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An introduction to crypto and Bitcoin fundamentals for beginners
2021.02.18
An overview of key market metrics for Bitcoin and cryptocurrencies
With growing interest from institutional investors, Bitcoin and cryptocurrencies emerged as an alternative asset class, with their prices reaching new heights this year. The resulting media coverage coupled with a focus on crypto prices has naturally drawn more retail investors to the space.
However, as was the case during the 2017 hype around initial coin offerings, there are thousands of crypto assets available to retail traders, but they vary significantly in terms of their actual utility and adoption. In this guide, we aim to introduce key metrics and factors that drive Bitcoin and are relevant to most cryptocurrencies, allowing newcomers to assess various projects and protocols.
The key metrics we’ve selected are classified into three categories:
- Network metrics
- Project metrics
- Financial metrics
Network metrics
These metrics indicate the health of a blockchain network, in terms of its usage and security, and include transaction statistics, number of addresses and other related statistics discussed below.
Transaction count
Transaction count measures the number of transactions on a blockchain network. In general, high transactions indicate high usage. However, transactions alone are not good indicators of a network’s usage, since mere counts can be inflated with very small amounts moved between the same addresses repeatedly.
Users can view transactions for any public blockchain network using websites likes Blockchain.com, Etherscan, etc.
Transaction value
This metric shows us the total value exchanged on a blockchain network within a set time period. Generally, this is a more reliable metric than simple transaction counts, but it can also be inflated by cycling assets between wallets.
Transaction value is obtained by multiplying the total number of transactions in a period with the amount (coin or USD) transacted in each. For instance, if there are 200 transactions of $100 each on the Ethereum network in a day, the total transaction value will be 200 x $100 = $20,000.
Total value locked
A metric popularized by the DeFi boom, total value locked measures the total value of all digital assets locked in a smart contract. It is usually denoted in USD, ETH or the native token of the protocol.
TVL is a widely used metric to assess the adoption of DeFi protocols, as it measures the value of assets staked by users. This metric can be accessed via DeFi pulse or DeBank.
In a similar fashion, the amount staked in a proof-of-stake blockchain measures users’ interest in the protocol over time and their willingness to support it, as opposed to trading the native token.
Active addresses
As the name suggests, this metric denotes the total number of active addresses on a blockchain network. In general, the higher this number, the more users a network is believed to have.
While a single entity can hold more than one address, the activity of active addresses is classified into sending, receiving and unique addresses, and it is often used as a general indicator of a network’s adoption and decentralization.
These metrics can be viewed using data providers such as Glassnode and via blockchain explorers like Blockchain.com.
Transaction fees
Transaction fees are paid by users of the network and earned by miners or stakeholders. This metric is usually denoted in USD or the network’s native token and is also accessible via the aforementioned websites.
Notably, transaction fees tend to spike when a blockchain network is congested, be it Bitcoin or Ethereum. This is because in periods of high activity miners naturally prioritize transactions with higher fees. Consequently, in order to avoid long waiting times, users offer higher fees to get their transactions verified.
Hash rate
Hash rate is one of the most common indicators to assess the health of proof-of-work blockchains. Generally, the more computing power committed to a PoW network, the higher its hash rate, and the more secure and less likely it is to suffer from a 51% attack.
Blockchain networks with low hash rates are vulnerable to bad actors who can compete with existing miners on the network and subvert their attempts at verifying new blocks.
Networks that are popular with miners, such as Bitcoin, typically have high hash rates. When new miners join a network, the hash rate goes up, whereas when miners leave a network, the metric drops.
Distribution and large holdings
As of the time of writing, BitInfoCharts shows that addresses with a minimum of 1,000 BTC hold 42.96% of total BTC in circulation. Generally, distribution metrics are good indicators of whether or not the underlying token or coin is sufficiently distributed, as compared to a few entities holding a controlling supply.
An increase in wallets with smaller holdings also indicates increasing retail interest and adoption.
Project metrics
Project metrics are qualitative in nature and mostly reflect the vision and development goals of the team behind the protocol. Key examples of these include white papers, team structures, tokenomics and more.
Project white papers
Reading a project’s white paper is essential for users to gain a basic understanding of the protocol, its design, utility and the native cryptocurrency. When reviewing a white paper users should generally consider:
- Rationale and vision of the project
- Use cases with clearly defined target customers
- Key technical properties of the project, such as the consensus mechanism used
- A detailed project roadmap
- Tokenomics with token usage and distribution
Apart from the project’s white paper, users can refer to one-pagers for a summary of the project. Technical white papers, which are commonly seen in public blockchain protocols, allow users to gain an in-depth technical understanding of the project.
Team
It is important to learn about the founders and the team behind a project before you consider investing. Transparency, qualifications and previous track record are obvious factors to look for.
Websites and social media channels
A proper website coupled with an active social media presence is a good indicator of a project’s popularity. Channels such as Telegram and Discord are also great for becoming a part of the community and observing a project closely in terms of the team’s communication and progress.
Github contributions
Github is the go-to website for users to track development progress. The number of commits submitted is a common metric to track a project.
Users can refer to Github Stars to learn more about the key developers and proposals in a cryptocurrency project. The contributors receiving the most stars are usually the key developers of the protocol and repositories with the most stars are the key proposals discussed among the developer community.
Tokenomics
The tokenomics in a project’s white paper reflect the proposed distribution mechanism and economics of the project’s token. Some of the key stats here include the total supply, rate of issuance, any buy-back commitments, and token allocations to the project’s team and treasury.
If most tokens are allocated to the founders and the treasury, the token price can be easily manipulated and the project will be a risky investment for users. However, if there is too little allocated to them, there may not be enough resources nor incentive to develop the ecosystem.
Financial metrics
Financial metrics refer to stats such as market capitalization, liquidity and token supply data.
Market capitalization
Market capitalization represents the total network value of a cryptocurrency and is calculated by multiplying the current price with the token’s circulating supply. This metric is often used to estimate the growth potential of a cryptocurrency.
Most top coin lists, such as the one on CoinGecko, are ranked in terms of market capitalization, and at the time of writing Bitcoin and Ethereum are in the first two spots.
Liquidity and trading volume
Liquidity refers to how easily a crypto asset can be bought and sold in the market. The liquidity of a crypto asset can be assessed by factors such as the 24-hour trading volume, number of trading pairs available on the market and the number of active addresses holding the token.
Supply mechanism
Maximum supply, circulating supply and total supply are the key metrics in a token’s supply mechanism. Maximum supply includes all tokens that are in circulation as well as those that are yet to be issued.
The circulating supply refers to the number of coins or tokens that are publicly available and trading in the market. Supply stats are at the heart of most price valuation models and discussions.
Risk factors
The crypto space is a high-risk environment due to a host of challenges, ranging from technical lapses to regulatory clampdowns and other security risks users need to be fully aware of.
Legal/regulatory risks
Crypto tokens can be subject to regulation or legal risks depending on their token issuance mechanism and/or operational jurisdictions. For instance, if the tokens are issued via an initial coin offering in the United States, the tokens may face a potential lawsuit from the U.S. Securities and Exchange Commission for unregistered securities offerings.
A recent example of regulatory risks faced by crypto projects is that of Ripple. The company behind the sixth-largest cryptocurrency, XRP, was recently charged by the U.S. SEC for its unregistered $1.3 billion securities offering in 2013.
Smart contract/security risks
Regardless of the project’s vision and progress, security exploits are a constant threat and can lead to loss of funds. Given how developers can easily plagiarize code, users should pay attention to projects which have been independently audited by security firms.
Smart contract vulnerabilities, such as flash loan attacks, remain prevalent in the decentralized finance market and have resulted in losses of $48 million so far in 2021.
Business risks
For cryptocurrency protocols, the competitive landscape of their respective use cases presents a business risk to the users. For instance, tokens representing a decentralized crypto exchange face competition from other, perhaps more established decentralized exchanges and traditional financial institutions. Another example would be payment tokens, where they face competition from traditional payment giants like PayPal.
Closing thoughts
Bitcoin and other cryptocurrencies are gaining popularity among retail traders in the recent bull run. However, users should remain mindful of the inherent risks and consider some of the fundamental analysis metrics discussed above when evaluating new and existing projects.
Users interested in trading can also refer to our step-by-step cryptocurrency trading guide to get started and sign up for an account on OKX to get $10.
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