Data-Driven Approach To Cryptocurrency Speculation The Ultimate Methodology

Introduction 

A Data-Driven Approach To Cryptocurrency Speculation is the only way to success.

How do Bitcoin markets behave? What are the causes of the sudden spikes and dips in cryptocurrency values?  Are the markets for different Altcoins, such as Litecoin and Ripple, inseparably linked or largely independent?  How can we predict what will happen next?

Articles on cryptocurrencies, such as Bitcoin and Ethereum, are rife with speculation these days, with hundreds of self-proclaimed experts advocating for the trends that they expect to emerge.  What is lacking from many of these analyses is a strong data analysis foundation to backup the claims. Also fundamental analysis plays a crucial role for long term HODLERS. 

Fundamental Analysis

Before investing on a coin you have to do your research first, you have to know what are you investing on. This translates to analyzing the following elements:

• The team reputation (e.g. team average age group)
• The team skill set composition (e.g. skill set balance, in marketing and engineering)
• The team skill set ratio (e.g. 70% engineers and 20% social community creation)
• The product white paper (e.g. well written whitepaper, reviewed by lawyer)
• HQ Location (e.g. London or Netherlands with stable legal framework etc.)
• Company partnerships (e.g. associates with other companies in the field )
• Social community  size (e.g. 30.000 users in telegram channel)
• Technology Use Case:
• Payment
• Insurance
• Oracle
• Clean Energy
• Shopping
• Tokenomics (e.g. inflation, coin max supply, market-cap etc.)
• Code audit from the product:
• Security code audit from an independent 3rd Party (e.g. Review for security bugs etc.)
• Manual Audit (e.g. Review for code quality etc.)
• Github Repo code review (e.g. update frequency etc.)

Note: A sample analysis can be seen in this link Matic .

Tools For Fundamental Analysis

For fundamental analysis,we can you the following websites to get all the required information:

• Coingecko - From this tool we can get information
• Lunarcrush - From this tool we can get information about the coin and social sentiment 
• OpenZeppelin - From this tool we can get information about the security audits

On top of the mentioned tools you can use also other tools. The mentioned tools cover 90% of my research.

Building Portfolio & Understanding Movement  

Usually by correlating different assets you can conclude how movement evolves and make the right bets. Below I have my latest correlation analysis, with pair from Poloniex public API. The test collects data from 2019-01-01 until today (2021-07-02), enjoy the Kendall correlation:

  This is for the same period the Spearman correlation:

 

  This is for the same period the Pearson correlation:

Note: For more information on correlations and how to use them please see my previous posts here and here.

From here we can see the following interesting correlations:

• ETH has 0.74 to 0.96 correlation with BTC, which this translates to BTC is leading the way and ETH is following.
• LINK has 0.74 to 0.9 correlation with ETH, which this translates to ETH leading the way and LINK following.
• UNI has 0.76 to 0.88 correlation with COMP, which this translates to COMP is leading the way and UNI is following.
• SNX has 0.66 to 0.9 correlation with BTC, which this translates to BTC is leading the way and SNX is following.

On Chain Data And Technical Analysis 

On chain data analysis is always mandatory and these are the metrics I am using to assess my short and long term movements:

• Exchange Inflows/Outflows for swing trading from CryptoQuant and GlassNode
• Coin reserves on BTC and ETH for long term investment and swing trades from CryptoQuant and GlassNode
• NUPL indicator from GlassNode
• Stable coin reserves on all main exchanges from CryptoQuant and GlassNode
• Coin charts from Tradingview (for short term) and the following indicators:
• RSI with fibonacci values
• MACD with fibonacci values
• Moving Average, Weighted Moving Average for 21,34 and 13 days
• Buy and Sell walls from Tradinglight for short term movements

Bull and Bear Cycle Periods 

As we can understand in all assets there is a Bull cycle that alternates with a Bear cycle. Now between the Bear and Bull cycle there are mini Bear cycles were BTC consolidates (aka. Moves sideways) or retests the resistance lines. That time period is usually the best to switch your cash to the Altcoin market, and the market movement can be recorded. 

The diagram below shows which market (BTC or Alts) dominates based on market cap: 

 

When the graph hist 70% towards the BTC market, we switch to BTC, when it goes below 65% we switch to Alts and so on. 

Technical Analysis 

Technical Analysis works because the markets are largely based on human psychology. Swings follow numbers, but the behaviors are predictable to a certain extent. That certain extent has to do with the fact that human psychology is a natural factor, and most natural factors seem to mysteriously follow the golden rule, or Fibonacci numbers and proportions. The theory goes that if you tell a bunch of people that bad news is coming, a certain portion of them will act early or prepare in one way, a certain portion of them will wait and see, a certain portion of them will sit tight and power through [1].

Below we can see the most common patterns for TA, in order to identify future price movement:

Social Media Sentiment

Lunar crush is a very good site to get the overall social sentiment on most of the cryptos:

Summary/Last Words

A summary the blog post about the methodology:

• Step1: Fundamental analysis for long term is mandatory
• Step2: Crypto coin correlation can give us a good understanding about price movement
• Step3: On Chain data analysis is a must to get valuable insights  
• Step4: Technical Analysis is a complementary tool
• Step5: Social sentiment can help you predict movement and new coins

Stay safe do not drive fast......

References:

• reddit [1]