Since its inception in 2009, cryptocurrencies have slowly edged their way into global recognition and acceptance. Though they are basically in their teenage years, they have seen several investors turn significant profits, which has piqued the interest of institutional investors and even whole countries. This is despite the fact that these assets are often riskier than mainstream assets such as stocks and forex. To that end, there is a dire need for crypto enthusiasts to learn how to perform analysis of these markets effectively.
In this article, we shall look at the most insightful indicators for crypto. But first, let’s see what analysis methods exist for these assets.
Types of crypto analyses
Like most other financial assets, crypto investors often perform both technical and fundamental analyses when looking for trade opportunities. In technical analysis, traders will bank on the fact that history often repeats itself. They look at patterns of previously repeated market behavior, then wait for them to manifest in current charts, predicting that they will yield the same outcomes. They also look at the forces of demand and supply, as these are often one of the major moving forces behind crypto price moves.
Fundamental analysis, on the other hand, involves understanding a coin’s qualitative and quantitative value. This is done by examining the utility of a coin and gauging whether the coin is undervalued for its intrinsic value or grossly overvalued. These analysts also examine the effects of global crypto events such as the Bitcoin halving. Such events, whether scheduled or spur of the moment, tend to have a significant effect on crypto prices.
Popular crypto indicators
1. Bitcoin dominance
Having been first to market, BTC has so far managed to retain the #1 spot as the biggest cryptocurrency by market capitalization. BTC dominance is a metric that gauges Bitcoin’s market cap relative to the market cap of the rest of the crypto market, collectively known as altcoins. It is obtained by dividing BTC’s market cap by the collective capitalization of all altcoins. In the first few years, Bitcoin’s dominance was close to 100% as there weren’t that many competitors, to begin with. Nowadays, with the ease of launching an ICO and creating new tokens, these altcoins have reduced BTC’s dominance significantly.
To trade this metric, traders look at a variety of scenarios. If the value of BTC is rising as its dominance index rises, it points to a potentially bullish setup for this top cryptocurrency, prompting them to buy the token. If BTC’s price falls while its dominance rises, it may be time to go short on altcoins. If its value rises while its dominance index falls, it indicates a potential altcoin rally in the making. Finally, if both the price and dominance of Bitcoin fall, it points to a bear market for the entire crypto industry.
2. Correlation to Bitcoin
This is a metric that gauges how close an altcoin’s price is correlated to that of Bitcoin. Correlation is a mathematical principle that measures the statistical relationship between two variables, which in this case are our prices. This metric usually ranges from -1 to 1.
A measure near the -1 extremity would suggest a negative correlation to BTC’s price, which would mean the altcoin and Bitcoin prices move in different directions. A result of 0 or close to it would mean that both prices have no relation whatsoever. A correlation close to 1 would suggest that both the altcoin’s and the BTC’s price move in tandem at any given time.
The implication of this tool to traders is most evident in times of Bitcoin crashes. Whenever Bitcoin is performing poorly, traders will want to hedge their positions by investing in coins with low or negative correlation to this first market mover. As a rule of thumb, it is always wise to have assets with low correlations in your portfolio. This helps greatly minimize your risk exposure.
3. Ownership concentration
This is a metric that measures the distribution of a cryptocurrency’s total circulating supply. To that end, there are three groups of crypto owners: whales own over 1% of the total supply, investors own between 0.1 to 1% of the circulating supply, and retail traders hold less than 0.1%.
This metric helps speak to the decentralization of a particular crypto token. If most of its supply is held by whales and investors, this means they can easily control the market at the expense of retail traders. If, say, one wallet held more than 90% of the coin’s circulating supply, they could easily sell and crash the token’s price. Therefore, you’ll typically want to invest in a coin whose majority of supply is in the hands of retail traders.
4. Ownership concentration – whales
As aforementioned, whales are those addresses that hold more than 1% of the total circulating supply of a cryptocurrency. For different cryptocurrencies, whales may require to hold different dollar amounts to qualify into this classification. For instance, a BTC whale would need to hold a much larger dollar amount than, say, a Smooth Love Potion (SLP) whale. This is because the larger BTC market cap requires this coin’s whale to control a much larger supply of Bitcoin in dollar terms.
Whales are further classified into high activity and low activity addresses. Holders who typically average less than 300 transactions a year are termed as low activity, while traders with over 300 transactions are termed as high activity whales.
5. Ownership concentration – investors
Investors are addresses that hold anywhere between 0.1% and 1% of a crypto asset’s total circulating supply. Like whales, they are also classified into low activity and high activity investors. The former average less than 300 transactions per year, while their high activity counterparts trade their holdings more than 300 times in a year.
Conclusion
There are several indicators unique to the crypto market that are especially useful to traders. These include but are not limited to the BTC dominance, the correlation of a given coin to Bitcoin, and the ownership concentration of its circulating supply. These three metrics can help inform a trader whether and when to go long or short on their cryptocurrency of choice.
