If you’ve been following coinmetrics closely, you might be convinced of the usefulness of our network value to transactions metric (NVT) in determining relative value. However there is an important caveat that must be mentioned.
Mean-reversion and reflexivity: a Litecoin case study
Litecoin is a remarkable cryptocurrency. Of the seven profiled on coinmetrics.io/mtv, its MTV ratio is among the steadiest (in our sample period of the last two years). Only bitcoin boasts a stabler market to transaction value. (Read our intro to MTV and a handy explainer.) As mentioned in our last article, useful fundamental ratios ought to generally be stable, so that price movements can be compared to the fundamental.
Why should I pay attention to the NVT ratio, anyway?
Please note: By consensus, we have renamed the “MTV” (market to transaction value) to “NVT” (network value to transactions ratio). We’re leaving this post as is.
Our very first contribution to the body of research on cryptoassets is one we think will become mainstream as this discipline matures. It has intuitive strength – the market to transaction value ratio makes diverse cryptoassets easily comparable. This ratio wasn’t summoned out of thin air; we put careful thought into its legitimacy and usefulness. Read on for a discussion of why we chose this ratio above all.
An introduction to MTV
Please note: By consensus, we have renamed the “MTV” (market to transaction value) to “NVT” (network value to transactions ratio). We’re leaving this post as is, aside from changing some links.
Currency serves as a medium of exchange, store of value, and unit of account. The Market to Transaction Value metric captures its efficacy at enshrining that first property. For a cryptocurrency to intermediate effectively, it must have sufficient on-chain volumes. This reduces spread size and enhances convenience. Of course gross numbers aren’t particularly comparable, so we construct a ratio between transaction volume and market cap. We extract actual transaction volumes from blockchain explorers and construct a time-series metric so you can see how the market cap to volume ratio changes over time.
Introducing Coinmetrics
Cryptoasset investors often speak of investing based on “fundamentals” rather than hype, sentiment, or technical analysis. However the analytic infrastructure for a rigorous understanding of a cryptoasset’s value relative to another is virtually nonexistent. Equity investors have had 80 years to mull over and refine Graham and Dodd’s principles of value investing, but digital currency investors have had no such privilege.