Many people use market cap as an important (or even the only) reference indicator when selecting projects (tokens). A few days ago, a friend left a message and asked an interesting question: After seeing the news that Trump was shot, I also wanted to buy some TRUMP, but I found that the market cap of the token is currently $350 million. If I want the price of TRUMP to double again, wouldn’t I need another $350 million in funds? This seems difficult to achieve?
How to answer this question? From a simple mathematical calculation, it seems to be just as this friend said. But he may have overlooked the most critical factor, which is: market liquidity.
When selecting a project, market capitalization is indeed one of the important reference indicators, but if we look at the problem without considering the underlying logic of liquidity, it may sometimes lead to some one-sidedness.
So how should we understand this market liquidity?
According to Wikipedia, market liquidity is a characteristic of a market where an individual or company can quickly buy or sell an asset without causing a sharp change in the asset's price. Liquidity involves a trade-off between the price at which an asset is sold and the speed at which it is sold. In a relatively liquid market, people can sell quickly without having to accept a significantly lower price; in a relatively illiquid market, an asset must be discounted to sell quickly.
If applied to the crypto market, we can summarize it in one sentence: Market liquidity refers to the ability to quickly exchange (trade) cryptocurrencies at current market prices without causing significant loss of value.
This is actually not difficult to understand. For some friends who like to play MemeCoin, they may often encounter the kind of Dogecoin whose market value data looks large but has almost zero liquidity.
Therefore, while we pay attention to the market value data, we also need to pay attention to the liquidity data of the corresponding pool. As shown in the figure below. In short, sufficient liquidity is crucial, and the number of tokens you trade cannot exceed the amount allowed by its available liquidity.
For currencies in DEX, different pool (trading pair) pages will provide data such as Liquidity. For currencies in CEX, we can focus on checking three indicators, namely 24-hour trading volume, order depth, and bid-ask spread (the difference between the selling price and the buying price). Of course, due to factors such as limit stop orders and iceberg orders, the order book in the exchange cannot represent the most accurate price of the corresponding currency, but these indicators still have a certain reference value.
Let’s take the MAGA (TRUMP) token shown in the above figure as an example. As of the time of writing this article, the token price is $8.11, the TRUMP-WETH liquidity pool in Uniswap is $9.1 million, and the market value is $354 million. As shown in the figure below.
In other words, as long as the market continues to inject $4.55 million into the liquidity pool to buy TRUMP, the price of TRUMP should be able to double without injecting $354 million.
This involves an economic relationship between liquidity and asset pricing. To put it simply, when the supply of an asset is fixed, demand becomes the determining factor of price. When supply is elastic and demand increases, prices will not change, but demand will increase; when supply is inelastic (i.e., supply is fixed) and demand increases, prices will rise and further reach a new equilibrium point. Corresponding to the above figure, when demand increases from DD to D1D1 while S (supply) remains stable, prices will reach a new equilibrium point, from E to E1.
Similarly, the total market value of the crypto market (excluding USDT and USDC) is currently $2 trillion, as shown in the figure below. Many people are currently expecting the Fed's interest rate cut to bring a lot of liquidity to the market, but it does not mean that we still need $2 trillion in new funds to double the market value of the crypto market. In fact, as long as there is a certain amount of new liquidity, coupled with a new round of demand speculation, it is entirely possible to push up the overall market value of cryptocurrencies again.
In short, when choosing a project, don't just focus on the market value as an indicator, but should look at it comprehensively. If you have more time and energy, it is recommended to use the "Project Research Template" provided by Huali Huawai for assistance.
If you don’t have enough time and energy, you can also simplify the project research work appropriately, such as:
Step 1: Choose a narrative
Take the data classification of the Dropstab platform as an example. At present, the crypto field can be divided into at least hundreds of narratives. As shown in the figure below.
In the previous article of Hualihuawai (July 14), we also mentioned: Because everyone’s time and energy are limited, you can’t conduct investment research on all narratives in the current crypto field at the same time. You only need to select 1-3 narratives that you are most optimistic about and conduct in-depth research.
Step 2: Filter Items
Here we can continue to use the Dropstab tool. You can use the tool's filters to filter different dimensions and then select a list of projects that you want to learn more about or research. As shown in the figure below.
Step 3: Check the Project
Here we will continue to focus on several aspects of the corresponding project, including:
1) Financing of the project
If the project has already obtained investment from some VC institutions, then the risk of the project will at least be relatively low. Let’s not talk about the price here, but at least the risk of the project party RUG will be lower.
If you don’t know some of the CV situations in the current encryption field, you can use the DeFiLlama tool to assist in understanding, as shown in the figure below.
2) Community situation of the project
A project that can develop well must be driven by a strong community. You can join them and get to know them better. If the project DEV (developer) can have good discussions and communication with community users and can actively synchronize some development plans of the project, and the community users (fans) are also showing continuous growth, then this may be a good sign.
The project community includes the project party’s corresponding Twitter (X), telegram or Discord, etc. You can find these entrances directly through the project’s official website (usually displayed at the top or bottom of the official website).
3) Chart data for this project
In addition to basic information, it is also necessary to pay attention to the K-line chart of the project token. Some basic knowledge about K-line has been sorted out in the article "Some basic technical analysis indicators you need to know before making money" written by Huali Huawai a few days ago (July 3), so I will not repeat it here.
4) The token economy of the project
In the crypto space, token economics is a very important concept. If you trade without understanding the economic design of the corresponding token, you are trading blindly, which may expose you to serious losses.
Token economics mainly includes several aspects, including the market cap, FDV (Fully Diluted Value), circulating supply, and total supply of tokens, which in turn will lead to issues such as the distribution ratio of tokens and the unlocking of tokens. Mastering these indicators will help us evaluate the potential of tokens and understand the corresponding operation of the project and its possible impact on the token price.
After the three simple steps above, we should have a list of potential candidate projects. The next thing to do is to "buy on dips" based on a certain strategy. Regarding the topic of buying on dips, Hualihuawai has also sorted out some related content in previous articles, so I will not repeat it here. As shown in the figure below.
Finally, it is all about patience and executing according to the plan (take profit/stop loss). Of course, one thing that needs to be reminded here again is that if you do not consider yourself a professional trader, then it is recommended to minimize swing trading. For projects (tokens) with potential and value, it is normal to hold them for half a year or even a year.
