Best indicators for cryptocurrency - Kalkine Media

For experienced crypto users, it’s been a hell of a ride. Five years ago, there were around 500 cryptocurrencies. Today, after a period of dizzying growth, there are up to 8,000 coins in circulation.

This has its own upside. Witness the ability of savvy traders to rack up juicy returns through yield farming on more esoteric coins.

But it also poses an interesting question for an average user. In a crowded and complex market, what is the most useful crypto indicator? Volume? Market cap? Or is there some other, foolproof way to confidently buy and sell coins?

Top five crypto trading indicators

If you’re looking for an easy answer, best look away now. Just as traditional stock investors have their favoured investment metrics (think along the lines of price-to-earning ratio, debt to equity, return on equity, price to book and so on), so does cryptocurrency.

Fortunately, you don't necessarily need to perform extensive technical analysis to pick a high returning crypto coin. There are a range of cryptocurrency trading indicators to think about before you buy into a cryptocurrency.

Volume

First up, there are the tangible trade figures. One of the most important being a coin’s trading volume. As you would expect in such a crowded market, transaction volumes on some cryptocurrencies are small.

By way of illustration, compare the 24hr trade volumes in Bitcoin and Ethereum (around US$26 billion and US$25 billion, respectively, at the time of writing) to the least liquid coins in the market. Trade volumes of US$5 a day, or even less, are not uncommon in the most thinly traded coins.

So, if you think you might one day want to exit a position quickly, factor liquidity into your choice of coin. You might struggle to sell an asset if its trading volume has been low in the past.

But it is worth noting that liquidity is never guaranteed. No matter how big and popular an asset is today, it can be affected by a quick shift in sentiment in any financial market. Liquidity is there until it isn’t.

Market capitalisation

So, what about market capitalisation?

Bitcoin remains, by some distance, the largest digital currency by market cap, accounting for something like 43pc of the US$1.5 trillion total market cap for cryptocurrencies. Ethereum (ETH), Tether (USDT), Binance Coin (BNB) and Cardano (ADA) close out the current top five.

Market cap can be an important indicator if you are looking for the best cryptocurrency to buy. One of the strengths of Bitcoin, for example, is its network effect. Put simply, a lot of people buy, hold and value it.

To understand why this is important, take the telephone. On its own, a single telephone is pointless. But as more come into use, they scale up in value.  At a certain point of critical mass, they become both valuable and dominant. This is one reason why many Bitcoin hawks are so confident the currency will reach a US$100,000 valuation before the end of the year.

It is also why it makes sense to check out the strength of a coin’s community during your research. A large, or rapidly increasing number of users, opens up the possibility for a coin to become quadratically more valuable as more people trade it.

For this reason, market cap is probably a more useful (or at least reliable) crypto indicator than volume. But it is important to stress that on its own, market cap can still be a limiting metric.

In particular, it doesn’t necessarily tell a value investor much about the potential upside of a coin with a low market cap. There are other ‘intangibles’ to look for here.

The team behind the coin and other intangibles

So, for example, one important question to consider is which is the team behind the coin? What are their qualifications and how transparent is their business case?  

Also, does their coin solve a real-world problem or have a real-world use case? These are equally, if not more important, than metrics such as volume and market capitalisation. 

Regarding the team, questions to consider are: who is the major backer? Are they ambitious? And what is their track record? A pro tip here is to jump on LinkedIn and check out the management’s credentials and experience.

Price history

The other big metric to look at is price history.

Almost every (reputable) investment fund in the world is obliged to point out that, ‘past performance isn’t a reliable indicator of future performance’.

Nonetheless, understanding a coin’s price movements over time can be instructive. It is generally useful if you want to know whether a digital asset can withstand a significant stress test in the market or not.

Some larger exchanges like Swyftx, for example, can show users the price history and price movements of coins. Other useful resources include sites like Coingecko and Cryptorank, where you can also find out who is holding the majority of the supply of an asset. 

The buyer

Of course, none of this takes into account the profile of the individual crypto user. At Swyftx, we have well over 300,000 customers. This includes both new and experienced users, as well as customers with different risk appetites.

Such personal factors, as you’d expect, have a big role in choice, impacting the number and type of coins that users buy ranging from Bitcoin and Ethereum, to stable coins (that are pegged to a specific asset), ‘blue chip’ altcoins and small-cap coins.  

The Relative Strength Indicator (RSI) is a popular method of identifying when a cryptocurrency might be overvalued. This gives traders the opportunity to decide on their positions when the market corrects itself.

However, the most important thing any user can do is take a lesson from the pros and do their research.

Author Profile

Alex Harper is CEO and Co-Founder of Swyftx, one of Australia’s largest cryptocurrency exchanges. Harper, 27, was named one of ‘Australia’s 30 Under 30: Brightest Young Minds of 2021.