How to analyze a cryptocurrency, the off-chain metrics you want to track.
How do we analyze blockchain projects? After 20 years of venture capital experience looking at thousands of companies, for me it boils down to one basic approach - a framework. What do I mean by a framework? A framework is just a simple and clear way of organizing and sorting through piles of information.
So what's the best framework to analyze cryptocurrency? I organize the information into two buckets, off-chain metrics and on chain metrics. Now today we're going to talk about off-chain metrics. And I want to start with off-chain metrics first because that is what most people look at and the subject of off-chain metrics is so vast in itself we're going to break it down even further.
So there are two categories of off-chain metrics. The first is everything you can learn about the cryptocurrency itself and the second is what you can learn about the group or the company behind that project.
This video is just going to talk about off-chain metrics of the cryptocurrency that you should be looking at. I've done another video that addresses off-chain metrics around the blockchain project.
So let's get started. There are three off-chain cryptocurrency metrics I want to discuss here, exchange volume, order books, and OTC trading. There are others of course but I want to focus just on these today.
Alright so let's dive into exchange volume. Exchange volume should actually be a fantastic metric. It's one of the most widely tracked metrics in fact but it has to be real and a lot of volume is fake. We don't have time here to discuss the whole fake volume issue of cryptos but I want to emphasize here is that there are strong incentives for exchanges to pump fake volume. For what reason? Well because then it looks like their exchange is popular and has lots of liquidity, but don't confuse volume with liquidity.
Real liquidity is great and unfortunately today fake volume figures masquerade as real liquidity but it isn't. It's mostly just wash trading. So here's a rule of thumb - a healthy volume level of a publicly traded stock is between 75 basis points and 150 basis points of its market cap per day. Cryptocurrencies range higher, 5% sometimes 10% is not unusual for a particular cryptocurrency but if you are seeing the trading volume of a cryptocurrency trade at 50% or even 75% of its market cap, you should be very skeptical. There's probably some fake volume there.
Now onto order books. Order books are just the aggregate amount of buying interest and selling interest for that particular cryptocurrency at any given time. That buying and selling interest however can be manipulated, just like exchange volume.
So tracking order books over time can give you a good sense of what normal looks like for that particular crypto and when something looks unusual for that crypto.
And lastly OTC trading, over the counter trading. OTC trading is simply off-exchange trading. Think of it as peer to peer trading that doesn't get recorded on CoinMarketCap. Although it does get recorded on the blockchain, that can’t be faked. And in some ways OTC trading then is much more reliable figure than the volume and exchange reports because the exchange is just telling CoinMarketCap what it says happened, it's not on the immutable blockchain. And there is no way to independently audit their figures. Oh and I should mention that a lot of people independently track large OTC trades and they're even nice enough to share what they found with everyone. Check out @whale_alert on Twitter that shows big OTC trades in real time.
So that's it for some but not all of the off-chain metrics that I find useful for analyzing cryptocurrency. My next video, part two of this, is where I dive into off-chain metrics around the blockchain project itself. To learn more about off-chain metrics check out my next video.
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