Basic Trend Analysis

The two most important metrics to track are the number of wallets used daily and the amount transacted daily on a blockchain. For example, the Bitcoin blockchains Daily Number of Wallets and Daily Total Transactions give you a feel for how many people are using the network and transacting and how much money is moving through the system. These are the two most important metrics to track trends from a fundamental analysis perspective. An investor can determine a network's basic value with just these two data points. Value is distinct from price. So, when an investor thinks the value is lower than the price, they can sell, and, conversely, when value is higher than price, they can buy. We like using trend data instead of absolute data because these networks are new and there isn't an established market price for the value like there is with more mature asset classes. If an investor can see that the trend is going up or down, they can make informed investment decisions about how much they want invested in any token based on this fundamental data.

Advanced Analysis

Trend is just one of the things that we review. Analysis of blockchain metrics can get much more sophisticated. The rabbit hole can get deep pretty fast, but we wanted to be sure to outline some of the more important indicators to watch. We recommend that you review these, then revisit them as your knowledge and familiarity with this world increases. As it did for us, this information may need a few passes for it to stick, but stay with it!

Advanced analysis can focus on several core metrics and indicators like:

• Volatility: A measure calculated by finding out the square root of the variance of a daily (periodic) price.
• Market capitalization: A measure of market capitalization colloquially, although network value more specifically, which is calculated by multiplying the price and the total supply.
• Daily trading volume: A measure of the dollar value of an asset traded daily.
• Realized capitalization: An alternative calculation of market capitalization derived by multiplying the price of each coin last traded by the size of each trade.

Transaction Metrics

• Transaction count: A measure of the number of transactions per day on a blockchain.
• Transaction value (USD): A measure of the amount of U.S. dollar value that is transacted/transferred in a day.
• Active/New addresses: A measure of counting various actions per day.
• UTXOs (Profit/Loss/Created/Spent): A measure of unspent transaction output (UTXO) actions per day.

Production Metrics

• Issuance (USD): A measure of value in U.S. dollar terms of how much bitcoin was issued or mined for a period, typically a day.
• Current (circulating) supply: A measure of how many coins have been mined and are in use; distinct from total supply, which is how many coins can possibly be issued by the end of the scheduled supply.
• Mean difficulty: A measure of the average mean of how hard it is to find a hash below a given target.
• Hash rate: The measuring unit of the processing power of the crypto asset blockchain network.
• Mining profitability: A percentage calculation that determines income after expense consideration based on mining difficulty, exchange rate, power costs, and hash rate.

Ratios

• NVT (network value to transactions) ratio: A crypto asset valuation metric that takes the market capitalization (network value) of an asset and divides it by the transaction value, which is how much is being transacted, exchanged, or transferred each day, in USD.
• NVT (network value to transactions) signal: A valuation metric that improves on the NVT ratio by using the same NVT ratio and adding a smoothing mechanism of a moving average.
• Mayer multiple: The current price of bitcoin divided by its 200‐day moving average (named after Trace Mayer).
• Metcalfe's ratio: Like the NVT ratio, except that it relates to Metcalfe's law; calculates price divided by n log n of the number of UTXOs; can be a relative valuation ratio.

Social Metrics

• Tweets per day: A measure of the number of tweets per day that contain crypto‐related hashtags.
• GTrends (Google Trends): A measure of the number of Google searches per day of crypto‐related search terms.
• Sentiment data: A measure of sentiment on the crypto markets using Twitter as a dataset and using some machine learning to qualify sentiment.

Advanced Metrics

Many advanced metrics are exposed through blockchain analysis tools, which we identify and describe below. There is so much data that can be obtained from blockchains; seeing that data over time can create significant trend data that you, as an investor, can leverage. Here are just a few that could be incorporated to provide an added layer of sophistication to fundamental analysis.

• Bitcoin days destroyed: This measure of the transaction volume of Bitcoin is calculated by taking the number of bitcoins in a transaction and multiplying by the number of days since those coins were last spent. This is used as a better metric to value economic activity; thus, one bitcoin that hasn't been spent in 100 days (1 bitcoin × 100 days) counts as much as 100 bitcoins that were just spent yesterday (100 bitcoins × 1 day).
• Liquidity coverage ratio (from Messari): A ratio of real daily volume/daily dollar value of newly mined crypto assets, where the real daily volume eliminates fake and wash trading from the metric. From that, a liquidity coverage ratio is obtained for a given blockchain network. This gives you a sense of whether there is enough exchange liquidity on a daily basis to handle new liquidations. Low liquidity coverage ratios may lead to steadily grinding lower price in individual markets.
• UTXO age analysis: Basically an accounting system used in various blockchains like Bitcoin. UTXO unspent transaction output (UTXO) is the technical term for the amount of digital currency that remains after a cryptocurrency transaction. Basically, it is the unspent currency at the end. Every transaction creates a new UTXO, and the age of that UTXO tells in which block that transaction was first included. Analyzing UTXO age can give a savvy investor an idea of when that bitcoin was last transacted and, in aggregate, can give a window into historical and pricing patterns.
• NVTG ratio: The ratio of NVT (network value to transaction value) to growth compares to the price/earnings‐to‐growth ratio in equities. A lower value indicates a better value. This is a relative valuation ratio as well.

Basic Indicators

Technical analysis is used to make price predictions based on past price trends in an asset. There are several metrics used, like moving averages. Shorter‐time moving averages, like a 20‐day moving average, will be more sensitive to price changes while longer‐time averages, like a 200‐day moving average, give longer trend information. Each can be used for predicting price trend over different timeframes. Below I outline several fundamental indicators you can use to help in beginning technical analysis (for an example, see Figure 20.3).

Technical analysis helps an investor enhance their approach. The objective is to look for trends in price and find patterns based on past price history. A lot of time can be dedicated to this, so it's important to think about how much time you want to put into your investing process. I think an investor should be putting at least 10 hours a week into their crypto portfolio research and analysis if they are going to manage their portfolio and use technical analysis. Otherwise, they should simply dollar cost average, which we talk about at the end of this chapter, or leave the crypto investing up to a professional on their behalf.  The main areas of interest in basic technical analysis of price charts are:

1. Overall trend: Are prices increasing or decreasing over a period of weeks or months?
2. Support and resistance levels: What are the levels of support or resistance in price?
3. Buying and selling pressure: Are there more buyers or sellers?
4. Trading volume: How much conviction/how much trading is there compared to the past?
5. Relative strength indicator (overbought or oversold or neither): Is the asset overbought or oversold short‐term?

Moving Averages

• Simple moving average (SMA)
• Exponential moving average (EMA)

Trading volume (Vol): Measures daily trading volume. A higher transaction volume means an asset is more liquid and therefore easier to trade in larger‐size blocks. Higher transaction volume also means there's more conviction for trading at a certain price than if it traded at the same price with lower transaction volume.

Relative strength indicator (RSI): Shows whether an asset is overbought or oversold for a period of time. If there has been heavy selling of an asset, the RSI will indicate that it's oversold by being lower, like 30, and, conversely, overbought if higher, like 70. An RSI of 50 means it's neither.

Price trends tops and bottoms: One of the most critical indicators that I follow is price chart bottoms and tops and whether they are higher or lower than previous numbers. This pattern allows an investor to see if a price trend is continuing up or down or whether a trend reversal might be in place.

• Higher highs (HH): Indicates that a new higher high has been put in a price chart pattern.
• Higher lows (HL): Indicates that a new higher low has been put in a price chart pattern.
• Lower lows (LL): Indicates that a new lower low has been put in a price chart pattern.
• Lower highs (LH): Indicates that a new lower high has been put in a price chart pattern.

Trendline Support/Resistance: Looks at moving averages or chart patterns. It helps an investor glean whether a future price may run into support or resistance at certain levels. Suppose there was an accumulation at a certain price in the past. In that case, there's a good chance it might have a similar accumulation in the future because where traders enter or exit positions does influence where they may do a trade in the future. For example, if you chart a level of $10,000 in bitcoin and that level used to be a level of resistance, but bitcoin finally broke through and traded up to $25,000, when it falls or reverses, the $10,000 level may be a level of support on the downside. Conversely, if there was a level of support in the past, that may be a level of resistance in the future.

Trends

• Uptrends: Where the moving average line slopes up, indicating the trendline, and the price is making higher highs.
• Downtrends: Where the moving average line slopes down, and the price is making lower lows.
• Consolidation: Where price oscillates between two parallel horizontal trendlines.

Advanced Indicators

Any curious person with a wee bit of patience for math can glean financially useful insights from basic technical analysis. I recommend getting comfortable with all the basics before applying advanced indicators and metrics. They aren't necessarily better.

• Bollinger Bands (BBs): An advanced statistical chart that measures price and volatility of an asset over time. With BBs, a trader is looking to see if the bands are widening or tightening and then where the actual price trend falls within the band. There are entire advanced strategies built using BBs.
• Trend Patterns
  • Reversal: A trend pattern that shows a change in prevailing trend.
  • Pennant: A continuation pattern drawn with two trendlines that ultimately converge.
  • Flag: A continuation pattern drawn with two parallel trendlines that slope up or down.
  • Wedge: A continuation pattern drawn similar to pennants, but both trendlines are moving in the same direction, up or down.
  • Triangle: A continuation pattern marking a trend with an entry point, a profit target, and a stop loss. If trading (distinct from investing), all trades should have these three identified before a trade is initiated.
  • Cup and handle: A bullish continuation pattern with an upward trend that has paused but then continues. The “cup” is the trend reversal and move higher, then the pause, then the “handle” is the continuation higher.
  • Head and shoulders: A reversal pattern that can appear at market tops or bottoms.
  • Double top/bottom: A reversal pattern signaling where the market has made two unsuccessful attempts higher or lower.

Charting Tools

1. TradingView

   TradingView is one of the most comprehensive tools on the market. It's good for novice users as well as the most advanced.  You can do so much with this tool (see Figure 20.3). One great feature is that you can create templates that you can publicly share.

2. Yahoo! Finance

   Yahoo! Finance has been around a long time. It provides the basics and is easy to use. If you're just getting started, this might be one of the easier tools out there to use and it's free.

3. Crypto‐Trading‐Focused Tools
   1. CryptoWatch: A tool with good drawing tools for charting and predicting future pricing trends.
   2. Cryptrader: A good tool that connects to multiple platforms and exchanges for real‐time data.
   3. Coinigy: A good tool for novice traders.