Crypto market analysis involves evaluating the factors that influence the price of cryptocurrencies. Understanding market analysis is important for investors who want to make informed investment decisions.
I have outlined some of the things to look out for when conducting crypto market analysis:
Market Cap
The market capitalization (market cap) of a crypto asset refers to the total value of all the coins or tokens in circulation. It is calculated by multiplying the current price of the cryptocurrency by the total number of coins or tokens in circulation. Market cap is an important indicator of the popularity and demand for a cryptocurrency.
The higher the market cap, the less risky it seems. Keep in mind though that lower market cap means more upside, but more risk.
For example, Bitcoin has the highest market cap of all crypto assets. If the market cap of $BTC is $1trn, that means $BTC market cap has to be $2trn for you to make 100% ROI.
If you have low capital, or you are new to crypto, you will want to take on more risks by looking at crypto assets with much less market cap
Fully Diluted Market Cap
Fully diluted market capitalization (FDV) of a crypto asset refers to the total value of all the coins or tokens (circulating + locked). It is calculated by multiplying the current price of the cryptocurrency by the max supply of coins or tokens.
This is very important as crazy high FDV could mean a serious dilution/inflation, which is usually bad for price.
For example, token $ABC has 1,000,000,000 max supply. Of this supply, only 10,000,000 is in circulation, representing 1% of max supply. If $ABC is trading at $2 per token, market cap will be $2 x 10,000,000 = $20,000,000
The FVD will be $2 x 1,000,000,000 = $2,000,000,000
At this point, you will want to ask yourself some questions such as:
- Is this FDV realistic?
- Where are the rest of the supply, and who do they belong to?
- What is the vesting schedule
- At what point will the entire supply be in circulation
Answers to these questions will let you know if the project is worth investing in or not. You will also be able to time your entry and exit.
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Trading Volume
Trading volume refers to the total amount of a cryptocurrency that is bought and sold on exchanges over a specific period. High trading volume indicates a high level of market activity, which can be an indicator of investor interest and demand for a cryptocurrency.
For example, Ethereum has a high trading volume, which reflects its popularity and demand among investors.
So, if the trading volume of the crypto asset you want to trade is low, it is likely not a good investment. Although there are several factors that may explain why volume is low, it is a cause for concern.
If the market cap of a coin/token is large and volume is low, especially in a very volatile market, you want to find out why.
News and Events
News and events can have a significant impact on the price of cryptocurrencies. Positive news or events, such as the announcement of a new partnership or a government’s decision to legalize cryptocurrencies, can increase the demand and value of a cryptocurrency. Negative news or events, such as a security breach or a regulatory crackdown, can decrease the demand and value of a cryptocurrency.
For example, the news of Tesla investing in Bitcoin in early 2021 caused a surge in its price. On the other hand, the news of China banning cryptocurrency transactions led to a sharp decline in the value of cryptocurrencies.
What does this mean? You have to keep up with what’s going on in the community of the crypto asset you are invested in. And you want to be the first to interpret any major update.
Is it good or bad? How will the general market react to this? You want to think far about things like that.
Generally, the first reaction to a news/event may not be the ultimate direction of the market. Except if the news is a straight up bad one like a government crack down cited above.
Competition
Competition refers to the presence of other cryptocurrencies that offer similar or better features than the cryptocurrency being analyzed. The competition can affect the demand and value of a cryptocurrency.
For example, there are several blockchains to build on, and most of them have tokens/coins. Why will anyone buy the coin of a blockchain over the others? What special features do they have? What unique problem does it solve?
Some protocol look cool at first glance. But is it just a fork of another protocol? Is there a project doing same or similar and possibly even better?
Answers to these questions will help you understand the level of competition, and the chances of the project succeeding.
Crypto Market Analysis – Conclusion
Crypto market analysis involves evaluating market cap, fully diluted valuation, trading volume, news and events, and competition. Understanding these factors is important for investors who want to make informed investment decisions. By analyzing these factors, investors can identify potential risks and opportunities in the crypto market.
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