If Coinvestor wants to know how to assess and analyze a cryptocurrency based on the market cap, volume of supply, and circulating supply, here are some things Coinvestors need to know:
Although these three factors are good to use in building an investment strategy, Coinvestors should not only pay attention to these three factors when choosing what cryptocurrency to invest in.
The market cap of a coin is the total value of all coins in circulation and is one of the metrics used to determine value. The general market cap calculation is the last trade price, or the average trading price, multiplied by the total supply of coins in circulation.
For example Bitcoin, when bitcoin is trading at $ 10,000, multiplied by the total circulating supply of 16.4 million coins, resulting in a market cap of approximately $ 164 Billion. However, this does not take into account trades that occur on-chains or individual-to-individual transactions.
On websites such as CoinMarketCap, the average price is determined by the average price of the various exchanges or marketplaces where trading activities take place. However, there is a big problem that while the market cap can provide an overview of the current value of Bitcoin, the market cap can also be easily manipulated with the “wash trading” trick.
Wash trading is when two parties trade between themselves to make it appear as if the price is moving. For example, let’s say we have a coin with a supply of 1 million coins and we sell it to Coinvestors for $ 5. That means the market is $ 5 million. Then Coinvestors resold us 0.5 coins for $ 5. This means that the current market cap has doubled.
If we sell again to Coinvestors 0.25 coins for $ 5 means the market cap is now $ 20 million. So, in these three transactions, we can increase the market cap by 400%. While this is illegal in other markets as it is price manipulation, in the cryptocurrency market it is a common practice for many people to do.
This is important because if we can create enough hype and market movement, a beginner is likely to buy the coin thinking that the price of the coin has the possibility to soar even though then we can sell the coin when the price rises by 400%. Then the newbies will hold the coins at a price much higher than the actual market rate.
So, when analyzing market cap as a metric, professional traders will look for signs to ensure that wash trading is not being used to factor in the calculation of a cryptocurrency’s market cap.
Volume is the number of active trades that occur on a particular coin. for example, if Bitcoin has $ 100 Million in trading volume, and the price is worth $ 10,000 it means that there are around 10,000 Bitcoin being actively traded. In general, the bigger the volume, the better it is for the coin, as it will be easier to buy and sell.
If a coin is low in volume, then coin investors have to wait longer to sell and it may be difficult to find buyers at the current market price. So coinvestors have to keep these coins longer in the market to get the desired price or reduce the price so that they can be sold faster.
Volume as a metric is a great way to find out if a coin is healthy or not, because volume shows the public’s interest in that coin as well as the market liquidity around the coin. For example, if this means that the coin is getting more popular and also more liquid then it has the potential to be a good investment.
However, strategies like wash trading can also create fake volume and be very difficult to see, unless the coin investor has a very strong understanding of the market history and its statistics. Professional traders can probably spot these kinds of manipulation tricks and they will have a hard time finding them on coins that are manipulated by lots of bots and whales. This is even more so for large coins, which the manipulations can be hidden in normal volume.
So, for a coin like Bitcoin, it would be much easier to hide volume manipulation than for a much smaller volume altcoins.
Total supply vs circulating supply
These two metrics are commonly used to determine the value of a coin. A circulating supply means coins that are mined (mined) or coins that are distributed and available for sale. While the total supply is the maximum supply which refers to the total amount of a coin that has been determined by the code or script coin.
For example, in February 2018 Bitcoin had a circulating supply of 16.4 million, with a maximum supply of 21 million. By dividing the circulating supply by the total supply, Coinvestors can find out how many coins have been mined or distributed.
Bitcoin, for example, means 16.4 / 21 = 0.78 or 78%. This means that the amount of Bitcoin that has not been mined is very limited and the coins that are already in circulation will become more valuable as the new Bitcoin supply decreases.
In addition, Bitcoin is also awarded in blocks and the reward is reduced in half every four years, the value of Bitcoin has the potential to increase in that time period. 2012 and 2016 were years when the Bitcoin mining reward was reduced by half, and in that year the Bitcoin value experienced a significant increase.
2020 is the next year when Bitcoin mining rewards will be halved and we will probably see an increase in value as creating new Bitcoin will become more difficult and fewer coins will enter the market. But it is speculation that BTC is still the most dominant cryptocurrency and no other cryptocurrency has more demand.
These two things are also important factors in determining the value of other cryptocurrencies. For non-mineable altcoins, for example, based on the coin supply in circulation to the ratio of the total Coinvestor supply can determine how many coins the coin development team has the potential to dump on the market.
If the number is too large, it means that the coins have the potential to experience a price decline due to oversupply. Conversely, if it is too low it means that a coin is gaining in popularity and it is possible that the price will increase as demand increases but the supply is not sufficient. In fact this is a better metric for determining the potential of one cryptocurrency than others, because it cannot be manipulated.
The three things previously mentioned are indeed basic analyzes that can help Coinvestors assess a cryptocurrency, but these are just a fraction of what Coinvestors should pay attention to. Other factors such as the market potential of the technology used, the credibility of the management and development team, market capability and competition. In addition, market variables such as regulation or level of trust must also be taken into account.
Investing in cryptocurrency is a risky thing, and unlike other markets, the cryptocurrency market is not regulated. Even though many people have made a lot of profit in the marketplace, there are also those who have experienced losses.
Cryptocurrency, like other markets including stocks and forex, is an investment activity that can be done if Coinvestors already has sufficient knowledge and understanding of how cryptocurrency works. Unfortunately, in this industry, 99% of people who enter think that they are guaranteed to make a profit even though the real situation is not like that.
Most people also have not to ask for professional advice. In the conventional market 99% of investors use a broker or professional trader to manage their portfolio and risk profile. In the cryptocurrency sector, 99% of individuals attempt to manage their own portfolios. Maybe this can work well in an uptrend, whereas if the market is trending down the results can be very bad.
Trading is a job like a doctor or a mechanic. So even though many people can trade and manage their own portfolios, the services of a professional with better education and experience are certainly worth the pay.