Given the volatile nature of cryptocurrencies, traders must be able to do fundamental and technical assessments. These assessments give you information on the trade volume and patterns of various cryptocurrencies, allowing you to make informed judgments. Though connected with legacy financial markets, similar research approaches work quite well in crypto markets.
On-chain volume trading volume is an essential indicator for traders to consider when considering whether or not to invest in a particular cryptocurrency. Tools like the relative strength index (RSI), moving average convergence divergence (MACD), and Bollinger Bands have shown to be quite helpful in predicting market behaviour regardless of the trading asset.
However, on-chain volume, trading volume, and support and resistance indicators are among the first things every skilled trader would explore.
Before delving into these measures, it is essential to understand what fundamental analysis and technical analysis are, the issues with utilising these techniques in crypto, and how alternative metrics might aid.
What Are Fundamental And Technical Analyses?
Fundamental analysis considers several internal and external elements before determining an asset’s intrinsic worth. It aids in determining if a purchase is overpriced or underpriced, as well as whether a trader should enter or quit a position.
Technical analysis looks at asset performance in the past to forecast future price movements. The study produces valid trade data that provides insights. Technical analysts analyse candlestick patterns and analyse critical indicators to predict the direction of future price movements.
To determine how a given measure could perform, traditional financial analysis use indicators such as earnings-per-share (profit a firm produces for each share) or price-to-book ratio (investors’ valuation of the enterprise its book value).
Problems Associated With Analyzing Crypto Projects
Crypto businesses are unique and can’t match any financial standard. Cryptocurrencies are commodities, not stocks or bonds. Many crypto businesses take cues from certain derivatives and which is why it is hard to utilise existing crypto analysis tools; we have to alter them to function with digital currency.
First, define vital project metrics. The metric’s strength suggests it should give project information. You can’t use Twitter or Telegram followers to value a crypto project. Promoters may rig these numbers by creating phony accounts or purchasing engagement.
No metric is perfect. Crypto is complicated and has numerous variables. To achieve a reasonable conclusion, consider many measures. Use blockchain-specific analytics to analyse a crypto project.
Checking the number of active addresses on a blockchain might reveal a use increase. This measure isn’t apparent. Some self-serving actors may send and receive money for new lessons to produce the surge. Using analytics helps you avoid tedious tasks and improve your game. On-chain volume and trade volume will be significant measures.
Understanding On-Chain Volume
It might pique your interest in how on-chain analysis might helps cryptocurrency traders. The digital currency transmitted to exchange from external venues is called on-chain volume. As these transactions go on the blockchain, the number of instances of false transactions decreases.
A blockchain explorer allows you to observe the distributed ledger’s transactions. These transactions are not only authorised and validated by a certain number of participants, but they are also irreversible.
On-chain transactions take longer to execute because they must go through several processes before being judged successful. Transactions in a blockchain must go through validation by a certain number of network users known as miners. Only once miners attain consensus is a transaction considered legitimate. The transaction details must also go into the blockchain.
Understanding Trading Volume
The trading volume shows how much trading happens within an exchange. Off-chain trades are documented in order books and reported through application programming interfaces (APIs).
Off-chain transactions deal with values that are not part of the blockchain. Its several processes include a transfer agreement between two parties, a guarantee from a third party about the transaction, a code-based payment system, or any other method.
Off-chain transactions don’t affect the blockchain in any way. Since there is no validation, transactions go through faster and fees are lower. Exchanges self-report transactions that involve trading volume, which makes them easy to manipulate.
Since off-chain transactions are not on the blockchain, there is no record of the financial details on the network. It means that crypto exchanges can dispute the transaction.
On-Chain Volume Vs. Trading Volume: The Role Of Crypto Exchanges
Crypto exchanges are similar to stock exchanges in the crypto ecosystem. Businesses connect traders and other crypto industry stakeholders. They act as a gateway to Bitcoin and a platform for currency swapping.
Not surprisingly, most blockchain transactions include digital currency swaps. On-chain volume and trade volume are two significant exchange trading measures.
The ratio between on-chain and trading volumes at various exchanges shows the movement of money. The data shows the importance of trade in multiple businesses. Without these indicators, you can’t verify claims. Trading leaders among conversations with similar user populations are hard to determine.
On-Chain Volume Vs. Trading Volume: Why These Metrics Are Important
Data falsification is a big concern. 95% of Bitcoin’s spot trade volume is a scam, according to Bitwise. Bitwise reviewed CoinMarketCap’s top 81 cryptocurrency exchanges and discovered a $6 billion daily Bitcoin volume. 5% of the claimed volume, $273 million, was actual.
Manipulation has ruined the crypto industry. Exchanges fabricate data to climb public data aggregators like CoinMarketCap. More trading volume on exchanges gives the perception of higher liquidity and market activity, attracting new users and cryptocurrencies.
Though it brings commodities for the exchanges, it gives the industry a terrible image. Once investors notice the gaps, they may doubt the entire idea. This scenario emphasises on-chain volume. Comparing on-chain and off-chain currency quantities helps differentiate the two.
Metrics For Crypto Financial Analysis
1. Transaction Count
You find the number of transactions for set periods. You must be careful as there might party transferring funds between their wallets.
2. Transaction Value
Transaction value is the value transacted within a period. For instance, in the event of five BTC transactions worth $1,000 each within a day, the daily transaction volume will be $5,000.
3. Active Addresses
These are blockchain addresses active for a certain period. The method helps count the senders and receivers of the transactions over the given period.
Liquidity And Volume
Liquidity, the ease of purchasing and selling an asset, is vital when investing in cryptocurrencies. Asset holders may sell liquid assets quickly at their market price. A liquid market has many asks and bids, narrowing the bid-ask spread. Asset holders can sell investments at a fair price in a non-liquid market.
Volume determines liquidity. You may find time-period traded value in an analysis when a crypto chart shows the market’s interest in a crypto project. There is a frequent and steady exchange of high-volume assets over low-volume ones.
It is impossible to establish a clear and fast guideline for the trading volume. Every crypto project is unique, and you must consider several aspects before deciding. While indicators like trading volume and on-chain traffic are essential when making an investment choice, any savvy trader will also consider other measures.