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Investing in crypto assets is risky for investors unless they have done proper research about the projects. Crypto metrics assist cryptocurrency investors in assessing projects so that they can make informed decisions.
Last updated Nov 9, 2022 at 03:04 PM
Posted Nov 9, 2022 at 02:56 PM
Trading risky assets like cryptocurrency demands some expertise. Choosing a strategy, comprehending the huge world of investing, and practicing basic and technical analysis – these skills require careful study.
Most price patterns can be learned from the more established currency institutions. Buyers prefer similar candlestick patterns used in currency trading, equities, and commodity trading. Regardless of the transacted fund, tools like RSI, MACD, and Bollinger Bands aim to forecast market behavior. As a result, the bitcoin industry relies heavily on these technical analysis tools.
However, the methodology employed in traditional markets cannot easily evaluate crypto assets. We must understand their source of value if we are to perform a good analysis of bitcoins. We'll discuss some crypto metrics in this tutorial that you can use to guide your investments.
Fundamental Analysis of Crypto projects
Traders employ fundamental analysis as a method to determine the "inherent worth" of a firm or commodity. Their major objective is to assess if the commodity or firm in question is overpriced or underrated by taking a variety of different factors into account. They can then use that knowledge to react effectively.
Crypto Assets Analysis
Even if technical analysis does not point to a specific decision, it nevertheless produces useful market information. Users of Technical Analysis think they can forecast possible price changes by looking at how assets have performed in the past by recognizing candlestick patterns and researching key aspects.
Conventional crypto investors typically use economic measures to determine what they think the true worth of an asset is. The total cost ratio or net income, which measures the profitability of a firm per share in circulation, is an example of a metric. To assess how their potential investment stacks up against others, they might do this for multiple companies operating in a particular niche, for instance.
Systems that use cryptocurrencies can't truly be analyzed using the same criteria as conventional firms. The more decentralized options, like Bitcoin (BTC), are more analogous to commodities. Conventional Fundamental analysis indicators can't tell us anything, especially with the more centralized digital currencies (like those produced by corporations).
Therefore, we must focus on several approaches. Finding good crypto metrics, especially those that are difficult to manipulate, is the initial phase in that approach. It's almost certainly not a good idea to rely on crypto metrics like Twitter or Telegram/Reddit members because it's easy to create false accounts or purchase social media participation.
Metrics of Fundamental Analysis
It's crucial to remember that no individual metric can provide us with a comprehensive view of the crypto project we're evaluating. On a blockchain, we may observe that there is a rising number of active addresses. But by itself, that doesn't really offer us much. For all we know, that may be a single person sending money to herself repeatedly while using multiple addresses each time.
We'll examine three types of crypto metrics in the subsections. This list won't be thorough, but it should give us a good starting point for developing a good strategy in the future.
On-chain indicators include those that can be discovered by examining the information that the blockchain provides. By operating a terminal for the chosen system and transferring the information, we could accomplish this on our own, but this can be time consuming, especially if we merely want to study the project and do not intend to devote time or money to it.
Pulling the data from the internet or APIs created particularly for the aim of guiding financial decisions is a simpler approach. For instance, the on-chain study of Bitcoin by CoinMarketCap provides us with a wealth of data.
Blockchain domains operational at a given moment are known as active addresses. There are various ways to determine this, but one typical way is to track both the sender and recipient of every transfer across set time intervals. Many researchers look at the total of distinct domains over time, or overall.
Bitcoin Active Addresses
The above picture shows the number of active addresses on the Bitcoin blockchain. You can check the active addresses of the project you’re evaluating.
The fees charged can provide information about the consumption for transaction capacity, which may be more significant for some digital currencies than for others. Participants contend with one another to get their payments published in a reasonable time; we could compare them to offers at a sale. The transfers of those who pay more will be verified more quickly than those who paid less.
Bitcoin Average Transaction Cost
This is an important measure to research for coins with dwindling output timelines. Block rewards such as fee income and block subsidies are offered by the main Proof of Work (PoW) blockchain systems.
Service charges need to grow since the expense of mining continues to climb over time while the block incentive is gradually lowered. Eventually, miners will lose money and start to leave the system. The safety of the network is impacted by this. Investing in crypto can be tricky, so be careful.
In Proof of Work digital currencies, the hash rate is frequently used as an indicator of the state of the system. It becomes more challenging to execute a 51% assault effectively with a bigger hash rate.
A rise over time may also indicate a rise in involvement in mining, possibly as a result of lower costs and increased returns. A decline in hash rate, on the other hand, indicates that miners have given up on maintaining network security and have shut down.
Bitcoin hash rate
The investment's market valuation, the volume of transfers, and the costs charged are variables that might affect the mining operation's overall expenses.
Another model similar to PoW computing is staking, but in terms of the processes, it functions differently. Individuals bet their own assets to engage in transaction verification. As a result, we may use the amount wagered at a particular period to determine interest (or lack of it). People who are investing in crypto assets must analyze these two factors.
Before investing in crypto assets, you should look at these project metrics to see whether the project is worth investing or not.
Before investing, everyone must study the project's whitepaper. An excellent document should outline the platform's objectives and, generally, provide information on:
Discussing this data with others is a good idea. What is being said by others about it? Are there any warning signs present? Do the objectives sound reasonable?
The previous history of the individuals who make up the digital asset's crew, if one exists, can shed light on whether the group possesses the necessary expertise to see the project through to completion. Have members ever launched profitable businesses in this field? Do they possess the knowledge necessary to meet their anticipated milestones? Have they participated in any dubious endeavors or frauds?
An initiative's likelihood of success can be significantly influenced by the team's reputation and expertise. If the staff is not fully revealed, that raises suspicion (bitcoin is the exception).
We must be able to determine what usage crypto asset is aiming towards from a solid whitepaper. It's critical to note the initiatives it competes with at this point, as well as the outdated facilities it aims to replace.
Preferably, these should undergo equally thorough structural scrutiny. Even while an asset could seem enticing on its own, comparing it to other crypto assets of a similar type may show that it is less strong than the others.
Some initiatives use the creation of tokens to solve problems. The initiative itself is feasible; however, its related token might not be very helpful in this situation. As a result, it's crucial to ascertain whether the token actually has any use, whether or not the general market will recognize the usefulness, and how much it is going to be valued at.
Concentrating on the distribution of the native asset, we might be able to identify any potential risks. For example, if a few people possessed an overwhelming amount of the supply, we may conclude that this is a dangerous purchase because those people might someday influence the market.
Before investing in crypto assets, you must analyze some of the financial aspects of the project.
The market cap represents the total worth of the project. If you have funding equal to one specific project, you can buy every coin of that project. Projects can have a manipulated market cap.
However, the market cap is frequently employed to evaluate systems' future growth. Some cryptocurrency investors believe that "small-cap" currencies have a higher chance of growth than "large-cap" coins. Others think that because large-caps have greater network benefits, they have a higher likelihood of success than newly floated small-caps.
The ease with which an entity can be purchased or sold is referred to as liquidity. We would have no trouble selling a liquid asset for its market value. A "liquid market," is a market that is active and competitive and is overrun with offers and requests (leading to a tighter bid-ask spread).
Being unable to sell our assets at a "fair" price is a challenge when no buyers are eager to make the trade. As a result, we have two choices: decrease the ask or wait for liquidity to improve.
Trading volume can assist us in determining stability. It is used to demonstrate how much worth has been exchanged during a specific amount of time and can be quantified in a number of ways.
Understanding liquidity is beneficial while performing fundamental analysis. In the end, it serves as a gauge for market interest in a potential investment.
Fundamental analysis, when done properly, can offer priceless information about digital currencies in a manner that technical research cannot. When investing in crypto assets, it helps greatly to be able to distinguish between the current price and the "real" worth of a system.
There isn't a universal strategy. Hopefully, this post has given you a better understanding of some of the things to take into account before starting or leaving investments using crypto assets.