3mins read
Published on: Feb 11, 2025
#Crypto 360
#Trading 101
Recently, the cryptocurrency market has been going through a period of uncertainty. As of 10 February, Bitcoin was trading at around $97,855. It has been largely stagnant, with many attributing this to the lack of fresh capital inflows. The hype that fuelled last year’s price surge was largely driven by institutional money, and now, without fresh capital entering, Bitcoin’s price is having difficulty breaking out to new highs.
One of the biggest concerns is the decline in retail investor sentiment; data shows retail traders are losing confidence for several reasons. First, the market has seen a series of corrections, with Bitcoin and other major cryptocurrencies experiencing price drops after reaching new highs. Many retail investors bought at higher prices and now see their investments decrease in value, making them more hesitant to invest, since their interest is tied to big price movements.
Image Source: Crypto Fear & Greed Index
However, despite representing a bearish sentiment, it also presents opportunities. Historically, when retail investors turn fearful, it has sometimes signaled a bottom, as it leaves room for institutional investors and whales to accumulate assets at discounted prices.
The on-chain data, which provides insights into what’s happening behind the scenes in the crypto market through the Network Value to Transactions (NVT) Ratio and Market Value to Realised Value (MVRV) Ratio, are currently showing mixed signals.
The NVT Ratio, which compares Bitcoin’s market value to the number of transactions on its network, suggests that when Bitcoin’s NVT (Network Value to Transactions) ratio is at 124, it indicates that the market value (market cap) of Bitcoin is 124 times higher than the value of transactions being processed on its network.
This suggests that Bitcoin is overvalued, implying that the market price is significantly detached from the network’s actual usage and transaction volume. In this case, it could point to excessive speculation or an inflated market price relative to the current transaction activity.
Historically, a high NVT ratio tends to coincide with periods of price bubbles. On the other hand, a low NVT ratio indicates a potential undervaluation, suggesting strong network activity relative to Bitcoin’s market cap. When the NVT ratio is extremely high, it could signal that Bitcoin is overpriced and a price correction might be looming, as the market may be driven more by speculation than by actual usage and demand.
Image Source: BitboBTC
On the other hand, the MVRV Momentum, which measures the Bitcoin price divided by the realised price, is at 2.4, indicating that, on average, Bitcoin investors are holding significant profits.
This means that, on average, Bitcoin is 2.4 times higher than the price at which Bitcoin was last moved on the blockchain, suggesting that many investors are sitting on substantial unrealised gains.
Historically, when the MVRV ratio is this high, it often signals that many investors are in profit, which increases the likelihood of profit-taking and selling. This can lead to downward pressure on the price as people begin to cash out. In essence, an MVRV of 2.4 can be interpreted as a warning sign that Bitcoin may be overvalued in the short term, and a price correction or pullback could be imminent.
Image Source: Bitbo
Recent developments have significantly influenced market dynamics. The US Federal Reserve’s projections of fewer rate cuts in 2025 have heightened market uncertainty. This policy shift has led to a decline in risk assets, including cryptocurrencies, as investors reassess their positions in response to the evolving economic landscape. It looks like the market has already priced in the market instability expected with President Trump’s future policies.
On top of this, the Bank of Japan is in the process of deciding whether to raise interest rates again, which could have a significant impact on the yen carry trade. If the BOJ tightens its policy, the cost of borrowing will increase, making the carry trade less attractive. As a result, investors may prefer to hold cash, and capital could flow out of risk assets like Bitcoin, further contributing to price stagnation.
Despite these challenges, some traders are still bullish on Bitcoin, given factors such as increasing institutional adoption, potential regulatory clarity, and technological advancements within the blockchain space as drivers for future growth.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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