Market Basics

Many investors and traders use technical analysis as a means of making decisions on crypto investments. As crypto markets have matured, sophisticated investors are beginning to also look at fundamentals as a proxy. On-chain analysis, also known as blockchain analysis, is a good example of how cryptocurrencies are measured today. On-chain analysis dives into the fundamental side of cryptocurrencies. The term on-chain analysis is an umbrella term that encompasses a broad-spectrum of metrics, most often used to value Bitcoin. Two examples use market cap and holding period as an evaluation tool.

The market cap of a cryptocurrency can be analyzed in many ways. One practical method to analyze market cap is to examine the “realized cap” metric. Realized Cap considers the value of a Bitcoin versus the last time it moved. This can be useful to analysts because of the inherent nature of Bitcoin’s supply. Bitcoin’s supply will never be more than 21 million. Within the total supply, analysts can account for inactive or lost coins. Another example of market cap analysis would be to simply compare the historical spread between one crypto’s market cap in relation to another and look for extremes.

An additional market cap metric that can be used is the Network Value to Transactions (NVT) ratio. This ratio is calculated by dividing the market cap of Bitcoin by the daily transaction volume. A high NVT can be perceived as a speculative, frothy market.

The fact that the Bitcoin network is open source is a unique attribute which can be useful for research. One use of this data is to calculate holding periods. The Bitcoin Days Destroyed (BDD) metric sizes up Bitcoin’s demand by segmenting the supply into factions based on the number of days held. Typically, when there are more long-term holders of a coin, the fundamentals are deemed to be more bullish, all things being equal. The reason for this is that long-term holders tend to have more conviction.

What Factors Have the Biggest Influence on Token Trading Price?

The economic principles of supply and demand – and the related concept of scarcity – can be significant influencers on token prices. If a cryptocurrency has a high supply of circulating tokens but low demand from traders, investors, and users, its price will trend down. If a cryptocurrency’s circulating supply is limited – and demand is high – the token’s value will increase. Scarcity is an economic term that refers to the gap between limited resources and high demand. Because some crypto tokens launch with a fixed supply, scarcity is a known driver across crypto markets. The supply of Bitcoin, for example, has a programmed capped at 21 million tokens.

What Other Factors Affect the Value of Cryptocurrencies?

Cryptocurrencies do not derive value from a government order, like fiat currencies. Instead, each cryptocurrency must earn adoption by its perceived value it provides to the marketplace. Crypto insiders refer to this as token utility. In other words, how effective is the new token in solving a real-world problem? For example, a user cannot access the Ethereum Network, an advanced blockchain for decentralized finance (DeFi) and smart contracts, without holding the Ethereum token, Ether. Therefore, Ether’s value as a token is also tied directly to the Ethereum platform’s success.

Media coverage, as with stocks and other securities, can also influence the price of cryptocurrencies. If a token or crypto network receives negative publicity, that coin’s price may drop and vice versa. Human emotion and public sentiment can greatly influence token prices – just like other tradable assets such as stocks and currencies.

Why Is There So Much Fluctuation in Token Prices?

As mentioned, crypto is a relatively young and nascent market. Nascent markets are inherently more volatile than established markets. For example, the daily trading volume of all fiat currencies runs in the trillions. At the same time, crypto is a tiny sliver of that size. This lack of liquidity and trading volume leads to specific known characteristics. For example, the spread — the difference between the buy and sell price — in fiat trading is measured in pennies. Crypto spreads, in contrast, are often measured in dollars. In short, thinly traded markets are more sensitive to turbulence than established markets. Lastly, thousands of new users are onboarding into the crypto markets every day, boosting volatility. In early 2018, for example, major crypto platforms, like Coinbase, reported adding ~100,000 new users daily.

Cryptocurrencies have garnered a reputation as a volatile asset class due to the wild historical price swings in popular assets like Bitcoin (BTC) and Ethereum (ETH). Behind the buzz, the crypto industry is rapidly evolving. It continues to present valuable opportunities for trading, investing, and use as a medium of exchange.

What Methods are Used to Value Cryptocurrencies?

As the crypto markets evolve, both old and new valuation methods are taking hold. Market capitalization has historically valued stocks but has now valuing crypto. You can calculate the crypto market cap by multiplying the coin’s circulating supply by its current trading price:

Crypto Market Cap = Total Token Circulation x Current Token Trading Price

Let’s apply this equation to an example. If Coin A has 200,000 coins in circulation and is trading at $2, the market cap would be $400,000. If Coin B has 50,000 coins in circulation and is trading at $4, the market cap would be $200,000. Even though Coin 2’s trading price is twice that of Coin 1, the value of Coin 1 is higher. Market cap can be a more accurate indication of value than price alone.

The crypto industry has also created its new measuring sticks. As we’ve mentioned previously, Satoshi Nakamoto is the pseudonymous developer behind Bitcoin. As a tribute, the crypto community named a new benchmark after him: Satoshi pricing.

Bitcoin is the world’s most popular crypto asset. To provide greater accessibility, BTC is denominated in smaller units, with Satoshis being the most diminutive derivation. Today, one Bitcoin token is equivalent to 100 million Satoshis. Users can value Satoshis versus other tokens and versus U.S. dollars – providing a better gauge of a token’s value in real-time.

A useful analogy for Satoshi pricing is the U.S. dollar (USD), broken down into pennies. USD is the global reference point for trading all fiat currencies and commodities like gold and oil. Satoshi pricing provides a similar standard for the global crypto markets.

Three Takeaways

• Crypto has a reputation for being volatile. In reality, crypto is a nascent market, and volatility is not uncommon in young and thinly traded markets.
• The most significant influence on a cryptocurrency’s price and value are the economic principles of supply, demand, and scarcity.
• Market cap, total supply in circulation and volume are three effective valuation methods.