Fear or greed? Crypto sentiment index hits "extreme greed," NVT indicator set to reach "sell signal"

Bitcoin reached a yearly high of $12,468 on the 17th, initially appearing to break and hold above $12,000. However, it began to decline starting at 5 a.m. today, dropping to a low of $11,612. A fundamental indicator for Bitcoin suggests that its price is nearing a peak, with the indicator set to touch highs seen in 2017.

Bitcoin broke the $10,000 mark at the end of July and has since continued to rise rapidly, setting new price highs for the year. Many well-known analysts on Twitter have changed their views, believing that Bitcoin has broken out of its long-standing resistance range, with the extent of future increases now uncertain. However, aside from indicators like the "extreme greed" level on the Fear & Greed Index, the NVT indicator is also approaching levels indicating overvaluation.

Bitcoin NVT Indicator

The Bitcoin NVT (Network Value to Transactions Ratio) valuation model was proposed by crypto analyst Willy Woo. It estimates the value of Bitcoin based on the ratio of the overall value of the Bitcoin network to on-chain transaction volume, also known as Bitcoin's P/E ratio. Since trading volume on centralized exchanges can be manipulated, measuring on-chain transaction volume is considered more accurate.

According to the derivative indicator of NVT, called "NVT Signal," during the peak prices of Bitcoin in December 2017, late 2018, June last year, and February this year, the "NVT Signal" indicated overvaluation. It is now about to signal a sell-off once again.

In the chart above, it can be observed that:

• Bitcoin's historical high in 2017
• Before the Bitcoin crash in 2018
• Bitcoin's breakthrough to $10,000 in 2019
• Before the Black Thursday crash in 2020

At these points in time, the "NVT Signal" touched the overbought level, which is a variant of the NVT Ratio introduced by Dmitry Kalichkin, an analyst at venture capital firm Cryptolab Capital. It is derived by dividing the Bitcoin network value by the 90-day moving average of on-chain transaction volume.

No Perfect Analysis Indicator

Compared to the NVT indicator, "NVT Signal" emphasizes predicting signals before Bitcoin prices reach their peak, making it useful for investors to judge market lows and peaks.

However, a closer look at the historical trends of "NVT Signal" shows that although it predicted the historical high of 2017, there were several instances in 2018 where it did not signal a sell-off, and Bitcoin began to decline. In April 2019, "NVT Signal" also indicated overvaluation, but the result was Bitcoin rising from $5,000 to $13,800.

In addition to the 24/7 nature of the cryptocurrency market, which is known for its high risk and volatility, in such an unstable market, both fundamental and technical analyses are difficult to predict future trends. Therefore, many experienced individuals believe that refraining from excessive trading and avoiding short-term trading is the best strategy. Nevertheless, "NVT Signal" remains one of the few fundamental analysis tools in the crypto market. When combined with different strategies for bull and bear markets, as well as integrating other data, it should still be able to serve as an indicator for capturing major market trends.