Metrics are numbers that investors use when deciding whether to buy, sell, or hold a cryptocurrency. There are 6,317 cryptos actively traded on 405 exchanges! This makes it difficult to quickly decide whether a cryptocurrency is worth investing in. If you are a serious investor, you need to know these 5 types of measurements:
R = ROI and risk
O = Open-high-low-close price
H = Holder Statistics
A = Amounts
S = Speed
Yes, I know I managed to reconstruct it around my name, but hey, it’s easy to remember, right? Let’s go!
R = ROI and risk
Let’s talk about return on investment (ROI) and risk metrics.
Return on investment (ROI) measures the amount of return on a crypto investment, relative to its cost.
ROI = Profit / Cost
The chart below shows the return on investment of Bitcoin over the years.
Photo credit: Future Money Wallet
Cryptocurrency prices are known for their sharp upward and downward fluctuations. The 2 important measures of crypto risk are volatility and Sharpe ratios.
Volatility
Volatility measures the price fluctuations of a crypto. If a crypto has higher volatility, its value may spread over a wider range. The value of volatile cryptos can change significantly in a short period of time.
Conversely, a crypto with lower volatility is likely to be stable and subject to lower fluctuations.
Volatility is typically measured using variance and standard deviation.
The chart below shows the volatility of four cryptos: Bitcoin, Ether, Tether and XRP. As expected, Tether (USDT), which is a stablecoin, has virtually zero volatility.
Photo credit: Future Money Wallet
Sharpness ratio
The Sharpe ratio is the average return obtained above the risk-free rate per unit of volatility. When calculating the ratio, we subtract the risk-free rate from the average return. This allows us to calculate the benefits associated with the risky activity.
The risk-free rate of return is the return on an investment that carries no risk, such as a Treasury bond. A positive Sharpe ratio implies that returns are greater than the amount of risk.
O = Open-high-low-close price
OHLC is a type of bar chart that shows the open, high, low and close prices of a crypto for a given period of time – an hour, a day or even a year. Other price metrics are All-Time High (ATH) and All-Time Laws (ATL). As the name suggests, ATH is the highest price a crypto has ever reached and ATL is the lowest.
Example: Ether (ETH) hit an all-time high of Rs. 318,620.83 on May 12, 2021. Its all-time low was Rs. 30.74 on October 21, 2015. You should also check the recent high and low prices 24 hours, 7 days, 30 days, 90 days and 52 weeks. You can track this data on this Bitcoin price history page.
H = Holder Statistics
You’ve probably heard of the term “whales.” These are addresses that own more than 1% of the circulating supply of a crypto.
Some of the important metrics related to crypto holders are:
- Total number of unique addresses containing assets on the network.
- Active addresses in the last 24 hours and 7 days
- Transactions carried out by the main addresses by balance
A = Amounts
We are going to talk here about supply and market capitalization.
Circulating supply
This is the number of coins/tokens that are circulating in the market and in the hands of the public. Usually, the lower this number, the higher the prices are likely to be.
Example: The circulating supply of Bitcoin (BTC) increases approximately every 10 minutes as new Bitcoins are generated with each block mined. The crypto with the highest circulating supply is SHIBA INU with 394,796,000,000,000 SHIB.
Maximum supply
This is the maximum number of coins/tokens that will exist over the lifetime of a crypto.
Examples: The maximum supply of Bitcoin (BTC) is 21 million while that of Ether (ETH) is unlimited!
Total offer
The number of coins/tokens already created, minus coins/tokens that have been “burned”.
Examples: In the case of Bitcoin (BTC), the circulating supply is equal to the total supply. Binance Coin (BNB) regularly “burns” coins, which helps maintain its price.
Market capitalisation
The total market value of a crypto’s circulating supply. Market capitalization is the circulating supply multiplied by the current price. Historically, Bitcoin (BTC) has always had the highest market capitalization and Ethereum the second.
Fully diluted market capitalization (FDMC) is the market capitalization if the maximum supply was outstanding, or the price times the maximum supply.
If the maximum supply is unknown or unlimited, as in ETH, then FDMC is the price times the total supply. If both the maximum supply and the total supply are unlimited, then we cannot calculate the FDMC.
S = Speed
Here we are going to talk about volume, speed or velocity. Volume measures the amount of crypto traded over a specific period of time, such as within 24 hours or 7 days. The velocity or velocity of a crypto measures the rate at which the crypto is traded globally and is calculated as the 24-hour volume divided by the circulating supply.
Cryptos can be of different types, most commonly store of value, medium of exchange and utility cryptos. For these cryptos, velocity is a very useful metric. The image below shows the speed of some of the fastest cryptos as of September 2.
Photo credit: Future Money Wallet
There are also wrapped cryptocurrencies that are tied to assets such as commodities, stocks, intellectual property, etc. Since these are totally dependent on the indexed assets, their speeds may not be very relevant. The same could be said for governance tokens, dividend-paying cryptos, and security tokens.
Rohas Nagpal is the author of the Future Money Playbook and the chief blockchain architect of the Wrapped Asset Project. He is also an amateur boxer and retired hacker. You can follow him on LinkedIn.
Tech
