NVM Ratio

Network Value to Metcalfe Ratio (NVM Ratio) is defined as the ratio of the log of market capitalization divided by the log of the square of daily active addresses in the specified window.

Definition

Network Value to Metcalfe Ratio (NVM Ratio) is defined as the ratio of the log of market capitalization divided by the log of the square of daily active addresses in the specified window.

NVM Ratio=ln(Market Cap)ln(Daily Active Addresses2)\text{NVM Ratio} = \frac{\ln (\text{Market Cap})}{\ln (\text{Daily Active Addresses}^2)}

Interpretation

NVM Ratio evaluates the fair value of the blockchain network by applying Metcalfe's Law where the law claims that the value of the network is proportional to the square of the number of active users. If the value is too high, the indicator indicates that the network is too overvalued by the interpretation where the price is too high compared to the low number of active addresses. On the other hand, if the value is too low, it means the network is too undervalued.

Use Case

RSI based market spotting

Relative Strength Index (RSI) is one of the famous technical indicators measuring the relative strength of an upward trend and downward trend. We apply RSI to NVM for spotting the market's local tops and bottoms by thresholding. As you can see in the figure below, RSI of NVM quite correctly spots local tops and bottoms in a robust way.

The settings for this analysis are the followings:

  • We use a 7-day window for NVM for smoothing.

  • We use a 14-day window for RSI formulation.

  • We use 70% and 30% thresholds for the upper and lower thresholding.

Link to Our Data