How to Analyze Cryptocurrency Using Market Cap
Conducting market analysis is one way to get profit from trading, including in crypto trading, the trader need to make analysis before decided
One way to carry out cryptoanalysis is to utilize data market capitalization, supply volume, and circulating supply, Here we will try to explain how to analyze using these data.
1. Market Cap
Market cap is the total value of all coins in circulation, and one metric use to determine value.
The general market cap calculation is the last trading price, or the average trading price, multiplied by the total coin supply in circulation.
Example, Bitcoin, when traded at $10.000, multiplied by the total supply in circulation, value which is 16.4 million coins. produces a market cap worth approximately $ 164 billion
But this does not consider trading that occurs on-chains or individual transactions to individuals.
On websites like CoinMarketCap, various exchange or marketplace, the trading activity that occurred determine an average price value
But there is a big problem that even though the market cap can provide a general picture of the current value of Bitcoin, the market cap can also be easily manipulated with a “wash trading” trick.
Wash trading is when two parties trade between themselves to make it look like there is a price movement.
For example, let’s say we have a coin with a supply of 1 million coins and we sell to others for $ 5. Means the market is $ 5 Million, then these person sold to us 0.5 coins for $ 5
This means that the market cap has doubled now. If we sell another 0.25 coin for $ 5, the market cap is now $ 20 million.
So, in these three transactions, we can increase the market cap by 400%. Although this is illegal in other markets because it is price manipulation, in the cryptocurrency market this is a common thing that many people do.
Then the beginners will hold the coin at prices far higher than the actual market rate.
Professional traders will ensure if wash trading not being use on this time
Volume is the number of active trades that occur from a particular coin.
for example, if Bitcoin has $ 100 Million in trading volume, and the price is $ 10,000, there are about 10,000 Bitcoin being actively traded.
n general, the bigger the volume, the better this is for the coin because the coin will be easy to buy and sell. If the coin has a low volume, then you have to wait longer to sell and it might be difficult to find a buyer at the current market price
So you have to save the coin a longer time in the market to get the expected price or reduce the price so that it can be sold faster.
The volume as a metric is a great way to find out whether a coin is healthy or not because the volume shows public interest in the coin and market liquidity around the coin. For example, if this means that the coin is increasingly popular and also more liquid then it has the potential to be a good investment.
But strategies like wash trading can also make fake volumes and are very difficult to see unless you have a very strong understanding of market history and statistics.
A professional trader might able to see manipulation tricks wash trading, and they will have difficulty in finding on the by the coin that manipulated by bots
What’s more for large coins, where manipulation can be hidden in normal volume. So, for coins like Bitcoin, it will be very easy to hide volume manipulation from altcoins that have a much smaller volume.
3. Total supply vs. supply in circulation
These two things are commonly used metrics to determine the value of a coin.
Total supply means coins that are mined or coins that are distributed and available for sale.
While the supply circulation is the maximum supply that refers to the total amount of a coin that has been determined by the code or the coin script.
For example, bitcoin has an outstanding supply of 16.4 million. Maximum supply of 21 million.
By dividing the amount of supply in circulation with total supply, then you can find out how much coin that has been mined or distributed.
Bitcoin, for example, means 16.4 / 21 = 0.78 or 78%. Means, the amount of Bitcoin that has not been mined is very limited and the coins that have been circulating will be even more valuable as the new Bitcoin inventory decreases.
In addition, Bitcoin is also awarded in blocks and the reward is reduced by half in four years, the value of Bitcoin has the potential to increase in that time period.
2013 and 2017 are the years in which mining Bitcoin rewards are reduced by half, and in that year the value of Bitcoin experienced a significant increase.
The year 2021 is the next year where Bitcoin will be reduced by half and we will probably see an increase in value along with making new Bitcoin will be increasingly difficult and fewer coins enter the market.
But this is speculation if BTC is still the most dominant cryptocurrency
Both of these are also important factors for determining the value
For altcoins that cannot be mined, for example, based on supply coins in circulation.
Until the total supply ratio as a tool to determine how many coins that will be dumped on the market. By development team.
Coins have the potential to experience price declines due to oversupply. If the amount is too large Conversely, if it is too low, it means that a coin is becoming more popular and the price may increase along with the increase in demand but the supply is insufficient Actually, this is a better metric to determine the potential of a cryptocurrency than others, because it cannot be manipulated.
4. Another factor
The three things that have been mentioned before are indeed basic analysis that can help to assess a cryptocurrency, but these things are just a bit of what should be considered
Another factor like as technology used, credibility management and development team. Market competition also a skill
Cryptocurrency investing is risky, an investor needs to wisely spend their money.
Similar with forex and stocks. Investing money in the crypto market. Has potential risk and profit.