The 'Network Value-to-Transaction' (NVT) ratio is an asset valuation metric similar to the P/E ratio traditionally used in equity markets to gauge a stock’s growth potential.
The P/E or 'Price-to-Earnings' ratio is calculated by dividing the company’s current price per share with its earnings per share. A high P/E could mean a stock’s price is high relative to its earnings and therefore possibly overvalued. Conversely, a low P/E might indicate that the current stock price is low relative to earnings and possibly undervalued.
As crypto assets are not companies we don’t know their earnings, so Transaction Volume is often used as a proxy for the blockchain’s underlying value.
As such, the typical formula for NVT is the following:
NVT = Daily Market Cap / Daily Transaction Volume
Since Daily Trx Volume gets rather noisy and often includes duplicate transactions, it’s not an ideal measure of a network’s economic activity. That’s why at Santiment we calculate NVT using Daily Trx Volume, but also by using Daily Token Circulation instead, which filters out excess transactions and provides a cleaner overview of a blockchain’s daily transaction throughput. You’ll find both approaches plotted on the graph and can choose which one you prefer.
As with P/E, a high NVT indicates that an asset’s network valuation is higher than the value being transmitted on the network. In other words, the network is expensive relative to how much value it moves, signaling a potentially overvalued asset.
Conversely, a low NVT denotes an asset that is cheaper per unit of on-chain transaction volume, signaling a potentially undervalued asset.
NVT is often used as a long-term indicator of an asset’s price trends, rather than a day-to-day valuation metric.