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In a previous article, we looked at [NVT, the Network Value to Transactions ratio](https://steemit.com/bitcoin/@crypto.inferno/what-is-nvt), which is a basic way of valuing a crypto network.


NVT is simply the overall market cap of a crypto divided by the volume of transactions that take place on its blockchain. The thinking is pretty straightforward: more valuable blockchains should see more transactions. Comparing NVT for different cryptos, you should be able to see which are under- or over-valued. And changes in NVT do broadly correlate with price inflections.

But it’s not a particularly sophisticated metric, and doesn’t account for a lot of important factors (a spam attack, for example, sees a lot of transactions on the blockchain, but doesn’t reflect underlying value). A more nuanced approach is [NVM, or Network Value to Metcalfe ratio](https://medium.com/cryptolab/network-value-to-metcalfe-nvm-ratio-fd59ca3add76).

NVM is not nearly so simple as NVT to grasp, but it turns out it’s quite good at predicting when bitcoin is over- or under-valued. Robert Metcalfe was an early Xerox PARC employee, and came up with the principle that the value of a network is proportional to the square of its nodes or users. So a telephone system with 200 users is four times as valuable as one with 100 members – not twice as valuable, as you might first think. This is why bitcoin is so valuable: its network is that much larger than any altcoin’s network, and the impact of that difference is squared.



Taking different implementations of Metcalfe’s law, [Cryptolab Capital has come up with a model](https://medium.com/cryptolab/network-value-to-metcalfe-nvm-ratio-fd59ca3add76) that works surprisingly well. Read the article in full for a proper overview, but the take-home message is that a rise in value should be accompanied by a rise in [Daily Active Addresses](https://bitinfocharts.com/comparison/bitcoin-activeaddresses.html)  – if not, price may be getting ahead of ‘real’ value (i.e. a bubble).



This may all change with the introduction of proper custodial services and exchange-traded products, but in the immediate future it’s another useful tool to add to the crypto investors kit.

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