Bitcoin Indicators & Metrics is Part 1 of the Crypto Fundamentals for Trading series
While macroeconomic events and sentiment can have a major impact on driving the market, there are fundamental price indicators and metrics that every investor and trader should understand to recognize price movements and help themselves succeed.
Trading and investing in bitcoin is, like all things finance-related, a personal decision; remember to always do your own research (DYOR). We’ll cover further technical indicators in a separate upcoming post.
Understanding the fundamentals of BTC price movements:
Price indicators & analysis
The spot price is the current, real time price that bitcoin can be purchased from the market. In the chart below, dated July 16th, the BTC spot price was USD $9107.56. The price changes frequently and rapidly and can be different across exchanges based on market dynamics and liquidity.
Often measured by day or by month, the moving average (MA) gives you a real-time, or ‘moving’ average of a desired time period; a number of days or months. The MA makes reviewing a chart easier, by smoothing out the price based on the average of that time period.
Chart attributes: Time frames
Day traders are more likely to review micro price movements, reviewing price based on a daily time period; 1min, 3min, 15min, 1hr, and 1day charts.
This indicator refers to volume changes, measuring buying and selling pressure, to analyze possible future price movements. By looking at cumulative volume, the OBV aims to determine market sentiment, predicting whether investors are bullish or bearish. Buy volume increases the metric, sell volume decreases the metric.
VPVR: Volume profile visible range
The VPVR indicator visually represents how much trading volume occurs at a set price range. This means that the VPVR shows how much was bought and sold at certain price levels with a graphical display of the data at the side of your chart. By showing volume of trading activity over specific time periods, traders can understand price levels that are showing to have the most interest to the market. VPVR can also be high because the chart moved through a certain price level multiple times during the day.
MACD: Moving average convergence divergence
The MACD gauges strength of current price trends by looking at pricing events in the past. As a ‘lagging indicator,’ that follows trends, MACD looks at changes in the direction, momentum, and duration of trends by calculating the difference between exponential moving averages (EMA). Unlike a simple moving average, which weighs all price activity equally, the EMA gives a higher weighting to recent prices.
MACD is calculated by subtracting the longer moving average from the shorter moving average, as explained by Coindesk:
- MACD line is made up of the 12-period exponential moving average (EMA) minus the 26-period EMA.
- The signal line is the 9-period EMA of the MACD line.
- The histogram plots the difference between the MACD line and the signal line.
BB: Bollinger bands
Bollinger bands characterize price and volatility over a period of time. The bands are drawn as curves around the price structure and consist of three lines: upper and lower bands indicating price levels, and a middle band, showing a moving average (MA).
The moving average acts as a base for the upper and lower bands, providing a reference point to determine volatility between the MA and the outer bands. The upper and lower bands are set a number of standard deviations away from the MA, which is determined by the trader setting their chart.
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NVT: Bitcoin’s Network Value to Transaction Ratio
Similar to the price-to-earnings (PE) ratio used in equity charts, the NVT looks at whether BTC is undervalued or overvalued. The ratio represents current market capitalization via network value and the level of USD-based transaction volume over a 24-hour period.
High NVT can indicate high growth or that the price may have reached an unsustainable level, while low NVT can signal market opportunity.
MAA: Monthly active addresses
The number of active addresses in the Bitcoin network indicates how many active users there are buying and selling bitcoin. MAA indicates growth within the network and points to potential volume as bitcoin adoption increases.
When Bitcoin network transaction volume is high, the competition to have a transaction validated and confirmed heats up. This results in an increase in transaction fees as users raise the financial incentive for miners to include their transaction in the next Bitcoin block. The fee is based on the data size of the transaction instead of the amount of BTC being transacted, as well as the current network conditions.
Number of nodes in the network
The number of nodes indicates the strength of computing power in the network, looking at how many computers are participating in validating transactions and storing the bitcoin ledger and full transaction history.
At present, there are about 10,000 nodes in the Bitcoin network.
The rate at which the Bitcoin network performs hashes, meaning how quickly nodes are confirming blocks of transactions. The hashrate measures total hashrate (TH/s) and is based on a 24 hour period. Hashrate is also a security metric; the higher the hashrate, the more nodes there are in the network contributing to its security and ability to resist an attack.
When the hashrate increases, mining blocks can become more expensive because there are more nodes, or miners, competing for block confirmations.
Mining rate of difficulty
The Bitcoin rate of difficulty tracks how much energy must be used in order to confirm a block of transactions to the blockchain. Within the Bitcoin network, the difficulty is adjusted every two weeks to manage the speed at which new blocks are added to the chain. The difficulty is increased if blocks are being added too quickly and is decreased when blocks are being added too slowly.
Things to watch
BVI: Bitcoin volatility index
Measuring price fluctuations, the BVI shows how volatile Bitcoin has been over a certain time period. This helps investors to understand how risky the investment may be, looking at the rate of Bitcoin’s price swings.
Like the BVI, realized volatility looks at Bitcoin’s historical volatility.
Rate of correlation to equity markets
Correlation between bitcoin and equity markets, typically represented by the S&P, can give traders and investors a reference point for assessing the impact of market conditions including macroeconomic events and volatility. In the chart below, the rate of correlation looks at the movement of price between BTC and SPX, indicating the strength of the relationship between the two measures.