Looking at NVT Ratios: A Comparison Between LTC and BTC
Updated: Feb 20, 2022
Today, I wanted to take a look at the NVT ratio of both Bitcoin and Litecoin. If you're unfamiliar with this metric, it's basically a P/E multiple for blockchains. What it does is take the market cap of a network and divides it by the total amount sent on-chain. In this case I used the 7 day SMA of the market cap vs. the 7 day SMA of the total transfer volume of LTC and BTC. Then, I divided the LTC NVT Ratio by the BTC NVT Ratio to get see when LTC is undervalued vs overvalued against BTC.
Let's take a look at the two NVT Ratios side by side:
The red line shows LTC's NVT and the black line shows BTC's NVT going back to 2014. When either NVT moves up, the network is considered to be overvalued on a relative basis as it's p/e multiple increases. You're paying a premium vs. the total amount sent on-chain. When the NVT is lower that means the network is trading at a discount to it's total transfer volume and you should consider buying.
When the LTC NVT (red line) is above the BTC NVT (black line), LTC can be considered to be overvalued. It's important to take this data into context though. For example, at the end of 2013 notice the LTC NVT ratio went down significantly but was largely due to a large volume of transfers going to exchanges to dump coins.
This isn't organic network usage. We need to be able to try to sort out organic vs. inorganic network usage. In other words, what amount of this volume is medium of exchange (use as money) volume vs. speculative volume? I'll do some more digging to try and come up with a way to sort this for discussions in the future.
Also notable is that we've also seen a discrepency between total transfer volume on LTC vs the adjusted transaction volume published by data metrics websites like Messari, which is important to keep in mind. These charts would look quite different using the adjusted transaction volume metrics.
For now, let's take the data we have at face value and interpret it on the assumption it's accurate.
Below is the LTC/BTC NVT Ratio:
When the ltc/btc ratio is below 1, we should consider that the LTC network is undervalued relative to BTC, and when above 1 we should consider that LTC is overvalued. A value of 1 should represent equal value between the two networks because it means their price/market capitalization is proportionally the same to its total transfer volume.
If this data is accurate, then it looks that LTC, at current transfer volumes is around 4-10x undervalued against BTC. Because we have been speculating that bitcoin prices should start rapidly accelerating to the upside, fees should rise, and this ratio should get even lower (even more undervalued) until the market realizes this and then ltc/btc repricing should occur very rapidly to the upside.
Let me know if this article is helpful and any mistakes I may have made in this analysis.
If you prefer video explanations, I recently released a video describing this same metric here: https://www.youtube.com/watch?v=r4JnPMhceV8