The global blockchain technology market is projected to surge to $39.7 billion by 2025, reflecting a Compound Annual Growth Rate (CAGR) of 67.3%. This growth trajectory is mirrored in various fintech domains, including digital banking, expected to reach $1.1 trillion by 2027, and the burgeoning field of robo-advisors, with assets under management poised to hit $2.9 trillion by 2025.
Meanwhile, sectors like InsurTech and peer-to-peer (P2P) lending are revolutionizing traditional models, leveraging technology to streamline processes and enhance user experiences. The integration of Artificial Intelligence (AI) and Machine Learning (ML) in finance is set to reach a market size of $22.6 billion by 2025, fundamentally altering how financial data is analyzed and applied. If anything, that data is underestimated, considering the latest trends in tech. The bottom line is that the opportunity is enormous and growing.
Another notable fact is the space of mobile payments, which is expected to grow to $12.06 trillion by 2027, highlighting a shift towards more accessible and user-friendly financial transactions. Each of these sectors not only presents unique opportunities but also comes with its challenges, from ethical concerns in AI to the risks inherent in P2P lending.
So why do I care, right? There are a couple of reasons. First, blockchain solutions (NFT Blockchains) are growing in the number of user cases and applications. Eventually, many of those that I use will be run on them. I would like to know what companies are behind these solutions and how well they do. Secondly, if you save your money for retirement, these solutions are becoming more prevalent in financial institutions' operations. Thirdly, if you are an individual investor who allocates capital in crypto, you want to know how to assess asset performance. Finally, I'm just a curious animal.
As always, every industry has metrics that help us understand the market, performance, and trajectory toward success. Indifferent is here with the blockchain. Despite the most recent emergence of the industry, standards like NVT (Network Value to Transactions Ratio measuring NFT blockchain network) are becoming apparent suspects.
The NVT ratio compares a blockchain's network value (market capitalization) with the volume of transactions conducted on that network. It is calculated as:
NVT Ratio = Network Value (Market Cap)/ Daily Transaction Volume
A high NVT ratio might indicate that the network is overvalued relative to the actual transactions. If we are dealing with a low NVT ratio, it could suggest that the network is undervalued or efficiently handling a high volume of transactions. One of the classy metrics that more of either doesn't necessarily mean good for the business.
Using 5th-grader language, I'd compare the blockchain solution to an enormous shopping mall. The NVT ratio tells us how busy the mall is compared to its size. If the mall is huge but only a few people are shopping, it might be too big. But if there are many shoppers, the mall is just the right size. So the conclusion is that you must ensure that you have more people in your mall for most operating hours.
The real example for Ethereum would look as follows:
Network Value (Market Cap): Assume $300 billion.
Daily Transaction Volume: Assume $1 billion.
Using these figures, the NVT Ratio for Ethereum would be:
NVT Ratio = 300 billion/ 1 billion = 300
The visual below shows how the NVT trajectory looks over time and fluctuates against the price. The NVT ratio is a powerful tool for investors and analysts in the blockchain space, offering insights into the network's value relative to its transactional use. However, it's essential to consider it alongside other metrics and qualitative factors for a well-rounded analysis. As you can see below, the correlation between these two lines is easier to spot with additional context. For the same reason, you can see here the price increase while the NVT stays within the same range. Context is the Queen (Cash is always King).
While a valuable metric for blockchain companies, the Network Value to Transactions (NVT) ratio does have typical and atypical issues associated with its use. Understanding these issues is crucial for companies when communicating with investors.
Volatility of Cryptocurrency Markets: The crypto market is known for its high volatility, which can lead to sudden and significant changes in market capitalization and transaction volumes, impacting the NVT ratio.
Data Accuracy and Availability: The analyst's professional life is defined by data accuracy. Reliable transaction volume data can be challenging. How many of you will say, "I've heard that before. Nothing new"? Inaccuracies in this area are especially acute, making it harder to react or prepare for sudden changes. That inherent volatility of fluctuations is causing many to misread the data, especially if all of them lack a standard. Rapid evolution is another factor that makes the data obsolete or change quickly. I'm not making a case against the investment but saying it's much harder to keep your tabs on.
Differing Blockchain Purposes: Different blockchains serve different purposes (like utility, governance, or value storage), which affects how transaction volumes should be interpreted. It could be a utility (e.g., transactional) purpose, governance blockchain, or store--of-value blockchain.
Market Cap Limitations: Market capitalization can be a misleading indicator of a network's health or value, especially for tokens with low liquidity. Tokens with low liquidity can be more easily manipulated in terms of price. A few transactions can significantly impact the market price, leading to a distorted view of the network's value.
Changes in Network Utilization: Sudden shifts in how a network is used (e.g., a shift from transactional use to holding as a value store) can distort the NVT ratio. I think everybody knows Bitcoin, which went through this transformation and made a few millionaires.
Technological Upgrades: Technological upgrades in blockchain networks, such as Ethereum's transition from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism, can significantly impact the network's transaction capacity, fees, and, ultimately, the Network Value to Transactions (NVT) ratio. These upgrades often aim to improve scalability, efficiency, security, or sustainability, but they also bring about changes that can influence how the network is valued and analyzed. Upgrades like Ethereum 2.0 aim to increase transaction throughput significantly. This can lead to a higher volume of transactions being processed. An increase in transaction volume, assuming network value remains constant or doesn't increase at the same rate, can lead to a lower NVT ratio, potentially signaling increased network utility.
Ok, we know how this works. One thing is what people bring to the room, and another is what they try to avoid talking about. So, what do companies often need to remember to communicate to investors?
Contextual Analysis: Companies sometimes present the NVT ratio without the necessary context. It's essential to explain the underlying reasons for changes in the ratio, such as market trends, technological developments, or shifts in user behavior. Although there is no direct impact on this considering the FTX case, the Alameda Research Hedge Fund receiving large sums of money could impact the market sentiment. However, an indirect NVT impact still creates a critical context that helps to understand the metrics output.
Long-Term Trends vs. Short-Term Fluctuations: Focusing solely on short-term NVT data can be misleading. Long-term trends provide a more accurate picture of the network's health and potential. Considering long-term developments such as technological upgrades, regulatory changes, and shifts in market adoption or user behavior makes more sense.
Complementary Metrics: Relying solely on the NVT ratio without considering other metrics (like active addresses, transaction fees, or network congestion) can give an incomplete picture of the network's performance.
Qualitative Factors: Qualitative aspects like technological innovation, community strength, and developer activity are often overlooked but significant for a comprehensive analysis.
Conclusion: the NVT ratio metric is much more than a mere numerical indicator; it's a lens through which the intricate tapestry of blockchain technology and investment can be better understood. There is no panacea in any metric, but they help us understand and make decisions that always carry smaller or higher risks. The same is true here. In the diverse contexts of blockchain applications – from transactional platforms to store-of-value systems – the NVT ratio can serve you as a helpful tool, offering insights without keeping you blind.
Here are a few suggestions for those who are looking to use this metric going forward:
Deepen your understanding of NVT: Educate yourself about the nuances and applications of the NVT ratio in blockchain analysis, understanding how the NVT ratio reflects the relationship between a network's market value and transaction volume.
Regular monitoring: incorporate regular monitoring of the NVT ratio into your investment analysis routine. Please pay attention to the ratio's absolute value and trends over time to gauge the network's financial health.
Contextual analysis: Always analyze the NVT ratio in context. Consider factors such as market trends, technological advancements, and shifts in network utilization that influence the ratio.
Long-term trend analysis: focus on long-term trends in the NVT ratio, rather than short-term variations, to evaluate the enduring value of blockchain investment.
Integrate with broader metrics: combine NVT analysis with other metrics such as user growth, network scalability improvements, and governance models to comprehensively view an investment’s potential.
Balancing NVT with risk appetite: Use the NVT ratio to align investment choices with risk tolerance. A high or volatile NVT ratio may indicate higher risk, while a stable or moderately fluctuating NVT ratio could suggest a more balanced risk profile.
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