What metrics can we use to measure the general level of interest/sentiment in the cryptocurrency market? Are the markets overly bullish or bearish?Some influential traders on CT (crypto twitter) have recently talked about the importance of indicator levels and why they feel these indicators are important.
This article will describe some common metrics used in cryptocurrencies and how they can be used to assess the level of interest/sentiment of participants in the cryptocurrency market.
(1) Funding Rate
If you have tried to play with leverage through perpetual contracts on an exchange before, you will see a “funding rate” number, usually at the top of the page.
The funding rate is paid periodically, shown as a percentage, usually quoted at an 8-hour rate, and paid to long or short traders depending on the difference between the spot price and the perpetual contract market.
Funding rates are often shown at 8-hour rates (Binance Futures)
Perpetual contracts (“Perp”) are futures contracts that have no expiration date (no settlement date), making them similar to trading in the spot market – hence the term “perpetual contracts”. Traders use these contracts to gain leveraged exposure to specific tokens because they only need to provide a small percentage of the total value of the contract as collateral.
Unlike traditional futures contracts, where the futures price eventually converges to the contract price at settlement, perpetual contracts use the funds rate to ensure that the perpetual contract price and the spot price converge on a regular basis.
Another simple way to understand the funds rate is to think of it as a payment to the arbitrageur to ensure that the perp price tracks the underlying spot price (paying the difference between the two prices).
When volatility is high, the perp price may diverge from the underlying spot price. Depending on the direction and extent of the divergence, the funding rate can be positive or negative.
➕ When the perp price is higher than the spot price (i.e., contango), a positive funding rate occurs – participants are bullish and traders who are long will have to pay for the short position.
➖ Negative funding rates occur when the peripheral price is lower than the spot price (i.e. backwardation) – participants are bearish and traders who are short will have to pay for long positions.
The funding rate is generally made up of two components: the interest rate and the premium. The interest rate is usually fixed at 0.01% for each funding band (usually every 8 hours), while the premium depends on the difference between the perp price and the spot price (as described above).
Since the interest rate is fixed at 0.01% for each interval, 0.01% is often considered a “market neutral” funding rate. From this perspective, funding rates can be used as a measure of how overheated or oversold an asset is.
So, how do they correlate with market sentiment? Funding rates tend to be consistent with the general trend of the underlying asset, i.e., funding rates tend to be positive and get higher as the price of the underlying asset rises.
BTC Price and BTC Perp Funding Rate Chart
(2) Open Positions (OI)
Another way to measure interest in the cryptocurrency market is to look at volume based metrics; for example, we can look at how many contracts are being traded in the market, etc.
Open interest is one of the more popular volume-based indicators, and it indicates the total number of open contracts (both long and short) held by market participants at any given point in time.
In other words, open positions are basically the sum of all open trading positions (long and short) minus closed trades.
Why is open interest important? It is a general indicator of capital inflows into the market. When more capital flows in, the number of open positions increases, and vice versa. For this reason, it is also considered an indicator of market sentiment.
Since open positions include both long and short open positions, high values of open positions usually indicate increased price volatility. Therefore, when combined with a price trend, open positions can be used to identify market tops/bottoms.
For example, if the price of an asset is rising along with its open interest, it may indicate a bullish sentiment. Conversely, if prices are rising but open positions are falling, this could mean that sentiment is bearish and the forces behind the price action are weakening.
Possible explanations for market sentiment using price and position trends
Exchange BTC positions, chart from bybt.com
(3) Stablecoin Funding Flows
If there is a market sell-off and investors expect the value of their cryptocurrency investments to decline, they may turn to stablecoins as a safe haven while giving them the flexibility to deploy their funds back into the cryptocurrency market quickly.
Therefore, it is also useful to view general trends in stablecoin trading volume and activity, which can be viewed through Nansen’s stablecoin dashboard.
For example, the daily on-chain trading volume for stablecoin was trending up until the May 19 crash, followed by a spike on May 19.
Daily on-chain trading volume of stablecoins
On the other hand, a rapidly growing supply of stablecoins (as measured by market cap) relative to total cryptocurrency market capitalization could signal a bottom after a market decline, as it could mean that there is ample “dry powder (note: meaning total cash available for investment)” available that could easily flow back into crypto assets.
Stablecoin Market Cap
(4) Exchange Capital Flows
If market participants are bearish and fear that the value of their cryptocurrency holdings will decline, they will attempt to sell their holdings through exchanges.
Exchange net flows are an indicator of this trend; it measures the net amount of tokens entering/leaving an exchange. If the net inflow of a token into an exchange suddenly rises, this could mean that participants are trying to sell that asset by selling it on an exchange, and vice versa.
ETH net transaction flow, taken from Nansen’s ETH Tracker dashboard
For the same reason, one can also use Nansen’s Token God Mode dashboard to see changes in the balance of specific tokens held on the exchange to assess whether participants are trying to exit (positive balance changes when they sell tokens to the exchange) or enter (negative balance changes when they buy tokens from the exchange).
Change in balance of wBTC on the exchange, taken from Nansen’s Token God Mode dashboard
(5) Fear and Greed Index
A popular metric to measure the level of sentiment in the cryptocurrency market is the Cryptocurrency Fear and Greed Index. In most markets, the behavior of participants tends to be emotional. Market participants tend to be overly greedy (FOMO) when prices are in an euphoric upward spiral, and they also tend to be overly fearful (and irrationally cut their losses) when prices fall.
The Fear and Greed Index is an index that tracks current sentiment in the Bitcoin market and comes from several sources, namely.
Volatility: measures current volatility and the maximum decline in BTC relative to the past 30 and 90 day averages
Market Momentum / Volume: measures current volume and market momentum relative to the last 30 and 90 day averages (measures market overreaction)
Social Media: the number of posts tagged with bitcoin and their interaction rate
Bitcoin dominance: the rise in dominance is often caused by fear/selling of risky cottage coins
Google Trends: the amount of positive/negative searches for bitcoin
The index starts from zero to 100, with zero meaning “extreme fear” (a potential bottom signal due to overly worried investors) and 100 meaning “extreme greed” (a potential top signal due to overly bullish investors).
Historically, the Fear and Greed indexes have been good indicators of market bottoms; for example, at the bear market bottom in 18-19 and the COVID crash bottom in 19, the index hovered around the 10-20 range (extreme fear) for about 3-4 weeks.
Crypto Fear and Greed Index, taken from alternative.me
Next time you try to analyze the cryptocurrency market and measure sentiment, keep these indicators in mind as they may provide you with useful insights.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/nansen-analyst-common-market-indicators-when-investing-in-cryptocurrencies/
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