Pulling Your Hair Over the Crypto Market? Gain Immediate Success with These Five Simple Steps at Your Fingertips Today.
Here’s the complete guide to trading cryptocurrencies using Tokenomics and technical analysis.
As of 2021, there are over 4,500 cryptocurrencies in the market right now; with the number growing higher and higher. Each cryptocurrency has its own function — ranging from the immensely useful like Ether (the currency of the Ethereum network) to the downright silly like Dogecoin. So which one do we pick? Which ones should throw our money behind? This guide will use the tenets of Tokenomics (economics for cryptocurrencies) and technical analysis to help you select the right coins to buy.
Author’s Note: This topic is pretty dry, so get some coffee handy.
Here’s the table of contents (for easy reference):
- Step 1: Bull or Bear market?
- Step 2: Filtering Out Coins
- Step 3: Overbought or Oversold?
- Step 4: Demand Analysis
- Step 5: Figuring Out a Sell Point
Step 1: Bull or Bear market?
Let’s jump right to it. First of all — verify if the crypto market is in bull or bear. One good way of doing this is checking the price of Bitcoin. While trendlines on regular candlestick charts can be used to identify trends, they can be inaccurate and prone to false breakouts. Point and Figure (P&F) charts can help to view trends easier.
Point and Figure charts
P&F charts eliminate the emphasis on time, and places an emphasis on price trend instead. These charts are useful for filtering out ‘noise’ (tiny price movements), and making you less prone to false breakouts.
In P&F charts, price movement upwards are represented by ‘X’s, and price movement downwards are represented by ‘O’s. A typical trend reversal is only recorded when the price moves greater than 3 ‘X’s or 3 ‘O’s.
For example, here is a P&F chart of Bitcoin (taken on 19/07/2021). The column on the far right are all ‘O’s — signaling a clear descending trend. Only when the price moves past the $34000 line will the trend be considered ‘reversed’.
Thankfully, the free website Stockcharts.com has made our lives much easier. This website analyses all sorts of breakout and breakdown patterns, and lets you know if the market is in bull or bear. All you have to do is simply refer to this small portion above.
Additional notes: You might wonder why do we take reference from Bitcoin — and not other coins like Ether or Ripple? Bitcoin has the largest market dominance in the cryptocurrency market. It’s been proven time and time again that when Bitcoin value rises, other tokens and currencies increase in value as well — and vice versa. You can read more about the reasons listed in this article here.
Step 2: Filtering Out Coins
Here’s where we further define our strategy. Here are four components to consider when selecting the right coin — it needs to have a reasonable market cap, have a high volume/market cap, and decrease in price over the last 24hrs, and if possible, a hard cap.
- Market Cap
Market cap is a good indicator of showing how many people have ‘bought’ into a project. A large market cap represents stability. In terms of market cap, Bitcoin is the largest, followed Ethereum, Binance, Cardano, so on and so forth. Cryptocurrencies can be divided into three main categories: Large, Medium and Small projects. Here’s how these projects compare:
- Large Cap projects: More than USD$10 billion (E.g. BTC, ETH, BNB, ADA, XRP)
- Mid Cap projects: Between USD$2 to $10 billion (E.g. LTC, NEO, ETC, SOL, XLM)
- Small Cap projects: Between USD$300 million to $2 billion (E.g. AVAX, GRT, KSM, CHZ, XEM)
When buying into projects, it’s always good to take this correlation into account. The larger the market cap = more stable = lower risk = smaller returns. The smaller the market cap = less stable = higher risk = bigger returns. To put this into context, it’s more difficult to rugpull ETH or BNB as compared to say, OMG or ICX. On the other hand — smaller market cap coins allow more room for growth, compared to the established large market cap ones. It’s up to you to manage your risk appetite from here.
2. Volume/Market Cap
The volume/market cap ratio measures the activity of a cryptocurrency in comparison to its market cap. The volume of a coin is calculated by the number of number of coins that have changed hands over 24 hours.
Using volume/market cap ratio over volume is a more decisive metric as it allows you to scope out exciting projects among mid and smaller market caps as well. If we were to use solely volume as a metric, it would leave us with mostly large market cap projects.
Similar to fiat, a currency that changes hands frequently shows a demand for it — thus representing its utility. A coin that is useful is far more valuable than one that is not.
Looking at CoinMarketCap screener, we can see which coins are the most ‘useful’:
Filtering out stablecoins (coins around $1 USD like USDT and HUSD), we see that AXS, BAT, OKB, ETC, and QTUM are the most ‘useful’ coins. However, there are a few things to note:
- Be wary of coins that have a meteoric rise like AXS. Its high volume/market cap ratio of 71% could be attributed to the high volume of sell-offs (declined 15% over the past 24 hours) that is currently happening.
- I would take OKB out of the equation. OKB is not listed on Binance.com, which is the largest cryptocurrency exchange in the world. Not being listed there is a detriment to itself, as it prevents the coin’s access to the huge volume of traders on Binance.com.
That leaves us with BAT, which is a small market cap coin with a high utility rate of 25%.
3. 24hr Price Decrease
This metric is not as important as volume/market cap and market cap, but could be used for finding coins at a discount. We can also get serious bounce from these coins. By filtering coins according to 24 price decline on CoinMarketCap, we get this:
Taking into account the fact that we only want coins with relatively high volume/market cap ratio (at least 10%) with a reasonable market cap (at least $1 Bil), we can safely remove coins like STX (2%), RUNE (5%), FLOW (9%), and RVN (11%). In this scenario, we would only consider SUSHI (19%) and MATIC (it has only 7%, but it has a high market cap compared the other coins listed here.)
Pro tip: You can expand the charts and select more coins for analysis.
4. Optional Metric: Circulating Supply
Another way of determining a future short supply of a coin is by checking its circulating supply. Looking at BAT, we can see that its circulating supply is almost nearing its max supply — with 99.25% of its coins already issued out.
BAT’s supply of coins is almost nearing its end. In basic economics, when demand (utility) exceeds its supply (in this case, 0), shortages occurs — resulting in a coin’s increase in price.
Similar for SUSHI and MATIC, we can see that their supply stands at 50.90% and 63.31% respectively, meaning that it will take some time for its supply to be maxed out.
Of course, circulating supply is not the only metric that we should bank on. There are incredibly useful coins like ETH, TRON and BTT that do not have a hard cap. Therefore, circulating supply should not be a ‘do or die’ metric (and should be optional) to help you make further buying decisions.
Pro tip: Here are some customisation settings that I use for CoinMarketCap’s screener:
Step 3: Overbought or Oversold?
The next step if to find if the coin or token is overbought or oversold. Two good indicators to use are the Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI).
Relative Strength Index (RSI)
The RSI is a good way of identifying overbought or oversold conditions. Let’s use BAT as an example.
In the RSI, the 30th percentile represents an oversold region, and the 70th percentile represents overbought. As you can see, most of the time the market bounces up upon hitting the 30th percentile. This adds on to our rationale why we select coins with the highest 24hr decline, coupled with high volume/market cap ratio. The decline increases our chances of the coin hitting the 30th percentile.
Moving Average Convergence Divergence (MACD)
The MACD allows us to further analyse the coin’s trend. Markets (stocks, commodities, cryptos, etc.) tend to move in cycles. You’ll notice that markets make pullbacks every few days (or weeks). This is because of short-term profit taking. This creates peaks and troughs within the market.
The question is — how do we find the right time to enter to benefit from these pullbacks?
MACD Histogram
The MACD’s histogram show us that the troughs (circled in red) correspond to the lowest points of a trend. Prices bottom out when the MACD histogram reaches a low.
This is the best time to buy the coin. However, it is difficult to know when the MACD histogram bottoms out. This is why we should use the MACD and RSI together.
Using MACD and RSI together
At circle 1 and 2, we can see that the market bounces back up after hitting the oversold 30th percentile of the RSI (oversold line). This is accompanied with the MACD histogram reaching its lowest point.
Let’s zoom in further to the MACD and RSI.
Therefore, we should use the MACD as an indicator when entering the market. Here’s our steps:
- When the histogram goes below the zero mark, prepare to enter the market.
- Buy the price when the market hits the RSI’s 30th percentile (representing oversold).
How to find the RSI’s oversold price
Using our mouse to hover over the current RSI point, we can see that it currently sits around the 33rd percentile. We can expect the price to bounce back after hitting around 30th percentile. Let’s do some basic math here:
Price to enter: (30 percent/33 percent) x 0.46 (current price) = $0.418 ~ $0.42
I would definitively say that the market could bottom out at around $0.42–0.43, and that would be a good price to enter BAT.
TL;DR version: The formula for making an entry during a BEAR market would be 1) Wait for MACD histogram to cross below zero mark, 2) Calculate the price of the coin at RSI’s 30th percentile, 3) Line up a trade at that point.
In the case of a bull market
In the case of a bull market, you may want to enter when it falls to the 50th percentile, instead of the 30th percentile of the RSI. Sell your coins once it hits the 70th percentile (oversold region).
Pro tip: Sometimes, the market may not fall to your entry point. It’s always good to hedge your bets and split your capital into different coins to increase the chances of hitting your targeted price points.
Step 4: Demand Analysis
To support our hypothesis in Step 2 (high volume = high utility = high demand), we need to analyse the demand of the coin.
We’ll use the three coins as filtered in step 2: BAT, SUSHI and MATIC.
Order Book Depth
There is an Order Book Depth function in every trading platform. If your platform does not have one, I recommend you using one that does. I’ll use Binance.com’s Order Book Depth function for illustrative purposes.
Order book depths are good in understanding the demand for the coin at the different price points better. At the moment, the green hill is larger than the red hill. This means that more people looking to buy BAT than sell it — representing that the demand for the coin now is larger than the supply of the coin.
In comparison, here’s an order book depth of Ethereum (ETH). The red hill engulfs the green one, showing that its supply is currently greater than its demand.
Buy/Sell Walls
When viewing order books, always look out for ‘walls’. High buy walls indicate that there are many buy orders lined up at that price — and vice versa for sell walls. For instance, we see that USD$0.463 (red underline) is the highest transactional value point of BAT, with 206,933.51 orders. This works out to about $95,874.93 of market capital flowing into the coin at that price — thus theoretically raising the price of the coin.
The Argument Against Order Book Depth
However, the problem with solely using buy walls to decide the entry price is multifold. Here are the reasons:
- There are no centralised Order Books in cryptos
Unlike stock trading platforms like Thinkorswim, there is no centralised order book for crypto trading platforms. In Thinkorswim, the platform collates orders from every exchange (NYSE, NSDQ, EDGX, ARCA, etc.) and displays it in an order book system called ‘Level II’. Crypto exchanges on the other hand — perhaps due to their deregulatory nature — do not share information with each other as freely. This means that orders in Binance’s order book may not reflect the true demand of the coin at that particular price point.
2. Order books do not take current market prices into account
There are a number of popular crypto trading platforms (like Coinbase, Coinhako, Binance.SG, etc.) that do not allow users to create order limits. This means that all buying and selling are done at market price. In times of bad news — say China banning all bitcoin mining — people using these platforms will sell their coins at market price. This large volume of sales (supply) at market price causes buy walls to be ‘eaten up’, outstripping demand and forcing price downwards.
3. Buy and Sell walls can be manipulated by whales
A main criticism of buy and sell walls is that prices can be manipulated by whales. Due to the huge volume of cryptocurrencies that they own, they can create buy or sell walls by lining up many orders at that point, and then retracting it once the wall is reached. However, here are two methods that you can use to see if buy/sell walls are manipulated by whales.
TL;DR: When using order book depth, use it to see if the demand is greater than its supply. If supply (red) is larger than demand (green) — DO NOT BUY IT. Do not use the order book depth as a sole metric in deciding your entry price point.
Pro Tip: You can also use Etherscan to check what percentage of your coin is owned by whales.
Step 5: Figuring Out a Sell Point
We’re finally at our last step! Congrats for making it this far. Using our findings from Step 1: Bull or Bear market — we can decide on a selling strategy that will fit our situation.
If Bull Market
If you bought a coin during a bull market,
- Calculate your coin’s price at the RSI 70th percentile and sell it at that price. Holding the coin at any point further than that puts risk to your portfolio.
- Use profits and repeat steps 1–4.
If Bear Market
Here’s where it gets a little trickier. In bear markets, you want to make small profits and close it within a few days. We’ve already discussed finding an entry point, but how do we find an exit point?
Order Book Depth — Sell wall
When selling during a bear market, it’s always better to use market sentiments. For example, if you were to buy BAT at our calculated price of $0.42, you could place a sell order at the sell wall as seen above at $0.550. This would allow you to rake in a small profit of $65 if you used $500 to trade.
Resistance Lines
Alternatively, you could draw a resistance line and sell at that point.
How to draw a resistance line:
- Use your platform’s pencil tool.
- Find three recent peaks and draw a straight line on top of them.
- Set your sell price there.
In this case, I would place a sell order at $0.6.
Pro tip: I would also recommend the use of stop losses. You can watch plenty of YouTube tutorials on how to set one up — like this one here.
And there we have it — five steps in making yourself a better crypto trader.
Note: You’ll notice that I haven’t mentioned anything about technology yet. That’s a whole another can of worms. If you want to have a grasp of how the Proof-of-Work system works, read my article here. I’ll be writing an non-exhaustive list about the various technologies that exist in the crypto sphere next. Stay tuned for that.
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Read my other articles here:
How to buy stocks using fundamental and technical analysis
The similarities between Blockchain Technology and Google Docs
How to fund your Binance.com account from Singapore
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