Crypto Stories: Whales, bull markets and indicators!
In a new series of interviews, we will be talking to some of the companies and traders that are active on Bitfinex Pulse. In our first interview, we’re delighted to speak with Santiment. In their own words, Santiment create “Tools to help you analyze the crypto market and find data-driven investing opportunities”
They give us insight into the markets and how to best use their platform to leverage data in your trading.
Why did you create Santiment and what are your main goals?
Dino: “The main reason why we founded Santiment back in 2017 is that we believed – like we still do – that pricing data in crypto is extremely unreliable. Sadly, wash trading, pump and dump groups, whale manipulation are all still alive and well in 2020, and contribute to increasingly skewed information about what’s really happening in the market.
That’s why our main goal is to discover and develop additional sources of information about the cryptocurrency markets, so we can provide greater context into the actual behavior of all relevant stakeholders.
In terms of valuation methods, what differentiates the traditional finance instruments from cryptocurrencies?
Dino: “There’s a massive gap between stocks and digital assets in terms of valuation methods.
For one, it’s pretty much impossible to directly replicate many of the common valuation methods for stocks. Take the classic Price-Earnings (or P/E) ratio, for example, where you divide the company’s current market price by its current earnings per share to gauge a stock’s potential.
This is clearly impossible to do in crypto – Bitcoin is not a company so there are no ‘earnings’ to calculate such a ratio. However, since Bitcoin is a payments/store-of-value network, we can use the value flowing through the network (on-chain transaction volume) as a surrogate for ‘company earnings’. So we can still create a modified version of P/E ratio for crypto – what’s usually referred to as the NVT (Network Value to Transactions) ratio.
On the other hand, blockchain’s innate transparency allows us to create many completely new valuation methods that would be impossible in traditional finance. Metrics like the MVRV ratio, which calculates the average profit or loss of a certain group of holders based on when their addresses initially acquired tokens.
This technology is so young, we’re still in the process of discovering brand new ways of both understanding and appraising token networks.”
What unique indicators have you developed over the years?
Dino: “Instead of price-based metrics, our indicators primarily rely on on-chain data, social media data and development activity information. So far we’ve created 150+ indicators using these sources of information, with most of them currently available on Sanbase (http://app.santiment.net/), our main platform.”
On top of providing metrics that people are already familiar with (like daily active addresses or on-chain transaction volume) on our site, we’ve also developed many new indicators and strategies ‘in house’ over the past 3 years.
For example, one of the indicators that’s shown a lot of promise is our social volume metric, which tracks the amount of coin-specific mentions on more than 1000 crypto-related social channels. What we found is that extreme social volumes – especially during a price rally – very often point to local price tops and short-term corrections.
We’ve recently done some backtests on this too – in 200 instances when the coins’ social volume spiked to extreme levels, their price has, on average, dropped by 8.2% in the next two weeks. Pretty strong findings, and on a significant sample size.”
If we were to transition to a bull market, what are some of your indicators that Bitfinex users should be keeping an eye on?
Dino: “It’s all about tracking the behavior of relevant market stakeholders. For example, what are Bitcoin (or Ethereum) whales up to? Are they continuing to accumulate or starting to move their bags, possibly to exchanges to sell? For this purpose, we’ve built various ‘Holder Distribution’ metrics that let users track the behavior of different holder cohorts, from the retail investor to the biggest whales.
Bitfinex users should also keep a close eye on the behavior of long-term holders and ‘new money’, respectively. One metric that can help Bitfinex users with this is time-bound MVRV, which measures the average ROI of all addresses that acquired, say, Bitcoin, within a certain time. Analyzing this metric historically can reveal at which profit levels different BTC holders often start exiting their positions and cashing in.
The list goes on, of course.”
What type of metrics do you rely on to determine a digital token’s overall health?
Dino: “Personally, the ones that I like to look at on a daily basis (all available on Santiment, of course) would be:
1. Daily Active Addresses + Network Growth (new addresses created on the network) – not perfect metrics, but still very good on-chain proxies of network activity and adoption over time. Short-term, these metrics can often indicate strong price trend reversals, but long-term, they reveal a lot about the network’s appeal and sustainability.
2. On-chain Transaction Volume + Token Circulation – how much value is actually being transmitted on the network and what are its long term trends? I also like to compare on-chain transaction volume (all tokens involved in daily transactions) with token circulation (which only counts unique coins involved in daily transactions) to check if the transaction volume numbers may be artificially inflated.
3. Social sentiment – this is different from just the pure amount of coin mentions. What is the crowd’s mood about a particular coin? We’ve developed our own sentiment algorithm which analyzes if the crowd is bullish, bearish or ambivalent about a coin’s prospects. When the crowd is super bullish on a coin, I’m usually betting against it in the short term.”
How could Bitfinex users incorporate Santiment’s data into their trading strategies?
Dino: “All our metrics, strategies and tutorials are available at app.santiment.net, however, Bitfinex users can also get access to some of our most popular metrics directly on the Bitfinex platform!
Every coin’s trading page on Bitfinex carries the Santiment logo (the letter ‘S’ with two black dots on each side) next to the asset’s price. Clicking on the logo opens a new page featuring a number of our social, on-chain and development activity metrics – available at a discount.
These metrics are a collection of some of our most popular indicators, including social volume, daily addresses, on-chain transaction volume, MVRV ratio and much more. If users want to get a ‘second opinion’ before executing any of their Bitfinex trades, I strongly suggest trying them out for a month.”
To get a 25% discount on Santiment Pro, visit the official Bitfinex Pulse and view our Santiment post to grab the code