The Metrics You Should Be Aware Of When Designing Your Crypto Trading Strategy

Cryptocurrencies are unique among tradable assets due to the fact that they are entirely digital and operate on decentralized systems that don’t require the assistance of a mediator. However, there are also some challenging aspects investors need to be aware of before they begin building their portfolios. One of them is the volatility and price fluctuations that inevitably arise in decentralized environments. Prices change significantly and suddenly, and the only way to guarantee you’re not caught unprepared is to learn about technical analysis and historical patterns. The fear and greed index is one such metric, but you should make use of as many of them as you need in order to ensure you achieve your goals and increase your chances of success.

The Fear and Greed Index

The Fear and Greed Index is a measure used to determine investor sentiment and show how emotions influence the amount investors are willing to pay for crypto. On top of that, the figures also help you see if an asset is fairly priced or not at any given point in time, a crucial aspect when you’re looking to come up with a reliable game plan. The general assumption is that fear moves prices lower while greed pushes them forward and boosts value. There are seven separate indicators used in order to determine the full scope of the index and measure market behavior.

When it comes to cryptocurrencies, the Fear and Greed Index works with metrics such as trading volumes, marketplace momentum, general investor sentiment, and market dominance figures. Each of these figures matters for the final calculation.

Trading Volumes

The trading volume refers to the total amount of a financial instrument that changes hands during a certain amount of time. Generally, a 24-hour period is considered when looking for this indicator. When the trading volumes are high, it suggests that there’s plentiful interest and robust liquidity in the market, so crypto coins can easily be bought or sold without the effect of the price being too significant. Low trading volumes point to weak interest or reduced and unreliable liquidity. These are markers of higher volatility, so you will need to adopt a different strategy to ensure continuous gains.

Trading volume figures can also allow you to spot trends before they blow out of proportion and it becomes more challenging to keep up with them, and you will also get the chance to have a more comprehensive and objective view of the general market sentiment. Both short- and long-term investors gain a clearer and more comprehensive picture of the trading volumes this way. Volumes also confirm the presence of breakout trends, with spikes being confirmation for such a movement. However, if breakouts take place during times of reduced volume you need to be careful as it could be a false signal.

Total Supply

The total supply of a cryptocurrency is the full number of coins that exist for an asset, including those that are no longer in circulation. The figure shouldn’t be mistaken for the maximum supply, which is the number of coins that will exist at a time. You can rely on the total supply scores to offer valuable insights into both the inflationary and the deflationary tendencies of the digital tokens you want to buy or sell. Those that have elevated supply levels could experience depreciation since it is unlikely that the demand will be able to keep up with the growth. On the other hand, a limited max supply is known for its ability and potential to boost value as a result of scarcity. Demand remains strong, so the price action is naturally very different.

Market Dominance

As the name suggests, the concept of market dominance refers to a coin’s market cap relative to the total capitalization level of the cryptocurrency environment. Market dominance displays the relative importance of cryptocurrencies and their place in the broader trading environment. BTC is known as the coin with the largest market cap in the world, which means that it also has the most elevated level of market dominance. As a result, Bitcoin is known for the role it plays in influencing the values of other crypto assets. When Bitcoin thrives, they thrive as well, and when Bitcoin’s price plunges, the other tokens lose value as well. In some instances though, altcoins take matters into their own hands as well. For instance, Ethereum performs independently at times.

If you notice that this dominance is steadily increasing, it generally indicates that investors are looking for the safer holdings they can work with. You will notice that this scenario is most common when it comes to established assets, as they are the ones that are most firmly established and least likely to experience considerable volatility. As Bitcoin’s dominance decreases, you will most likely notice that interest in altcoins starts growing, so traders start adding them to their portfolios during those times in order to promote diversification.

Hash Rates

Since cryptocurrencies are fully digital, running them and completing transactions requires a certain amount of computational power. The hash rate is the metric used to measure it, with the figures being particularly important in the case of proof-of-work protocols. When the hash rate is strong, you can be confident that the network is more secure because the computational power is used to verify the transactions. It is also a pretty accurate indicator of miner confidence. When rates are rising, you can typically infer that the miners find the networks more profitable, which is another positive sign for investors.

Exchange Flows

If you’re looking for a barometer that can track the activity of a crypto trading platform, you will need help from an exchange flow. This metric traces the movements of all crypto coins between exchange and non-exchange wallets. For example, high Bitcoin outflows signal long-term holding. There are three primary categories: inflow, outflow, and balance. The first deals with the coins moving from non-exchange storage to exchange wallets, indicating sell-offs. The outflow tracks the coins moving in the opposite direction and shows that the investors intend to hold on to the assets. Finally, the balance showcases the difference between inflows and outflows, offering a view of the overall liquidity and investor sentiment.

As an investor, you must always do your research before commencing a transaction of any kind. Knowing what to expect will allow you to make more objective decisions and protect your capital so that your portfolio can be sturdy and continue to bring you gains.