergence: When the price bottoms and rebounds, but NVT continues to rise, it indicates that on-chain activity is recovering before the price reacts. In January 2025, Ethereum’s NVT rose from 18 to 32, and its price subsequently increased by over 30%.

3. Cross-Asset Comparisons
   NVT can be used to compare valuations across similar assets:

   • Public Chain Sector: Ethereum’s NVT has historically been higher than Bitcoin’s, reflecting a higher premium for its smart contract ecosystem.
   • Emerging Tokens: If the NVT of a DeFi token is significantly lower than the industry average, it may have room for value correction.

Limitations of NVT and Improved Models

1. Limitations:

   • On-Chain Data Blind Spot: NVT only counts on-chain transaction volume, ignoring centralized exchange activities (which account for over 80% of total cryptocurrency transactions), potentially underestimating actual demand.
   • UTXO Model Disturbance: Bitcoin’s UTXO chain “change” mechanism may overestimate transaction volume (e.g., if a 100 BTC transfer includes 90 BTC as change, the actual transfer value is only 10 BTC). This requires the use of “adjusted transaction volume” for correction.
   • Changing Functional Attributes: As Bitcoin shifts from being a payment tool to a store of value, a high NVT may no longer signal a bubble but could reflect its “digital gold” nature.

2. Improved Models: NVT Golden Cross and NVT Signal
   To improve NVT’s timeliness, analysts have developed derived indicators:

   • NVT Golden Cross: The short-term (e.g., 7-day) and long-term (e.g., 28-day) moving averages of NVT cross each other to serve as a signal. When the short-term NVT crosses above the long-term NVT, it signals a potential price peak. Conversely, when the short-term crosses below, it signals a potential bottom.
   • NVT Signal: Introduces Metcalfe’s Law and incorporates the number of active addresses into the calculation, formulated as:
     NVT Signal = Market Cap / (Transaction Volume × Active Addresses)
     This model is more suitable for high-frequency ecosystems like Ethereum and reduces the bias of relying solely on transaction volume.

Cooperative Use of NVT with Other Indicators

• Market Value to Realized Value (MVRV)
  MVRV compares market cap to realized value (the total value of UTXOs when last moved), identifying the average profit or loss of holders. When combined with NVT, it strengthens bottom detection:

  • When NVT < 40 and MVRV < 1, it suggests that the asset is severely undervalued. Historical data shows that buying in this range has yielded more than 200% returns over the following year.

• On-Chain Activity Indicators

  • New Addresses: Reflecting user growth, this can cross-verify with NVT. If NVT declines while new addresses increase, it may signal price increases driven by ecosystem expansion.
  • Whale Holding Changes: Monitoring addresses holding over 1,000 BTC. If whale accumulation coincides with low NVT, it can strengthen a buy signal.

NVT in the Evolution of Multi-Layer Networks and DeFi Ecosystems

With the widespread adoption of Layer 2 and cross-chain technologies, on-chain transaction volume distribution is becoming more fragmented. For example, Ethereum’s mainnet’s transaction volume share dropped from 90% in 2021 to 35% in 2025, with the remainder handled by Layer 2 networks like Optimism and Arbitrum. To address this, NVT needs to be upgraded into a “layered calculation model”:

• Mainnet NVT: Measures the security premium of the base layer.
• L2 Aggregated NVT: Aggregates transaction volume across Layer 2 networks to assess the overall ecosystem’s utility.

Conclusion

NVT is not a “magic key,” but its underlying logic, anchored in on-chain data to gauge market sentiment, makes it a cornerstone of the cryptocurrency asset valuation system. For investors, the key is to understand its applicable scenarios and limitations and to combine it with other indicators for multi-dimensional validation. In 2025, with algorithmic trading and AI analysis dominating, the iterative models of NVT will continue to provide insights that can transcend market cycles — as Satoshi Nakamoto once said, “If you don’t understand, I don’t have time to explain.”