Measuring Crypto Investments: Strategies For Success

Crypto investments can be volatile, so it's important to understand how to measure their performance and potential. There are several key metrics and strategies to consider when evaluating cryptocurrency investments. One common approach is to analyse the market capitalization or 'market cap', which calculates the total value of a cryptocurrency by multiplying the current coin price by its circulating supply. This metric provides insight into the size of the cryptocurrency market and can help identify overvalued or undervalued coins. Another metric is trading volume, which indicates liquidity and price stability, with high volumes suggesting a healthy market. Fundamental analysis is also crucial, including evaluating the white paper, the team behind the project, the leadership, the community engagement, and the tokenomics, which refer to the economic principles governing supply, distribution, and circulation. Additionally, technical analysis plays a role, with tools like moving averages and oscillators helping to identify price trends and potential entry and exit points for investments.

Market Capitalization

Market cap is an important metric for investors as it helps them compare the total value of one cryptocurrency with another, allowing for more informed investment decisions. It is also used to classify cryptocurrencies into three categories: large-cap, mid-cap, and small-cap. Large-cap cryptocurrencies like Bitcoin and Ethereum are generally considered lower-risk investments due to their demonstrated track record of growth and higher liquidity. Mid-cap cryptocurrencies have a market cap ranging from $1 billion to $10 billion and are seen as having more growth potential but also higher risk. Small-cap cryptocurrencies have a market cap of less than $1 billion and are highly susceptible to dramatic swings in value based on market sentiment.

While market cap is a useful indicator of a cryptocurrency's stability and growth potential, it is important to consider other factors as well. For example, cryptocurrencies with smaller market caps may be more volatile but can also offer greater upside potential. Additionally, market trends, stability, and an individual's financial situation should all be taken into account when evaluating the risks associated with any investment.

Trading Volume

Volume is important because it has a significant impact on price from both an absolute and relative perspective. The total volume traded for a given cryptocurrency is directly related to its volatility. If the same amount (in volume) is being bought and sold, the price will be stable, but stability also suggests that people's opinions about the price are well-informed, which is known as market efficiency. Cryptocurrency is inherently volatile because it is immature and its adoption path is uncertain. Therefore, the total volume traded will immediately tell you how volatile a cryptocurrency is likely to be.

High trading volume may indicate more liquidity and price stability. On the other hand, low trading volume may indicate a lack of interest or price disputes. A steadily higher volume shows stable liquidity, resulting in lower price fluctuations. As a result, high-volume cryptocurrencies are often traded more swiftly and frequently. However, it is important to remember that a higher volume is not always positive; it can also indicate panic selling.

Volume can also be an indicator of crypto trend reversals. In the crypto market, if there is a drop in trading volume along with price movement in one direction, it might indicate a crypto trend reversal. Low selling pressure and trading volume can signal a declining asset's price. So, trading volume can assist in identifying market trend reversals.

Lastly, examining the trading volume is one of the best ways to validate crypto market strength. This metric depicts the level of interest among buyers and sellers, as well as the buying and selling pressure for a specific cryptocurrency. If there is a change in the trading volume that coincides with a corresponding price change, it can assist in determining whether a trend is strong or weak. An upward movement with high trading volume often indicates a strong trend. Therefore, keeping track of the trading volume can help in determining the overall crypto market strength.

Supply

It's worth noting that supply isn't an exact figure. It can be difficult to determine how many tokens are being held by long-term investors or how many have been lost, burned, or forgotten about. For example, of Bitcoin's 18.8 million current supply, an estimated 3.7 million have been permanently removed from supply, including a stack of 1.1 million held by Satoshi Nakamoto.

Checking the supply of a cryptocurrency can help investors avoid the 'unit price bias'. This is a phenomenon where people want to purchase tokens simply because they have a low unit price. For instance, some people buy a token like Siacoin because the price is only around 1 cent, and they can own millions of them. However, when looking at Siacoin's supply of 48.4 billion, the appeal of owning millions of coins is put into perspective.

The maximum supply of a cryptocurrency is the total amount that will ever be in circulation. For example, Bitcoin has a maximum supply of 21 million coins, and as of 2024, there were 18.8 million in circulation. This means that Bitcoin's supply is slightly inflationary until all 21 million coins have been mined.

Not all cryptocurrencies have a maximum supply. Ethereum, for instance, is inflationary, meaning that more coins are mined over time, and the supply is continuously inflated. However, changes in Ethereum 2.0 could make it deflationary, with more coins being burned than mined, reducing the supply over time.

Investors tend to seek out cryptocurrencies with limited supply and low levels. The argument is that once a token reaches its maximum supply, the supply becomes static, and miners can no longer create new coins, leading to continued growth in demand and guaranteed value gains.

ROI

Alternatively, ROI can be calculated as:

The rate of return can then be calculated by multiplying the ROI by 100.

A positive ROI indicates that the crypto investment is generating profits, while a negative ROI reflects losses. For example, if an individual purchased 100 tokens for $1,000 (a price of $10 per token) and the current price of the token is $19, the ROI would be 0.90 or 90%. This means that the investment has been profitable and the individual has almost doubled their money.

However, it is important to note that ROI does not account for the time period of the investment. A longer time period may result in a less efficient investment, even if the ROI appears higher. Therefore, it is recommended to use ROI alongside other factors when evaluating the success of crypto assets.

Volatility

Cryptocurrencies with lower trading volumes or emerging crypto-assets tend to have higher volatility. Positive or negative news coverage, earnings reports, and unusually high spikes in trading volume can all increase volatility. Very low volume also usually corresponds with high volatility.

There are a few ways to quantify volatility. One method is to use beta, which measures how volatile one stock is relative to the broader market (usually the S&P 500). Another method is to compute an asset's standard deviation, which measures how widely its price has diverged from its historical average.

For some crypto investors, high volatility is part of the appeal, as it creates the possibility for high returns. For less risk-tolerant investors, there are strategies to limit the downside impact of volatility, such as dollar-cost averaging. There are also now cryptocurrencies specifically designed to have low volatility, called stablecoins, which have their price pegged to a reserve asset like the US dollar.

Bitcoin, the most popular cryptocurrency, has experienced extreme volatility since its public release in 2009. Its price has risen by tens of thousands of dollars and has sometimes fluctuated by thousands within a single day. There are several reasons for Bitcoin's volatile price history, including supply and demand, investor actions, media influence, and its relative infancy as a means of exchange.

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