Lets talk crypto trading. This is the most dynamic asset class on planet earth. The volatility it provides cannot be matched. Throughout this article I am going to highlight a few key metrics one should assess when wanting to enter a crypto trade.
Correlation Matrix:
It is wise to perceive crypto as a higher risk and higher return alternative to standard "risk on" stocks. One should air on the side of caution when evaluating a trade within the space - volatility should be expected.
Below is a Pearson Correlation Matrix presenting data between SPY, NASDAQ, and Gold relative to Bitcoin. Positive values close to 1 are very highly correlated, negative values approaching -1 are negatively correlated.
Self explanatory, but one can see a trend: crypto/stocks typically move together,
With this in mind, it sets the precedent that we should be assessing Bitcoin and the crypto market as an extension of traditional markets - subject to the same fundamental factors.
Measured in Bitcoin:
Similar to how stocks can be measured in dollars, euros, or pounds, a cryptocurrency has different relative values depending on the reference asset. Using XRP Weekly as a case study, we can cleary see some favorable price action as it falls into deep value territory.
As you will see shortly, it is a distinctly different chart then the USD value.
Measured in Dollars:
Assessing the dollar value of 12H XRP, it appears to be more "mature" in its market structure development. In addition, one could argue it has less volatility.
The reason one must consider both the Bitcoin and Dollar value is the trend for "bitcoin season" versus "altcoin season" as measured by key metrics like BTC.D..
Bitcoin Dominance:
BTC.D or ALT.D (can do any alt coin in trading view) is a measure of the captured market capilitaization divided by total crypto market cap.
In this instance, it is clear to see that Bitcoin has been capturing significant market share and is absorbing market dominance.
When Bitcoin Dominance is finding support = Bitcoin Bull Market imminent
When Bitcoin Dominance is encountering resistance = Alt Season Opportunity.
As with anything, this is not promised. Additional context like a capitulating bear market could cause a rising BTC.D, without appreciation of Bitcoin itself.
Open Interest:
This metric provides insight into the derivatives market and the directionality within. Large spikes/falls in OI suggest accumulating or liquidation of positions, respectfully. The next logical question: dump or pump?
to which, there is no perfect answer.
Funding rates provide some insight into if the bulls or bears are the majority. Combining the OI picture above it is clear to see there is "average" OI with a bullish bias. This could be interpreted as the market is bullish and looking for Bitcoin to continue climbing - a perfect opportunity for a liquidity crunch to the downside.
Wrapping it up:
Learn something? be sure to follow!
Next article we are going to discuss a balanced approach to analyzing the market :)
