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Popular Crypto Trading Indicators

For many investors, the crypto market can be tough to get your head around. These handy trading indicators will help you make sense of it all.

Category TradingandInvesting

Summary

Most professional traders use indicators to guide their investment decisions. While there are many conventional models in use for traditional markets, many do not translate to crypto markets. As a result, several crypto-specific indicator models have emerged, each aiming to deliver improved market insights. While Bitcoin’s market dominance has influenced the development of many models — notably the bitcoin (BTC) Heat Map and Bitcoin Rainbow Chart — other metrics like the crypto Fear and Greed Index aim to assess broader crypto market sentiment.

What Are Trading Indicators?

Financial market professionals and hobbyist investors alike can make use of myriad trading indicators to better inform their investment decisions. In general, investors categorize these tools into two types: technical and economic indicators. Economic indicators synthesize data like the Consumer Price Index (CPI), Gross Domestic Product (GDP), and unemployment figures to help assess economic growth or contraction. This information often guides fundamental analysis (FA), providing insight into the future performance of public companies and a macro view of the market.

In contrast, technical indicators are applied to trading charts — which track the price of an asset historically — to identify trends that reveal specific market information. For example, by analyzing metrics like price, volume, and open interest, an indicator can help determine when an asset is overbought, oversold, or due for a pullback. Some of the most common technical indicators include on-balance-volume (OBV), moving averages (MAs), moving average convergence divergence (MACD), and the relative strength index (RSI).

Although investors have come to rely on these very familiar technical indicators over time, the rapid rise of the digital asset class has seen an entirely new suite of crypto-specific metrics emerge. Many of these crypto metrics are calculated on-chain using data directly from the blockchain. This can offer highly detailed and specific data about on-chain activity thanks to the transparent nature of blockchain records.

Further, as cryptocurrency remains a fairly young asset class compared to markets like real estate, there is less than a decade of market data from which to build reliable models using established methods. Instead, crypto analysts have built new crypto volume indicators and trading models that analyze factors like scarcity and market sentiment in addition to on-chain data and technical analysis, with the overall goal of furnishing a new generation of crypto indicators for a new generation of assets.

Bitcoin Metrics and Crypto Indicators

What Is Bitcoin Dominance Data?

Many crypto trading indicators track the performance of bitcoin (BTC) first and foremost because of its long history of data (relative to other cryptocurrencies) and its persistent market dominance. As of October 2021, BTC accounted for around 42% of the total crypto market value. In fact, bitcoin’s market dominance (often referred to as bitcoin dominance or BTCD) is itself an indicative coin metric that is often reflective of the health of the wider market. Similarly, many crypto traders use indicators tied to ether (ETH), the second-most popular currency by market cap, and such metrics include ether’s market dominance (often referred to as Ethereum dominance or ETHD). More generally, though, BTC-based indicators tend to be concerned with bitcoin metrics like moving averages, inflation schedules and halving of block rewards, and market pressures originating from miners to identify trends that will affect not just bitcoin, but the entire crypto market.

The Bitcoin Heat Map

The Bitcoin Heat Map operates on the premise that the BTC price historically finds its cycle bottom around its 200-week moving average — which refers to the average price of Bitcoin over the prior 200 weeks (approximately four years). This crypto indicator analyzes historical price data, and then generates a color heat map based on the percent increases above the 200-week moving average. The color assigned to the price chart depends on the month-by-month percent increase of the 200-week moving average, starting with low intensity blue troughs, and moving up towards a cycle top in red at the peak of each macro Bitcoin cycle.

Long-term BTC investors can monitor the monthly color changes on the Bitcoin Heat Map to identify trends. For example, orange and red dots assigned to the price chart have historically been a good time to sell BTC, as those colors indicate that BTC is overbought in comparison to its price over the past 200 weeks. Conversely, when the price dots are purple and close to the 200-week MA, it has typically been a good time to buy BTC. In over a decade of analysis, the Bitcoin Heat Map has yet to be invalidated, cementing its status as a go-to technical macro trend indicator.

The Bitcoin Rainbow Chart

The Rainbow Chart gets its name from the eight colored bands that segment the ranges of BTC price, which are playfully separated into categories like “Fire Sale,” “Accumulate,” “HODL,” and “Maximum Bubble Territory.” These color bands follow a logarithmic regression mapped over the dates of bitcoin halving dates that has thus far provided a valid framework for predicting long-term market cycle trends. The Bitcoin Rainbow Chart puts forth a colorful and playful method of looking at long-term price movements while ignoring the “hype” of daily volatility.

The Rainbow Chart perspective allows investors to identify trends that indicate the best times to buy or sell BTC based on patterns established in prior cycles. With that being said, even when analyzing this historical data, the eight bands do not serve as precise indicators of when to buy and sell, and it is entirely possible that the Rainbow Chart (and other crypto indicators in the rapidly-evolving ecosystem) could one day be invalidated. Like other indicators, the Rainbow Chart is not intended to serve as investment advice; past performance does not indicate future results.

The Puell Multiple Crypto Indicator

Although block rewards are constant between halving events, the USD value of block rewards changes as the market price of BTC fluctuates. As such, traders find it helpful to consider the daily value of block rewards. This indicator is known as the Puell Multiple, a metric that compares the revenue of BTC miners to the price of BTC. More specifically, this coin metric estimates the amount of sell pressure originating from miners as they sell BTC rewards to cover fixed costs like mining hardware and electricity.

Using the Puell Multiple, traders can utilize a single metric to determine how healthy miner revenue is on any given day. In other words, high Puell Multiple might suggest minimal sell pressure, while a low Puell Multiple might indicate considerable sell pressure. Because miners (especially major institutional miners) often have access to a high volume of BTC, understanding their pressure to sell can reveal short-term price trends before the movement has become evident in the markets. Although helpful, the original Puell multiple did not include transaction fees that miners can receive, excluding them from overall mining revenue estimates. However, as BTC adoption grew, fees began to account for a more significant portion of miners’ total revenue. As a result, the Puell multiple now includes total miner revenue, inclusive of both fees and block rewards.

The Stock-to-Flow (S2F) Crypto Model

The Stock-to-Flow (S2F) model has been used across several asset classes for decades, and is built upon the assumption that scarcity drives value. The S2F model determines the ratio between a commodity's current stock and the flow of its new production. While these variables are more apparent for traditional assets, traders can amend the model inputs to accommodate digital assets. Because the price of BTC usually tracks the S2F ratio, it has become the most popular input for this model.

For BTC, the current stock equates to the circulating supply of BTC, while the flow of new production refers to newly minted BTC according to the bitcoin network’s inflation schedule. The resulting S2F ratio reflects how many years it would take to double the amount of BTC at current production levels. Thus far in bitcoin’s history, this simple equation has proven to be a useful waypoint to which the BTC price has generally adhered.

For example, in April of 2021, the SF2 ratio was:

  • Stock (BTC circulating supply): 18.6 million

  • Flow (newly minted BTC per year): 328,500

  • S2F Ratio: 18,600,000/328,500 = 56.6 Years

Thus far, the S2F crypto model has proven quite accurate, and presents a powerful argument about the role of scarcity on value. Major deviations from its charted course have occurred, however, and it remains unclear if the model will hold, as it predicts the price of Bitcoin rise to controversially high levels, forecasting sustained exponential growth as block reward issuance continues to be halved every four years and scarcity increases.

Broad-Based Crypto Indicators

Broad-based crypto metrics perform more like economic indicators than technical indicators, offering a broader assessment of the crypto ecosystem. Compared to BTC-based metrics, these indicators may be most effective when the correlation between BTC and altcoin market behavior is less prevalent.

Crypto Fear and Greed Index

There’s an old adage in financial markets that says: “Be fearful when others are greedy, and greedy when others are fearful.” For several years, the software company Alternative.me has been operating a BTC Fear and Greed Index — as well as crypto Fear and Greed Indexes for other prominent cryptocurrencies. The index utilizes weighted data sources to generate a number between 0 (extreme fear) and 100 (extreme greed) that indicates the general sentiment of the cryptocurrency market.

The equation for this metric is made up of the following components:

  • Volatility: 25%

  • Market Momentum (crypto volume indicator): 25%

  • Social Media: 15%

  • Surveys: 15% (paused as of September 2021)

  • BTC Dominance: 10%

  • Trends: 10%

The index updates every day at midnight Greenwich Mean Time (GMT), providing a glimpse of market emotion and sentiment. The Bitcoin Fear and Green Index — as well as those for other crypto assets — operate under the premise that crypto investors as a collective tend to be temperamental and emotional. In general, the model assumes that these emotions often trigger two reactions:

  1. When markets are rising, the index assumes that many people will have a fear of missing out (FOMO), which can encourage irrational buying behavior driven by greed.

  2. When markets are falling, the index assumes that many people will act irrationally and sell their cryptocurrency out of fear.

The index aims to protect investors from these overcorrections by providing coin and token metrics that help illustrate emotion-driven market trends. For instance, extreme fear might signal that investors are worried, highlighting a potential buying opportunity. On the other end of the spectrum, extreme greed might suggest that a market correction has appeared on the horizon. While the Fear and Greed Index is less scientific and more qualitative than many of the other popular trading indicators, it does provide a useful snapshot of the ever-changing tides of market sentiment in crypto markets.

The Evolution of Crypto Trading Indicators

Although economic and technical indicators do not equate to investment advice, traders can still use them to make more informed investment decisions. Despite the historical accuracy of conventional indicators, crypto markets are less mature and more unpredictable, which can make existing models less effective. While some models, like Stock to Flow, may translate between the different ecosystems, several specific on-chain crypto metrics have emerged in recent years. These alternatives have become more popular as investors seek new ways to analyze digital asset performance. While BTC performance and on-chain data from the Bitcoin blockchain underpin many of these models, market maturation may eventually lead to a wider array of alternatives that take a broader and/or more accurate perspective.

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