One of the difficulties of getting into Trading is the sheer amount of time required to understand the techniques used and find a successful strategy that might work. It is not particularly intuitive and there are some who doubt that Technical Analysis even works.
Fortunately, there are different sources of information that can act as indicators to both short and long term price movement, which are less abstract, more intuitive and specific to cryptocurrency..
Transactional Data
If you were considering investing in your local coffee shop, one of the first things you’re going to want to look at is revenue. Total revenue is crucial but so would the daily patterns in revenue, relative growth rates week-on-week, and what types of coffee are being sold so you can create basic customer profiles.
You can take a similar approach to analysing cryptocurrencies by pulling transactional data yourself – by running a node – or relying on existing services or analysts. Just taking Bitcoin as an example, there is a wealth of data that can act as leading indicators:
Mining Data
Miners are the backbone of the Bitcoin network, their work – in running the hashing algorithm – literally secures the integrity of transactions. Mining is measured in Hashrate, so the logic goes that the higher the hashrate, the stronger Bitcoin is and the better it functions as a store of value.
Hash Rate plotted over time supports this idea, but of course isn’t very granular. By looking at things like
- Mining Distribution you can assess whether this crucial function is becoming concentrated.
- Mining Revenue and its movement will tell you whether it is being retained, or sold to finance operations.
- Transaction Fees can help you understand the types of users and how this might relation to further adoption.
In exactly the same way, you can look at the following data groups and find useful potential indicators:
Network Activity
This is a proxy for customer data, as you can see things like number of Addresses, Number of Transactions, Transaction Processed per Second, UTXOs (balances) & Average Transaction Value
Wallets/Exchange Accounts
Wallet providers like Blockchain.com provider data on the number of wallet downloads. This is quite a crude indicator as it doesn’t mean the user has funds. In a similar way, big exchanges like Coinbase release data on customer growth, and as it will soon be a publicly listed company will have to share this kind of data. Its recent filing provided a trove of information.
Scarcity
Bitcoin’s most important characteristic is its scarcity. It is programmed into the rules that govern its function and works like clockwork, creating 6.25 BTC roughly every 10 minutes (a rate that halves every four years). A model has emerged that charts a relationship between this predictable scarcity and price, called Stock-to-Flow.
Stock-to-flow was created in 2019 by an anonymous analyst called PlanB, and uses a traditional measure of the scarcity of precious metals like Gold. It uses the relationship between existing stocks and new stocks in a simple formula:
Stock-to-flow = 1/Supply growth rate
Gold’s supply is predictable, because it is indestructible and extraction is inflexible. SF is about 62. Bitcoin’s SF is constantly increasing, because supply growth rate is constantly declining and trending to zero, as in 2140 the last Bitcoin is expected to be mined.
Broader Ecosystem Data
Cryptocurrencies don’t have standard measures PE Ratios but there are a growing set of bespoke metrics that can provide indicators of network health, growth and hodling. Sites like Blockchain.com, Glass Node and Woo Bull Charts provide them for free.
A good example is Market Value vs Realised Value (MVRV) – which measures the Market Value of bitcoin in relation to the price it last moved. This is one of a number of proxies for understanding how much users are hoarding.
In the same way, statistics measuring the proportion of balances that haven’t moved over the last 12 months helps quantify hodling behaviour, and potential selling pressure.
In a similar way, measures in the growth of Whale Accounts and Institutional Investment are both valuable indicators, as are patterns in the movement of coins into or off exchanges, which act as pro or contra-indicators of hodling.
Leave a Reply