This post is the product of a four-hour, very enlightening conversation between Willy Woo of woobull.com and I. He’s a brilliant, creative Bitcoin data-wizard. We cover the mechanics and application of the NVT Ratio (Network Value to Transactions Ratio), a ratio Willy Woo invented to track bubbles and buying opportunities in Bitcoin and other Cryptocurrencies. We cover cryptoasset analysis and talk about the innovation and disruption caused by Bitcoin and Cryptocurrencies. Enjoy.
Introduction: Who is Willy Woo?
Willy Woo: “I’m specifically a Cryptocurrency researcher as I’m trying to find the underlying stuff that people haven’t figured out yet. If you go to Wall Street and stocks, there’s all manners of indicators and calculations you can do that are centuries old. Cryptocurrencies are new and I’m coming up with new stuff so we can start to understand this field. People talk about Bitcoin being in a bubble, there’s no intrinsic value and what I’m doing, is showing actually there is intrinsic value and here are the indicators. This is a new field of Cryptocurrencies, these metrics are what’s relevant here. We didn’t know how to value internet stocks in the 1990’s. P/E ratios was through the roof and people didn’t understand zero marginal cost of companies. What if you reach the world at zero cost, what does it mean and how to value that stuff? It’s the same thing with Bitcoin. These aren’t companies so there is no earnings. How do you value it?”
Willy Woo: “What I like doing is just getting the data and plot it against each other and try to look at correlations. Just go very empirical. Then you go “ah why is that happening?” And then you go a layer deeper and usually shit comes out.”
Norupp: “You always know what you’re looking for?”
Willy Woo: “I don’t know what I’m looking for, actually. I’m looking for patterns and trends. “What happens if I do this? Boom, whoa that’s interesting, what does it mean?” And you kind of develop a thesis behind what it’s showing you and then you do other things to try to prove that it’s right or wrong. Then you might come up with another bunch of questions and you just keep going down this rabbit hole and every now and then you come up with useful stuff.
Norupp: “Sounds cool. So, it’s experimentation.”
Willy Woo: “Yeah I think it’s like art. Art is grabbing other people’s ideas and go “oh that’s cool what if you change it this way”. It just keeps going.”
The NVT – Network Value to Transactions Ratio
Norupp: “The NVT Ratio. Can you talk about what it is and its fundamentals?”
Willy Woo: “The NVT is… I guess I could explain how I came up with it. I started thinking about how to track the equivalent of the valuation of a payment company? So, if it was PayPal: PayPal would be how much money they’re earning to its stock price.”
Norupp: “The P/E Ratio.”
Willy Woo: “Yeah, that’s the P/E right. But there are other valuation metrics like Sales to Valuation. Like within the same industry, you’ve got multiple credit card companies and they’re all just doing sales. You’ve got their sales metric, you know their operational cost are the same. Well I could just look at the amount of throughput that PayPal is doing and do a ratio to its valuation. In Bitcoin, we know the transaction throughput, but we don’t know its earnings as it is not a company. It’s the closest proxy we have to it. That’s all it is really. If Bitcoin was a payment company, let’s measure how much throughput it has, to its valuation.”
Norupp: “So, it’s like the fundamental use and utility of the protocol versus the valuation.”
Willy Woo: “Yeah. You could look at it that way. Give me a graph of the transaction throughput of PayPal and its valuation and I could probably show you that valuation tracks throughput very closely. There is a chart of mine that maps the transaction throughput and the valuation of Bitcoin and they track almost exactly. All you’re looking for is a slight deviation where one is over and one is under and that’s what the NVT ratio is. If you divide one by the other it should be a straight line in a perfect situation, but it’s not! It deviates and that’s where you see undervaluation and overvaluation. It turns out the same as you would see in PayPal early on with high growth”.
Application of the NVT
Willy Woo: “I’ve used the NVT a lot lately, because I’m always concerned that Bitcoin is going to be in a bubble. I think that it is more reliable than a lot of other tools. I keep making shit up, you know. I don’t know if you saw the google trends tool? I use a lot of tools in cross, because not all of them are going to be perfect. For example, you can see the NVT is right up there, almost calling a bubble”. See the highest point in the chart below. “Bubbles are around a NVT of 90-95 and here you would’ve said “yeah it’s in a bubble”. But the reality is that the latest data shows that it is coming back down. The price pump created all the transactional activity on the Blockchain that pushed the NVT back down. You could easily read it wrong.”
Norupp: “When is Bitcoin in a bubble. Is that at a NVT level of 95?”
Willy Woo: “It’s around 90 to 100. It’s sort of a grey sliding scale. At 100 it would be very safe to call it a bubble. We only had two true bubbles.” See below.
Willy Woo: “The late 2013 bubble was “Willy Bot”. I think there were some bullshit happening there based on the underlying data. What kind of shit pushed it that high? I’m constantly looking at these metrics and the price chart. Not all of the bumps are the same”. Referring to the price bumps on the chart. “The price rise of 2017 as well as the ones in 2012 and early 2013 have more fundamentals than the bubbles of 2011 and late 2013”.
Willy Woo can spot the fundamentals of a price rise by tracking the NVT. If the price is mooning without transactions value following, the price rise will probably hit the bubble territory of the NVT. The transaction value on the Bitcoin network is a proxy for Bitcoin fundamentals or utility value.
“In the early 2017, I said to a group of researchers: this is going to be the bubble that changes the world” Referring to the ongoing bull run of 2017. “Because unlike the 2013 bubble, this is pushed by real money, not some scam-bot buying. So, this bubble is going to be long and it is going to see massive volumes of money coming in.”
Note that the huge increase in the NVT around the “Willy Bot” bubble in 2013, is properly due to the fact that Willy Bot kept bitcoin on an exchange. The fake demand for Bitcoin did not appear as transaction value on the Bitcoin Blockchain. The NVT skyrocketed as a result.
The NVT as a Measure of Store-of-Value vs Payment Utility
Norupp: “If Bitcoin is trending towards a store of value instead of a Payment network, will the NVT become less accurate?
Willy Woo: “The Ratio works on store of value level and even at the speculative level. The more speculation you get, the more transactions you’ll see on the Blockchain and when people get in to Bitcoin as new store of value holders, each one has to activate a transaction to their wallet. Transactions are a measure of the new holders coming in so all three use cases are being tracked by the NVT. The question is will it be relevant when we do true payments. True payments are off-chain. Lightning network and all this stuff.
Bitcoin Velocity: Store of Value vs Payments
The above chart is Bitcoin Velocity and demonstrates how BTC has swung between use as a payment coin vs store of value in its past.
On Google Trends vs the NVT
Norupp: “Can you talk about the fundamentals of the Google Trends versus the NVT?”
Willy Woo: “Trends is tracking users. So you can actually look at the adoption level. The number of people searching for “BTC USD” is going to be some portion of the bitcoin user base. So you have a baseline of growth and that baseline of growth is the adoption rate. Sometimes they’re going to search it more often than others and these are times when price is getting interesting. Like when there’s a price pump people are checking it every day or every so many hours. So, you can measure that against the baseline and you can see if it’s undervalued or overvalued. When there’s a lot of searches off the baseline, it is usually overvalued as price is pumping.”
Willy Woo: “The NVT is a metric that is Blockchain based. It’s economically based. Whereas Google Trends is kind of like having robots scanning the internet for user activity, drawing conclusions from the world usage of Google. Getting clues to the growth. It’s different ways of looking in to it. One is studying humans the other is stating the underlying economics.
How fast is Bitcoin adoption? For measuring the speed of Bitcoin user adoption, Willy Woo is using the above-mentioned proxy. The Google keyword “BTC USD”.
For measuring exponential growth Willy looks at the Google Trends data on a log-chart. He found that the Bitcoin user base grew 10x in 3.375 years. This amounts to a doubling of the user base, roughly every 12 months.
The Coming Protocol Economy
Norupp: “Before Bitcoin, the underlying protocols and internet infrastructure captured no value. The Apps and companies did. Now, with Bitcoin and the other Blockchain protocols, the underlying infrastructure captures all the value, with the businesses and apps getting a small piece.”
Willy Woo: “So here you can start to own a slice of the world GDP. The internet companies are becoming a huge part of the GDP. Before Bitcoin, we got access to companies, late into the investment, via stocks. The future companies are going to be built on the protocol stack and you can own a slice of the protocol. So, if you invest now, you’re investing early for a slice of the world GDP that is going to sit on top of the protocols.”
Norupp: “Yea, so you’re buying the future infrastructure of the internet.”
Willy Woo: “Yea, you’re buying the infrastructure and you get a slice of everything that runs on top of it.”
Willy Woo: “If you look at Bitcoin as the reserve currency, which isn’t necessarily true. It is a bit like the world now where we have a lot of currencies that are strong. We kind of have a basket of currencies that are relevant now. You might look at the apps as businesses, reflecting the world GDP. The money supply is the crypto reserve currencies. Maybe that’s bitcoin but I think more likely it’s going to be the major protocol coins. Money is being raised in Bitcoin and Ethereum and that is the money supply in which activity is acting under. Whatever people are raising in and transacting in, is going to be on the left side of the NVT equation, the money supply. The businesses, goods and services which are apps, are on the right side.”
Norupp: “The apps and businesses are represented by the transactions.”
Willy Woo: “Yeah, they’re pretty much a measure of the transactions. Or the GDP could potentially even by market caps of apps. You could probably do a ratio of all of appcoin market caps vs the money supply or the general currency coins.”
On Adoption and Disruption
Willy Woo: “People would call Bitcoin a bubble, but it’s not. What we are seeing is disruption. We are doing this s-curve of adoption and what we’ll probably see is the opposite with fiat money. We are going to digital currency. This is a faze-shift. What we are seeing right now, is the industrial age transitioning to post-industrial age. The Internet almost completed this cycle. The final part of completing that cycle is digitizing money which was a scientific breakthrough we had with Bitcoin.
Now we can stream money, we can send micro-fractions across the world in milliseconds and that changes the world completely. I could Skype you in Africa but I couldn’t send you 5 cents! Now we can. This disrupts how companies are going to bill people. ISP’s and tele-carriers are all there because of the billing system. When you can start to stream money at a micro level, Wi-Fi routers can be our own internet, they can hop through a mesh net and you can remunerate everybody for the data transfer. So, you can turn everything inside-out again. When this completes within the next dozen years, everything has changed. Big companies have broken down, new companies will arise, money becomes digitized and fiat money is going down, changing the way countries operate.”
Developer Activity as a Predictor of Success
Norupp: “I measure everything in crypto based on Cypherpunk culture. More Cypherpunk culture is good to me. If the project is more about marketing, buzzwords and stuff like that, I won’t touch it.”
Willy Woo: “Someone said to me this week that the highest correlation to long-term success, is Github commits. A research paper done a while back showed that developer activity was the highest correlation to long-term success. Not marketing, not hype, not liquidity or whatever. Go to Coingecko and sort by “Developer” and it has got an interesting picture. On top of that, I focus on daily or weekly commits as well. It’s pretty accurate.”
Norupp: “It’s pretty cool that you can track the number of contributors as well”.
Willy Woo: “Yeah. It’s really useful. It really shows what’s happening”.
Norupp: “So, you can do comparative analysis on this. Like if you want to invest in the top coins, you can compare based on this and find the best ones”.
Willy Woo: “Yea and you can even track this historically and it’s actually quite predictive. Like you can track the ranking of developer activity and it is a forward-facing predictor of price.”
Digital Empires and Leaving Bitcoin
Norupp: “So are you going to leave Bitcoin if it gets boring (mainstream)?”
Willy Woo: “Yea totally. I’m going to leave if Bitcoin gets boring.”
Norupp: “Yea I’ve been thinking the same thing and hopefully the Cypherpunks are going to find another coin or project to work on.”
Willy Woo: “What we’ve seen is multiple generations of the post-industrial age. Cypherpunks invented the World Wide Web. What’s that guy’s name that invented hypertext?”
Norupp: “Tim Lee”
Willy Woo: “Yeah Tim Berners-Lee. These guys had visions. They were doing their shit in the 60-70’s. Then you’ve got the 80’s generation of the Bill Gates’ and Steve Jobs’ coming in. Then you’ve got the Googles’ in the 90’s, with the Web. Now, deep in to the 2000’s the Cypherpunks are coming back in the realm of Cryptocurrencies. Each one of these are fundamental infrastructure being build for a post-industrial age. And so, I think the completion are Cryptocurrencies. We’ve got everything in place right now and once we got Cryptocurrencies, we’ve got everything so that we can interact digitally.
Cryptocurrencies flips everything that was build prior to be rebuilt again. We are going to rebuild the Facebooks’, we are going to rebuild the Internet – even the backbone of the Internet, based on these new-coming models. So, we’re working on the Cryptocurrency rails and then I think we’re going to see a new wave of apps, and when that’s done it’s going to be boring, you know.”
Norupp: “After the infrastructure, we see growing now…”
Willy Woo: “Yea, we got Apps.”
Norupp: “That’s it.”
Willy Woo: “We’ve got digital rails which will fuel real world rails. Like Wi-Fi transmitters mesh nets or who the fuck knows. A whole lot of core infrastructure we’re using that are communication channels. Re-doing it decentralized.”
Norupp: “Satellites, stuff like that”.
Willy Woo: “Yeah, so that’s going to take 10-20 years and then we will be fully in a post-industrial age. That’ll be the age in which we see nation-states crumbling. It’s kind of like the fall of the knights and the royal empires and the rise of the nation-states. It takes a long time. The fall of the nation-states and the rise of the new digital empires. The highly connected city commerce states on Blockchains or whatever the fuck it is.”
Norupp: “Did you read The Sovereign Individual?”
Willy Woo: “No, I’ve got told that this is what it’s about, but I’ve just come to it from another angle. I like studying history. We’re going to see all this in our lifetime and I think by that time I’ll be retired. Give it another 20 years and I’ll be retired, enjoying life and I’m just curious to see all this play out.”
For more of Willy Woo’s stuff, find him on Twitter @woonomic and woobull.com
Note: The interview was edited slightly.