bitcoin (BTC) price action can be "unsustainably high" as a metric hits its highest levels in seven months.
On-chain analytics company data glass node confirms that on December 21, the Bitcoin network's signal transaction value (NVT) 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.
The NVT signal modifies its readings using a 90-day moving average of daily trading volume instead of raw data, something Glassnode He says It โimprovesโ the NVT and allows it to โperform better as a leading indicatorโ.
On December 21, the NVT signal reached 18.58, a level that last appeared when Bitcoin fell in the last 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 shows a warning. Despite Bitcoin being worth less than 50% of its April levels, network volume has dropped to such an extent that even the current valuation of $16,800 might not last.
As Woo explained in a description from the NVT ratio on their review site, Woobull:
โWhen the NVT of Bitcoin is high, it indicates that the valuation of your network is outpacing the value that is transmitted in your payment network, this can happen when the network is in high growth and investors value it as a high-yield investment , or alternatively when the price is in an unsustainable bubbleโ.
A tale of two NVT signals
However, there is a catch to NVT. As several analysts, including Woo, have pointed out, the ever-changing nature of the Bitcoin network means that transactions are increasingly moving off-chain.
Related: Bitcoin Price Fails To Recover $17K With Market 'Not Prepared' For Drop
Along with other phenomena, this affects on-chain transaction data to the extent that NVT can produce an overly pessimistic picture of transaction value.
This is addressed with 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 the divergence of NVT from the mean. It also provides value zones to more easily determine entry points based on your readings.
DRNVT is currently in that value zone, TradingView data shows, a key contrast to the standard model.
โThe NVT signal with a dynamic fair value range should be used with care,โ Edwards cautioned, however, in a Introduction to the indicator in 2019.
"As with all markets, an asset can remain 'expensive' or 'cheap' for long periods of time and continue to get more expensive or cheaper."
The views, thoughts and opinions expressed here are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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