Low Bitcoin Volume Triggers BTC Price Warning As Metric Reaches Value Zone

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Bitcoin (BTC) price action may be unsustainable as a metric hits seven-month highs.

Data from on-chain analytics firm Glassnode confirms that on December 21, the Bitcoin network’s value-to-transaction (NVT) signal reached levels not seen since April.

Bitcoin activity may not support BTC price of $17,000

Created by statistician Willy Woo, NVT essentially measures the relationship between on-chain activity and the price of Bitcoin.

Signal NVT modifies its readings by using a 90-day moving average of daily trading volume instead of raw data, which Glassnode says improves NVT and allows it to work better as a leading indicator.

On December 21, the NVT signal reached 18.58, a level that last appeared as Bitcoin declined in the final days of April. At the time, BTC/USD was trading at just over $40,000.

Fast forward to the end of the year and NVT displays a warning. Although Bitcoin is worth less than 50% of its April levels, network volume has declined so much that even the current valuation of $16,800 may not last.

As Woo explained in a description of the NVT ratio on his analytics site:

When Bitcoins NVT is high, it indicates that the valuation of its network exceeds the value transmitted on its payment network, this can occur when the network is growing strongly and investors value it as a high yield investment, or alternatively when the price is in an unsustainable bubble. Annotated chart of Bitcoin NVT signal. Source: Glassnode/TwitterA tale of two NVT signals

There is a catch to NVT, however. As various analysts, including Woo, have noted, the ever-changing nature of the Bitcoin network means that transactions are increasingly moving off-chain.

Related:Bitcoin Price Fails to Recover $17,000 as Market Unprepared for Lower

Along with other phenomena, this impacts on-chain trade data in that NVT can produce an overly bearish picture of trade value.

This is addressed by an addition to the indicator called Dynamic Range NVT (DRNVT). Created by Charles Edwards, CEO of asset manager Capriole, DRNVT uses standard deviations to measure NVT divergence from the mean. It also provides value boxes for easier determination of entry points based on its readings.

Currently, DRNVT sits in this value zone, TradingView data shows a key contrast to the standard pattern.

The NVT signal with a dynamic fair value range should be used with caution, Edwards nevertheless warned in an introduction to the indicator in 2019:

As with all markets, an asset can stay expensive or cheap for long periods of time and continue to get even more expensive or cheaper. BTC/USD 1-day candle chart (Bitstamp) with dynamic range NVT signal. Source: Trading View

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