Polygon (POL), a well-known layer-2 scaling solution, has been facing significant challenges recently, raising questions about its current valuation. As the token struggles with declining network activity, dApp volumes, and reduced investor interest, some analysts are beginning to question whether Polygon may be overvalued. The recent drop in dApp volumes by 41% over the past 30 days and a significant decline in Open Interest suggest a potential downturn ahead.
As of January 24, 2025, Polygon traded at around $0.43, sitting on a crucial support level. A break below this level could lead to further downward pressure, as bearish trends continue to take hold. Let’s take a deeper look at the recent indicators and data driving these concerns.
One of the key metrics pointing to Polygon’s potential overvaluation is the Network Value to Transaction (NVT) ratio. Over the past two days, Polygon’s NVT ratio has risen dramatically from 27.66 to 86.44. The NVT ratio is an indicator that compares the value of a blockchain’s market capitalization to its transaction volume. When the ratio rises sharply, it suggests that the network’s market value is not supported by real transaction activity, hinting at an overvalued asset.
The increase in NVT signals a growing disconnection between market value and network activity, meaning that despite Polygon’s recent price fluctuations, there is not enough activity on the network to justify the current valuation.
According to data from DappRadar, Polygon’s dApp volumes have plummeted by 41% over the last 30 days, bringing the total to $6.16 billion. Alongside this decline, the number of Unique Active Wallets has dropped by 22%, now totaling around 3.62 million. These drops in usage suggest that there is reduced demand for the network’s services, which could impede future growth.
Further, in the DeFi sector, Polygon is also experiencing weak performance. The Total Value Locked (TVL) on the Polygon network has dropped to $1.03 billion, marking a weekly low. Similarly, daily revenues on the blockchain have dipped to just $6,860. These indicators point to a slowdown in both development and user participation, weakening the overall value proposition for POL.
On the technical side, Polygon is trading within a descending triangle pattern on its lower timeframes. This pattern is typically viewed as a bearish signal, as it indicates that the price is consolidating before likely continuing the downtrend. The lower trendline of this pattern sits at $0.43, a crucial level that Polygon is currently testing.
If Polygon fails to hold the $0.43 support, the price could potentially drop to $0.40, marking further losses. Additionally, the Bollinger Band Trend indicator shows that bears are in control, reinforcing the likelihood of a price decline. While the Money Flow Index (MFI) suggests that the token might be oversold (with an MFI of 30), signaling a potential buy opportunity, the overall market sentiment remains cautious.
Another worrying sign for Polygon is the recent drop in Open Interest—the total value of outstanding derivative contracts. According to Coinalyze, Polygon’s Open Interest has fallen by $14 million in less than five days, dropping to $73.59 million. This decline reflects a lack of conviction in the market and suggests that derivatives traders are moving away from positions in Polygon. This decrease in Open Interest indicates uncertainty, as traders seem unwilling to take on new positions amid bearish trends.
When Open Interest declines during a downtrend, it often suggests a lack of market participation and may lead to consolidation within the current price range. This situation reduces the chances of a price reversal or significant upward movement in the near term.
With the recent drop in network activity, declining dApp volumes, and the rising NVT ratio, there are growing concerns that Polygon might indeed be overvalued at its current price. The lack of strong network usage, paired with the increase in selling activity, raises doubts about the sustainability of the current price levels. Furthermore, technical indicators suggest that bearish momentum could dominate in the short term.
While Polygon does have strong long-term potential, especially considering its role in the growing DeFi and NFT sectors, the recent data and market signals point to short-term downside risks. If the price continues to struggle at key support levels, it may face further declines.
Traders and investors should stay cautious, especially as the $0.43 level is tested. A breach of this support could open the door for further downside, potentially signaling the start of a prolonged correction for Polygon.
Get the latest Crypto & Blockchain News in your inbox.