The cryptocurrency ecosystem continues to grow and change, infiltrating new areas of finance and society. Governments are integrating digital assets into their legal and regulatory structures, and individuals all over the world are increasingly adopting all kinds of crypto coins and tokens.
But for beginners, it is often difficult to make sense of the metrics, or technical characteristics, that distinguish a profitable cryptocurrency from a dud.
And, beyond this, it is crucial that everyone understands the basics of how digital currencies operate before making investment decisions.
So, in this guide we’ll examine and explain the main crypto metrics you need to be aware of.
Let’s start with some broad metrics that indicate some basic but critical market data about specific cryptocurrencies.
Market capitalization is a measure of the relative size of a cryptocurrency. It is calculated using the following formula:
the current price of a cryptocurrency x the total number of coins in circulation
Market cap, as it is also known, it important for giving you a sense of the overall market for any given coin or token, as well as whether that crypto is over- or undervalued.
Realized capitalization is a variation of market cap that puts a value on each unspent transaction output. Basically, instead of the crypto’s current worth, this metric considers the value at which it was last transferred. So, long-dormant currencies will have a much lower realized cap than market cap, reflecting their actual presence in a blockchain economy.
Network value-to-transactions ratio (NVT) approximates the relationship between market capitalization and transfer volume, or the total amount of currency moved between addresses or crypto wallets in blockchain transactions over a given time period.
The relative balance of these two values suggests, for example, whether Bitcoin is being priced highly (when market cap outpaces transfer volume) or at a discount (when transfer volume outpaces market cap growth) by investors.
In short, NVT gives an indication of the relationship between a currency’s overall value and the amount of transactions occurring with that currency.
Funding rates is the last broad indicator we’ll look at, and they are regular payments made between traders to keep the price of a perpetual futures contract, which is a long-term agreement to buy or sell an asset, close to the index price.
What does that mean? Well, positive funding rates are proportional to the number of contracts and show the long-term/short-term leaning of a crypto market. Positive financing demonstrates that long-term traders are mostly in control, whereas negative funding rates indicate that short-term traders are dominating transactions.
Transaction and Capital Flows
Now let’s look at some metrics that provide information about specific kinds of currency flows.
To start, Exchange flows measure the movement of crypto in and out of an exchange, specifically by considering the number of coins deposited in or withdrawn from all the exchange‘s wallets. By examining the exchange inflow, exchange outflow, and the overall exchange balance, you’ll be able to get a sense of the trading health of that particular exchange.
Stablecoin flows look specifically at, you guessed it, the flow of stablecoins in the broader crypto market. This can approximate the overall investor sentiment on stablecoins, which in turn is a proxy for how crypto trading is going: are investors flocking to a more stable, secure option, selling off stability in order to profit from skyrocketing currencies, or selling off their stablecoins altogether to exit the market?
There are similar metrics that look at altcoins, which in contrast give you a sense of the courage and innovation in the crypto market.
One the most widely used volume-based indicators, Open interest looks at the number of contracts being traded in a specific or general market at a specific time. The metric is produced by adding the total number of open trade positions and substracting the total number of closed trades.
You can use open interest to determine the capital inflows into markets, as it shows you how many market participants are looking to bring in money.
As Bitcoin is the undisputed king of crypto, it is also important to consider some BTC-specific metrics, which will in turn help you interpret the wider market.
The Bitcoin heat map is one such metric, and is based around the idea that BTC pricing works in 200-week cycles, finding its cycle bottom roughly every 200 weeks. This metric uses past price data to create a color heat map based on the percentage of increases over the 200-week moving average (MA).
By looking at the colors of the heat map, you can pinpoint good moments to buy or sell BTC within the broader context of its trading, e.g. whether the price is ‘hot’ or ‘cold.’
Taking a different approach, the Bitcoin rainbow chart is named after eight rainbow-colored bands that divide the Bitcoin price range into categories (for example: “hold,” “accumulate,” and “sell, seriously, sell.”)
The rainbow chart method provides investors with specific pattern-based information on what part of the price cycle BTC currently occupies.
It is crucial to note, however, that past performance alone (which is what the rainbow chart utilizes) is not necessarily a precise and correct signal to buy or sell. So always use this chart in conjunction with other metrics that account for market volatility and broader economic factors.
Price Fluctuations and Charting
Moving on from this, let’s dig into some more specific metrics that help us interpret price fluctuations or price movements. All of these take different approaches to help you glean specific insight from price charts.
On-balance volume (OBV) is a technical indicator that measures the momentum of a cryptocurrency. It attempts to predict price changes by measuring volume change as a compounding indicator (adding on up days and subtracting on down days) and thereby quantifying purchasing or selling pressure.
In turn, getting a sense of this pressure will tell you what kind of volatility to expect in a given market. A positive OBV suggests more buying than selling, and a negative OBV suggests more selling than buying.
Relative strength index (RSI) is another important technical analysis indicator that assesses the degree to which a stock or asset is currently overbought or oversold. RSI is shown with an oscillating line between 0 and 100. At 70 or above, a corrective price pullback or trend reversal is likely to happen soon, whereas at 30 or below, the asset is likely to see a major price increase.
In contrast, the Average directional index (ADX) focuses on the strength of a cryptocurrency trading trend, regardless of whether it is up or down. This is based on two indicators: the negative directional indicator (-DI) and the positive directional indicator (+DI).
Combined, the ADX usually includes three separate lines, which can be used to determine whether a trade should be taken short or long or not at all.
The Stock-to-flow (S2F) model shows the ratio between a currency’s current stock and new production flow. This is usually displayed as a percentage-based annual growth in supply.
S2F is constructed around the concept that scarcity is the source of value, and depending on the relationship between circulating assets and newly created assets, a currency can be either truly valuable or not. For example, with Bitcoin, the combination of a ceiling cap on the number of coins and the intense difficulty of Bitcoin mining makes the asset generally scarce and therefore valuable.
Moving average convergence-divergence indicator (MACD) is similar to these other metrics in that it shows the link between the moving averages of an asset’s price. It is one more way to guess whether there is a bull or bear market, and furthermore whether that trend is waxing or waning.
It is calculated by taking the difference between the 26-period exponential moving average (EMA) and the 12-period EMA, which produces a ‘signal line’ equating to nine days worth of EMA. In turn, the line indicates buy and sell signals.
Besides some of these more quantitative metrics, it is also important to consider slightly more qualitative metrics, or indicators that try to approximate slightly more abstract concepts.
A good example of this Fear & Greed index, created by the software firm Alternative.me. The index tries to measure investors’ emotions around BTC and other major currencies like Ethereum and ETH-based tokens.
Refreshed every day, it uses various data sources to capture the overall attitudes of investors and crypto traders with a weighted score between 0 (extreme fear) and 100 (extreme greed). This is also a shorthand for how bullish or bearish trading is at a given moment.
The index is useful because it recognizes the importance of collective volatility and sentiment in shaping trading trends. And while not all are as reliable as Fear & Greed, keep an eye out for these kinds of indexes as well as the more traditional numeric indicators.
This is by no means an exhaustive list of all the metrics one could use, but this is a strong list that will help you make sense of and profit from the cryptocurrency market. Indeed, using these metrics data to inform and hone your trading strategies is a great way to stay ahead of the curve, consistently turning a profit no matter what happens.
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