The brutal reality of cryptocurrency bear markets is their capacity to obliterate portfolio worth, often enduring far beyond anticipated timelines. However, every cloud has a silver lining; these market downturns allow investors to recalibrate and delve into potential projects that could prosper when fortunes favor the bullish trend. Let’s shed light on key metrics to scrutinise when contemplating an investment in a crypto project amidst a bear market.
Analyzing the price history of a cryptocurrency is critical in addition to understanding other market metrics. Given the volatile nature of the BTC to USD exchange, it’s quite usual to see price swings. However, a consistent upward trend over time could be a promising sign. Studying the price across various time frames, including the ‘all-time’ history, is advisable to understand both long-term and short-term price patterns for cryptocurrencies.
One should be wary of cryptocurrencies that show drastic surges followed by abrupt declines in price. This could signify a ‘pump-and-dump’ scheme, a fraudulent practice where the coin’s price is artificially boosted through misleading promotion and then swiftly sold for gains. This is also known as a ‘rug pull’. Hence, monitoring the price history is a key metric before making any crypto investment.
Many investors, seasoned ones included, often miss a crucial financial detail. The ‘earnings’ of a company do not always align with the cash coming in. Certain accounting aspects, such as depreciation, skew a company’s earnings, making them seem more or less than the real figure.
Free cash flow (FCF) gives a picture of the money a company generates. It is calculated by looking at a company’s cash flow statement and subtracting capital expenditures from the cash flow from operations. This information is useful when analyzing a company’s price-to-earnings (P/E) ratio. If the P/E ratio appears overly low or high, understanding the company’s
Beta is a key indicator used to assess the volatility of a cryptocurrency relative to the broad market, typically benchmarked against an index like the S&P 500. If a cryptocurrency has a beta of 1, it suggests that its price movements are closely tied with the market. The cryptocurrency can expect the same uptick if the index goes up by 5%.
Cryptocurrencies with a beta less than one are deemed to be less influenced by market shifts, while those with a beta greater than one are known to be more volatile. For instance, a beta of 0.4 for a cryptocurrency suggests that it would theoretically register a 4% change in response to a 10% shift in the S&P 500. Interestingly, cryptocurrencies with a negative beta behave contrary to the market’s movement.
The metric ‘24-Hour Volume‘ might be self-explanatory to some. Essentially, it refers to the total monetary value of all transactions that have taken place within the last 24 hours. This particular financial parameter is quite useful as it aids in understanding the liquidity of a cryptocurrency.
In scenarios where the volume of a specific coin is low and you intend to purchase a substantial quantity, it might not be feasible without causing a surge in price. Conversely, procuring the desired amount becomes considerably easier if the volume is high.
A robust volume indicates a thriving market and instills confidence in many traders about a project. This is primarily because it suggests significant trading activity in the market, which often translates to buying and selling enthusiasm.
The concept of max supply in the world of cryptocurrencies pertains to the absolute limit of coins that will ever be available. Take Bitcoin as an example, which has a ceiling of 21 million coins. Around 18.8 million are already in circulation, leaving only about 2.2 million bitcoins waiting to be mined.
However, note that a defined max supply isn’t a feature of all cryptocurrencies. In such scenarios, tracking the inflation rate is advisable, which is essentially the pace at which new coins are produced.
Consider Ethereum for instance. At present, it follows an inflationary model, meaning that creating new coins is an ongoing process, leading to a rise in total supply. But, the forthcoming Ethereum 2.0 update could flip this to a deflationary model where the number of coins removed or “burned” surpasses the number of coins mined, leading to a gradual decrease in overall supply.
Crypto is a digital asset that is becoming increasingly popular; it can provide great returns but also has a lot of risks. Knowing what to watch before investing in this digital currency is key. By monitoring the five metrics outlined in this blog post, any investor in the crypto sphere can assess whether an investment opportunity is worth pursuing or should be avoided.