Bitcoin (BTC) has just reentered a key price zone, which has signaled the beginning of the end for bear phases, data confirms.
In a tweet on Jan. 24, Charles Edwards, founder of crypto investment firm Capriole, flagged Bitcoin’s network value to transaction (NVT) ratio metric as it delivered a new and rare “oversold” signal.
NVT says it’s reversal time
Bitcoin price losses accelerated over the weekend, with the market not far off a retest of the seminal $30,000 mark prior to Monday’s Wall Street open.
Nonetheless, for on-chain analysts, there are plenty of reasons to believe that the extent of losses seen recently is more of a market overreaction than a taste of things to come.
Supporting that thesis is NVT, which calculates how overbought or oversold Bitcoin really is.
NVT, first developed by statistician Willy Woo and entrepreneur Dmitry Kalichkin, uses the ratio of Bitcoin’s market capitalization to its daily on-chain transaction value to create an idea of whether price behavior really corresponds to on-chain activity.
Edwards subsequently tweaked the metric by adding standard deviation bands to account for natural changes in on-chain behavior as Bitcoin matures. The result was the so-called “dynamic range NVT,” and it is this incarnation that returned to its green zone this week
Over the past two years, only summer 2021 — the post-China mining ban period — and the coronavirus crash of March 2020 have produced such NVT behavior.
“Valuing the Bitcoin network based on transaction value throughput suggests we have entered the value zone,” Edwards commented on Twitter alongside a print of NVT’s latest movements.
Bitcoin dynamic range NVT vs. BTC/USD chart. Source: Charles Edwards/Twitter
"People have short memories"
Back on the spot market, others called into question the veracity of recent losses, even with BTC/USD briefly exceeding -50% versus November’s all-time highs.
With two months being all that was required for some balances to halve, trader, analyst and podcast host Scott Melker, known as the “Wolf Of All Streets,” reminded followers that this is nothing new for Bitcoin.
“People have short memories. In May, Bitcoin went from 60K to 30K in 10 DAYS! 10 DAYS,” he tweeted.
“That was much more aggressive, on much higher volume, and was only 8 months ago. We’ve been here before.”
BTC/USD 1-day candle chart (Bitstamp) showing May 2021 decline. Source: TradingView
As such, when it comes to kneejerk reactions from crypto markets, the current drawdown, in Melker’s eyes, is unremarkable. Sentiment, meanwhile, has been at or near the bottom of its historical range for several weeks.