Analyzing and understanding the potential price and value of a cryptocurrency can be both tricky and frustrating. There are no quick and dirty methods of analysis that can forecast an altcoin’s price, but there some parameters that can help you understand where it might go and how to gauge if the coin is (still) a good potential investment.
Developing a good understanding of these factors can help you understand some of the things that are going on in the market. Nobody can know everything that is happening in the market, but understanding these concepts will enable you to know a few things. Some understanding of the market is always better than no understanding.
The cryptocurrency analysis concepts that every altcoin investor should be familiar with are Total Supply, Circulating Supply, Coin Price, Market Capitalization (popularly known as Market Cap), and Coin Price. Researching these will give you a better, but not always clearer, understanding of what is happening with the market.
Why you need to know the Total Supply of a Cryptocurrency
The Total Supply (also known as ‘fully distributed market cap’) of a cryptocurrency is all the altcoins of that specific currency in existence that are circulating and the ones released in the future.
This includes the coins available in the market or circulating supply, and all the currency being held by speculators, investors, and the people involved in the initial cryptocurrency offering (ICO).
The Total Supply is important because the size of it can determine the Coin Price. A popular rule of thumb is the larger the supply, the lower the price. Note: this is not always true because outside factors; such as investors’ sentiment and legal restrictions, can affect the Coin Price.
Three factors which can shape the total supply are the Founder’s Coins, the Mining Rate (also known as coin inflation), and the Company Lockup. Some cryptocurrencies out of the circulating supply for bounties and promotion as well.
Knowing what these terms mean are important because they can provide more data for analysis.
The term Founder’s Coins refers to cryptocurrency that the team behind an ICO is keeping for themselves. These coins might be sold off over a period of years, or kept by the founders as personal nest eggs. You can usually learn the number of founder’s coins by carefully reading the ICO website; the amount of the currency reserved for the founders is usually listed there or in the ICO whitepaper. Many cryptocurrencies have a ‘founder’ coin allocation between 5% to 30% with 10%-15% the usual figures though there are some cryptos where the founders own most of the supply. Generally, the LESS coins a founder hold, the better. A good ICO would have founder coins locked up for 1-4 years and released on some automated distributed smart contract to prevent the founders from dumping their coins on the market. This protects the investors and the coin value.
The Mining Rate is the speed at which new altcoins are created from the blockchain. It can affect the supply because faster mining means more cryptocurrency on the market which can lead to a lower price. Determining the total Mining Rate for a cryptocurrency can be tough because different miners have different speeds. This rate can be estimated by tracking the rate of change in the circulating supply.
The Company Lockup is the number of altcoins deliberately kept off the market by the organization behind an ICO. Unlike the Founder’s Coins, this cryptocurrency is held by the company rather than individual. Like the Founder’s Coins, the end of the Company Lockup can suddenly change the Total and Circulating Supplies by releasing a large amount of coins onto the market. The amount in Company Lockup is usually revealed somewhere on the ICO’s website.
The Total Supply must not be confused with the Maximum Supply. Some cryptocurrencies, such as Bitcoin, are designed with a limit on the number of coins that can be mined. Once Maximum Supply is reached there will be no new Bitcoins. Other altcoins, like Ethereum, have no Maximum Supply so their Total Supply can keep growing forever.
What is Up with Circulating Supply?
The Circulating Supply is the number of altcoins for sale in the market right now. This number can be easily determined at websites such as https://coinmarketcap.com/ – which list the Circulating Supply.
Tracking the Circulating Supply is the best way to estimate the demand for a cryptocurrency. This can be best done by looking at the Change Rate number posted at some websites.
Circulating supply directly affects the price of the coin. The ‘lower’ the circulating supply, the higher the price (depending on market cap with lower market cap giving a lower price). The circulating supply is the value that’s generally used to calculate the price of the coin.
This means a cryptocurrency with a lower circulating supply (such as say 10 million coins) is likely to have a much higher price per coin than a coin with a higher circulating supply.
For example, Ripple with billions of coins in supply and with a market cap in the billions has a coin price of about .25c to .40c). Zcash with a circulating supply of just above 1 million has a coin price ranging in the hundreds of dollars.
Ripple, due to the huge coin supply, will never have a coin that’s $10, $50, or $100. Small circulating supplies allow for higher prices per coin to be reached, assuming the same market cap.
Another point here is that a coin with a small circulating supply is likely to rapidly increase in price much faster than a coin with a large circulating supply. For example, it’s much easier (and faster) for a coin like Monaco with 10 million circulating supply to reach $25 dollars per coin than a coin like TenX which has 100 million circulating supply. The price jump tends to be quicker.
Generally, changes in the Circulating Supply precede a price change. Usually, a bigger Circulating Supply indicates a lower price, and a smaller Circulating Supply leads to a higher price. A change in circulating supply occurs when new coins are mined or some of the coins in lockup (founders coins, company coins, etc) are released into circulation.
Altcoins with a larger Circulating Supply are often subject to higher levels of market volatility and sudden price changes because more people hold them. Cryptocurrencies with a lower Circulating Supply will usually have a lower Coin Price but they will also be more stable.
The Importance of Coin Price
The Coin Price is the amount that a unit of a particular cryptocurrency is selling at in the market right now.
This is the number that news stories about a particular altcoin will usually focus on because it is easy to understand. A headline about $7,000 Bitcoin is referring to the cryptocurrency Coin Price.
The Coin Price is determined by a combination of Market Demand and Circulating Supply.
Circulating Supply is the total amount of coins in circulation right now. This does not include coins that have not been released yet.
The size of the Circulating Supply will affect how fast the coin price might change.
A sudden increase in the Circulating Supply, such as the coin founders releasing their held coins into the Circulating Supply can lead to dramatic change in the Coin Price in a downward direction. Usually, Company / Founder held coins are locked in a smart contract and only released at scheduled intervals to prevent this (usually over years).
Market Demand is a simple concept to understand but a hard one to measure. A high market demand will usually lead to a high price, if there is a limited Circulating Supply.
Market Demand is simply this: how much people are willing to pay for a coin. The higher the deman, the higher the price.
A low Market Demand will often lower the price.
Something to remember is that a lower price will not always lead to a higher Market Demand.
Market Demand is hard to measure because it is often affected by outside forces that are hard to measure such as investors’ sentiments and news coverage. Market Demand and Coin Price often go up after news stories about high Bitcoin prices for example.
Psychology of Coin Price
When looking at a coin price, there is something to be said about psychological factors that play a role. A cryptocurrency that hits $1, for example, passes a sort of psychological milestone. We could say the same thing about bitcoin when it hit $1000, $10,000, and recently, $20,000.
A coin passing a certain price seems to spike serious market demand as the coin ‘proves’ it’s value. The takeaway is that if a cryptocurrency climbs past a certain price, that price becomes fixes in the mind of the public and likely the coin will either gravitate to around that price and it becomes the new ‘price’ as people adjust to this.
For example, a cryptocurrency that was .03 rising to $1 and staying at $1 for a period of time will likely have people fixing that $1 value as the ‘worth’ of that crypto currency. This may lead people NOT to sell below that price and that price becomes the new support line.
Market Cap: The Most Important Factor for Investing
Market Cap or market capitalization is the most important number related to a cryptocurrency. You should study Market Cap carefully because it is the easiest factor related to an altcoin to measure and understand.
The Market Cap is the value of all the units of an altcoin on the market right now. It can be easily determined by simply multiplying the Circulating Supply by the Coin Price. If the Circulating Supply of IckCoin is one billion, and the Coin Price of IckCoin is $1 then the Market Capitalization of IckCoin is $1 billion.
The Market Cap is vital because it determines how much potential ROI (Return on Investment) you can achieve.
A high market capitalization means that there is less room for the coin price to increase. A low Market Cap indicates that an altcoin might be capable or more growth.
Knowing the amount of potential price growth is good because it can determine the Return on Investment (ROI) from a cryptocurrency. The ROI is always a good thing to know because it is the amount of money you might make from the investment.
ICO’s and Market Cap
The Market Cap can also tell you the potential value of an Initial Coin Offering (ICO) and is one of the strongest metrics investors can use to gauge how profitable an ICO may be over the short and long term.
Put it this way, it’s easier to see greater ROI by investing in an ICO with a lower market cap than in an ICO with a larger ICO. This depends on market sentiment as well.
However, if you invest in a cryptocurrency during ICO and it hits the market at say $5 million vs an ICO with a market cap of $100 million, it’s far easier for your $5 million market cap to go 500% to $25 million than it is for your $100 million ICO to go to $500 million.
Some investors use Market Cap for bargain hunting. They look for good ICOs or altcoins with a lot of potential value and low market capitalizations. Those characteristics can be a sign of a good cryptocurrency that the market is ignoring or has not yet discovered yet.
Note, make sure you read our new Ultimate Guide to Making Millions with ICO’s by Ben Krypto, the owner of CryptoIncome.io, and guy who knows what he’s talking about when it comes to making millions with ICO’s.
Behavioral and Value Investing With Market Cap
Value and behavioural investors pay a lot of attention to Market Cap because it can give an indication of investors’ attitudes toward a particular cryptocurrency.
A high market capitalization can indicate investors like an altcoin and are willing to pay more for it and that particular cryptocurrency has a lot of trading on it.
A lower cap might reveal a cryptocurrency that investors do not want at any price.
Of course, this depends completely on the market sentiment at the time.
Such reading of Market Cap can help investors pick up future bargains. A low Market Cap might indicate that investors do not understand the potential value of the technology involved in an ICO for example. A high market capitalization for another ICO might indicate that investors are overestimating the potential of that altcoin or just buying the coin out of FOMO.
There are also very irrational factors that inflate Market Caps. The high Market Cap for Bitcoin is partially driven by the fact that it is the only cryptocurrency many people are familiar with.
Many people, including a lot of journalists, make the basic mistake of confusing Bitcoin and cryptocurrencies in general. Some of them assume Bitcoin is the only cryptocurrency in existence, so it is the only one that they invest in. Others avoid altcoins entirely because of the well-publicized problems with Bitcoin.
Understanding such behavioural factors can help you make much better use of Market Cap in your analysis.
Why More Research is always better
Market Cap, Total Supply, Circulating, Supply, and Coin Price are only the beginning of what you need to know about a cryptocurrency or ICO. There are many other factors that can affect its price.
The other factors can include technology, marketing, investor psychology, economics, politics, regulation, reputation, crime, market hysteria, the news media, forks, rumours, plans, and market sentiment to name just a few. You cannot discover or predict everything but is possible to learn a lot through research.
The best advice for an altcoin investor is to do your homework. After you perform the basic analysis do as much research about the ICO cryptocurrency as you. Try to read or listen to everything about the cryptocurrency, even the pieces with conclusions you do not agree with.
The more you know about a cryptocurrency the better. It is what you do not know that will cost you money in the market.