When it comes to analyzing and attempting to predict the behavior of the cryptocurrency markets, there is often a tendency to just focus on price and volume. However, as mentioned in a previous article, technical analysis has its limitations in the cryptocurrency markets due to their unique nature and lack of ‘normal’ reactions to events.
There are a number of other important metrics that signal the underlying health of the networks and markets, some of which have been shown to accurately predict upcoming price movements 2-3 days prior to the event. Others are useful for analyzing longer term trends. If you want to get a more rounded view of the markets, you might want to make use of some of the cryptocurrency market indicators below.
Social volume is one of the most important metrics for determining ‘hype’ surrounding cryptocurrencies and ICOs. Recent research by data intelligence firm Pulsar found that crypto related social media mentions did not occur in response to Bitcoin price rises as you might expect, but actually predicated them by around 3 days. Therefore, monitoring social media buzz is a good way to determine hype and future price hikes. To find out more, check out our list of the best crypto social media tracking tools.
The research carried out by Pulsar also found that peaks in search traffic similarly predicated Bitcoin price rises, occurring the day after spikes in social buzz and around 2 days before increases in price. Google Trends is the easiest and most reliable way to assess search volume for any search term you are interested in. You can also compare up to 5 terms, which makes it useful for assessing interest in multiple cryptos or ICOs.
3. Network Usage
Beyond speculation, adoption is what will ultimately increase demand and drive long term price rises, so usage is an important metric for determining the underlying health of individual networks. This is commonly assessed by looking at the volume of transactions on the network, for example, at Blockchain.info.
However, falls in transaction volume can occur due to increased batching resulting in more outputs per transaction. So, due to this limitation, transaction volume alone does not serve as a clear indicator – more on this below.
4. Network Value to Transaction Ratio
The network value to transaction ratio (NVT) is a useful statistic for gauging underlying network adoption. It is calculated by dividing the network value (market cap) by the total volume of USD transmitted through the blockchain via on-chain transactions. Although, it does not include any transactions through exchanges as these occur of off-chain.
Similar to the PE ratio used in equity markets, it can be used to signal whether the market is overvalued or undervalued at any given point. When the ratio is high, it means that more value is being assigned for less value being transacted on the network. Generally, this indicates that the market is overvalued, with a low ratio acting as a signal the market is undervalued.
However, as some peoples perception of Bitcoin has developed to view it a store of value rather than a day to day payment network, this could result in the value rising whilst transactions are not i.e. people buy and hold Bitcoin. Similar to the other indicators above, this is the limitation of only using one metric for analysis.