How to Use Crypto Market Data to Improve Investment Strategies (Part 1)

Crypto market data can be a valuable tool for improving trading and investment strategies. It can be just as helpful in long-term investing, as in short term trading, and with advanced tactics as margin, short-selling, and derivatives trading.  In the first part of this two part series, we take a look at some of the ways data can help you improve your investment strategies.

Long Term Crypto Investment Strategies

Consistent Adherence to Fundamental Analysis

Fundamental analysis is a standard investing methodology.  It is based on the idea that an asset has an intrinsic value and, by accurately measuring that value, you can time your transactions to buy low and sell high. The way you’d determine the value is by some metric or combination of metrics. For equities, this could be earnings per share, the growth rate of the specific industry sector, GDP growth, the inflation rate, and so forth. Fundamentalists (as they’re called) have been using this strategy for almost a hundred years.

The metrics a fundamentalist would use in crypto are a bit different. There are no earnings, and the business activity associated with a typical crypto coin isn’t the same as it is for a traditional business. The metrics that drive crypto fundamentals are more commonly based on asset activity and blockchain data.

Some of these metrics, and how they can help you, are: 

• Market capitalization - Value implies adoption; the higher the better.
• Circulating supply - How many tokens are actively traded.
• Trade volume - Higher activity, especially with rising prices, can indicate interest in the token.
• Various network metrics - These include hashrate, issuance, miner activity, fees, supply, asset, and address activity. These metrics can tell you about the state and health of the blockchain network and its assets.
• Number of token holders - Breadth of user adoption.
• Asset velocity - The total transaction volume of a cryptocurrency divided by its market capitalization during a particular time period. Velocity can give you an idea of how that cryptocurrency is being used. ‌ This can help you determine a “fair value” of the crypto.  
• Total value locked - TVL is the total value of assets that are locked or deposited in a specific blockchain protocol or platform. It represents the total value users have committed to a particular DeFi project, and provides insights into the popularity, adoption, and overall health of a protocol and its associated tokens. High TVL indicates a large user base and a high level of capital inflow.
• Sharpe ratio - You can make huge gains by buying very risky tokens, but you can also take huge losses. Is there a way to measure the risk associated with that token’s returns or, put another way, its risk-adjusted returns? In fact, there is. It’s called the Sharpe Ratio.  Sharpe Ratio measures the returns you received above what you could’ve received with no risk, and the amount of risk you took on to get those additional returns. For a detailed discussion of Sharpe Ratio, please see here.
• Network Value/Transactions (NVT) Ratio - Market cap divided by daily volume. NVT can be used as an indicator of a network's relative utility—the more volume moving around the system, the more valuable the blockchain and its tokens are likely to become.
• Tokenomics - How tokens are created and, sometimes, destroyed. This gives you predictive insight into the supply and demand of the token.

This list isn’t exhaustive, but will give you an idea of what crypto fundamentalists look at. 

HODLing

Originally a misspelling of “Hold,” HODL has become a mantra in the crypto world.  Now taken as an anagram for “Hold On for Dear Life,” it describes one of the most prevalent crypto investment strategies—the idea that if you just hold onto your crypto during what can be hair-raising volatility, sooner or later you will be rewarded with a huge upside move.  Because many Bitcoin investors originally bought in years ago at very low prices, this has been a strategy that has worked out for them. But this is a strategy that always works. . .until it doesn’t, and it can saddle you with big losses when it goes wrong.

So how can crypto data help you if you’re a HODLer?

Typically, HODLing demands you ignore the data and just hold on no matter what.  That is after you buy, though. Before you buy, crypto market data can help you decide which projects look like they have potential. As with every investment, making a good choice on Day One goes a long way to determining your future success.   

Fundamental crypto trading data, as explained above, can be very helpful in identifying and classifying projects and tokens. Volatility data can prepare you for the psychological fortitude that might be necessary in order to HODL a particular token. Investor sentiment data, gathered from online sources such as social media interactions, stock message boards, blockchain data, and more, are also helpful in informing your initial buying decision.

Dollar Cost Averaging

Dollar cost averaging (“DCA”) is a time-honored investment strategy. It is based on the idea that no one can consistently predict short term lows as buying/entry points, and that trying to do so misses more moves than it catches. The thinking is that you should consider carefully what your investment goals and risk tolerance are and determine a dollar amount you can invest periodically and consistently, and automatically buy that amount of the crypto each period, regardless of the price.

Here's an example: you want to build a position in Bitcoin.  You get a paycheck every two weeks, and out of each paycheck you’ve decided that you can invest $100. So, every payday, you take $100 and buy Bitcoin, no matter what the price. This is simple and eliminates the work and anxiety of trying to time the Bitcoin market, which you would likely not succeed at anyway. 

Over time, you’ll build yourself a nice position, and if Bitcoin continues to rise in price, you will always have a favorable average cost per coin. At the very least, you’ll avoid a badly timed lump sum investment that’s immediately in the red.

How can crypto data help investors who dollar cost average?

As with HODLing, above, crypto investment data will be most helpful to you in choosing what tokens to buy. After that, your DCA strategy will kick in and your subsequent buying will continue automatically. The one big exception here is selling: when should you decide to sell. For this, indicators derived from crypto trading data will be helpful. These include things like trend lines, moving averages, Bollinger bands, RSIs, standard deviation measurements and the like.  

Experienced investors use these indicators and metrics every day, and Amberdata provides a host of them.

Short Term Trading Strategies

Trading differs from investing because a trade implies both a buy and a sell. That is, if you’re an investor who makes a great investment, you might hold onto it forever. Traders, on the other hand, always think about their exit before they make a purchase. Their trade is part of a strategic process they use to generate profits in a specific manner over a fairly specific time frame. This is especially true of short-term traders.

Below are three types of short-term trades and how crypto trading data can help improve their odds.

Swing Trading

A swing trade is one that is typically held for more than one day, and is made because the trader believes they have identified a certain type of move or chart pattern, with an identifiable duration, that they want to capitalize on. ‌Often a swing trader will talk about trying to “catch a move.”

Volatility data and trends are useful for swing trades because you need short-term price movement to succeed. A crypto whose price barely moves is a poor swing trade candidate.  Markets that have volatility but are moving sideways are great swing trade territory.  Generally, a market like this has an upper price band and a lower price band that, at least for a while, it keeps bouncing off.  So the swing trade here would be to enter when the price is at the low band and try to ride it to the upper band, or short the reverse.   

Crypto Relative Strength Index (RSIs) are momentum indicators that measure the strength and speed of recent price movements. Crypto RSIs can be very helpful in short term trading, particularly in helping you anticipate favorable entry or exit points.

Moving Averages can also be useful to swing traders if the token has shown a recent likelihood of bouncing off them.  Open/High/Low/Close (OHLC) data can also help if the trader believes that any of these price points will act as a short-term boundary.

Day Trading

Day traders make many trades per day. This can range from hundreds or, if they’re automated, thousands—trying to capitalize on the small temporary price inefficiencies that occur routinely during the day. They’re trying to get their order in a nanosecond faster than the next trader.  Nonetheless, there are certain types of crypto trading data that are very important to day traders.

• Real-time price data - ‌Faster, cleaner, accurate. This is utterly essential.
• Volume data - The greater the daily volume is in a crypto, the more opportunities it will provide for day trades.
• Order book - The order book displays the list of current buy and sell orders for a cryptocurrency, along with the corresponding price and quantity. Analyzing the order book can help traders gauge market sentiment and identify areas of support and resistance.
• Market depth - Market depth data is similar to the order book, except that it shows the total cumulative volume in the order book. It provides an overview of the liquidity available at each price point, often presented in the form of a depth chart or a graphical representation.
• Candlestick data - Candlesticks are a particular type of OHLC data that are helpful in spotting opportunities.
• Technical indicators. A wide range of technical indicators can help improve day trading. These include moving averages, relative strength index (RSI), MACD, Bollinger Bands, and more. These can help identify momentum, overbought/oversold conditions, and trends and reversals. Here are some you might like to check out.  

Arbitrage Trading

An arbitrage is the simultaneous purchase and sale of the same crypto at different prices in different markets. By doing this, a trader can lock in a profit with little risk beyond that of bad execution. Because crypto is traded not on a single exchange, but on hundreds of exchanges and platforms, arbitrage is a very popular crypto trading strategy.

Unquestionably, you need fast, accurate multi-exchange, multi-blockchain data from several exchanges to make it work. If you wish to automate your arbitrage trades, you also need a large amount of historical data in order to create and backtest your system. For a more detailed discussion of different types of arbitrage trades, please see here. 

Good Data, The One Constant

For all market strategies—short term or long term, investment or trading, swing or day or HODLing—there is one constant: you MUST have fast, reliable, accurate data. Everything else flows from there. With crypto, and its constant markets across hundreds of exchanges and blockchains, finding the right data isn’t as simple as it sounds, nor is it always easy to find easy-to-use Enterprise Digital Asset APIs.

Be sure to check back in for the second part of our look at “How to Use Crypto Market Data to Improve Investment Strategies.”

DISCLAIMER: The information provided in this blog is for educational purposes only and is not investment or financial advice. Please do your own research before making any investment decisions. None of the information in this blog constitutes, or should be relied on as, a suggestion, offer, or other solicitation to engage in, or refrain from engaging in, any purchase, sale, or any other investment-related activity. Cryptocurrency investments are volatile and high risk in nature. Don't invest more than what you can afford to lose.

Amberdata is your lens into the entire crypto economy. We deliver comprehensive digital asset data and insights into blockchain networks, crypto markets, and decentralized finance. This empowers financial institutions with critical market or DeFi data for research, trading and analytics, risk management, derivatives analytics, and compliance. To learn more about Amberdata, please contact us to book a demo, hear about our products that can help your business, or receive pricing information.