The cryptocurrency world is nothing short of exciting, especially for those new to trading. There is however, one aspect that newbies need to master in order to set themselves up for success and that is the use of technical and market analysis. As daunting as though it may seem, anyone can become a profit-making cryptocurrency trader by devoting time to learning the basics. In doing so, you will be empowered to trade effectively and confidently.
As many experts will confirm, predicting which way crypto prices will move is not always a simple task. For this reason, indicators are vital for helping traders predict movements in the price of crypto more accurately, while building an overall picture of what moves buyers and sellers will most likely take.
Herein lies one of the biggest benefits of crypto and blockchain. Most information relating to transactions is stored in a database that is known as the public ledger. Access to this is free which is highly advantageous as you can use the data to build indicators and use the data in the way you need to the benefit of your trading. In the following, we discuss the 4 main market indicators of interest to crypto traders.
SOPR stands for Spent Output Profit Ratio and is an indicator that is used to highlight potential bottoms in the market. Since the ledger stores data on all transactions, along with the price at which tokens are sold, it is possible to see at each point in time, the number of people at a profit or loss.
SOPR is able to do this by assessing the general state of profit and loss within the market and measuring the difference between buy & sell prices by using the selling price over buying price ratio. After applying the ratio, you will arrive at a value, which if greater than one, will indicate that market participants are selling with a profit. For values less than one, the opposite is true. Indicator readings that are continually over one indicate a bull market.
The CVVD indicator (Cumulative Value Days Destroyed) utilizes data that was gathered at the time that the transaction took place to determine the number of days that every person keeps tokens in their wallet.
Here, as coins are moved between old and new investors, the transaction in question also destroys a time value related to the amount of time that the original investor kept their coins. This ratio works by keeping track of the cumulative sum of the value-time destruction since coins are passed from old to new investors in the form of a ratio to the market age. There is a tendency for CVDD to increase in value consistently and is a useful tool for pinpointing the bottom of the market with precision.
Stock To Flow Model
The Stock to Flow ratio is one of the best known ratios which measures how much the quantity of an asset rises over time compared with how much of it is currently being used. This popular ratio is based on the economic theory that scarcity drives value. Hence, the higher the ratio, the more scarce the asset, which is thus more desirable. Bitcoin is a typical example. Its limited supply i.e. scarcity, drives its price.
Based on this factor, the Stock to Flow model predicts the price of Bitcoin. While this ratio has been criticised to a degree by some, it generally performs well. Hence, it is embraced by many traders as a successful tool to build a statistical model, and is an effective one for tracking price movements.
The Hash Rate indicator does as the name implies and is based on the hash rate. It is not a true indicator, however, it is seen as one of the key metrics of health when it comes to the Bitcoin network and is a vital tool for new traders. The hash rate is the amount of computing power generated by Bitcoin miners at a certain time. It measures how actively miners operate the system, create new blocks and process new transactions. This indicator is not known for predicting the price very well, nevertheless, it is still a very important way to judge how secure the network is at any time.
Overall, there is much information to be found on the blockchain, which is free for all. The Public Ledger is an open source, hence, traders have the means to obtain this data as required and use it to build their own indicators to benefit their trading.
On a closing note, it is important to take care when using these models with your trading activities. That said, these are very important techniques which should be mastered since they offer heaps of potential that will boost your profit-making potential.