Investing in Crypto – insights for a beginner trader with Omniscope

When looking to invest in crypto, most are afraid of entering at the wrong time and mistiming the market. Perhaps there has been a recent price run-up and the media is making you feel the FOMO, or maybe family members have encouraged you to start building a financially secure future for yourself. Even though it is clear that some cryptocurrencies do trend higher with time, choosing appropriate entry and exit points can save capital and ease the stress of being a bag holder. 

What separates crypto from traditional stocks and derivatives is that all transactions, data and information is immutable on the block chain, to be gathered and seen by any. By using a simple data tool, Omniscope, and the raw data gathered directly from the bitcoin block chain we can produce graphs and set conditions for relatively accurate buys and sells. This article explores on-chain metrics, market sentiment, block chain address activity and several supply and profit metrics. 


Supply in Profit

To start with we take a look at the supply in profit metric. This indicator is shown as a percentage with a lower band at >50% and upper band at <95%. In general when taking a macro view of the market, it is important that not too many investors are sitting on profit if you want the asset to climb in price. As more market participants become profitable, there is a higher likelihood of them selling. When the supply in profit reaches 95% or above, the market is due for a correction. As seen in the view below, the last times this occurred was during the latest price peak in November 2021 and the top of the previous leg back in April 2021. December 2018 was the last time that the % supply in profit dipped below 50%, and was indeed the best buying opportunity in the last 5 years.


% of inactive supply

The chart below shows the % of total supply inactive for 1 year or more. More bitcoins remaining inactive means that they are being held instead of traded, and indeed leads to higher prices being found shortly after. More specifically, if we were to take a look at each time the % of supply inactive reaches new all time highs after finding a macro bottom, we would see that it represents a shift in sentiment and price action. Historically each time a new high is made with this metric, it acts as a leading indicator for future bullish price action. First seen half way through 2012, a new high of 35% of all bitcoins remaining inactive for over a year signaled the macro bottom of that bearish period, and those prices were never seen again. Similarly in January of 2015, bitcoin supply inactive reached a new high of 55%, only a month shy of the macro bottom for that specific bearish period. The last time a high was formed was in July of 2020, preceding the recent run up to $64k. This metric is an excellent indicator for long term macro trend shifts, and should be on  every trader’s radar as a gauge of upcoming momentum shifts and large price moves. Currently this metric reads 62.5%, a level to keep an eye on as we head close to previous highs. 



Net Unrealized Profit/Loss

Next we take a look at NUPL, one of the more popular macro indicators for determining market sentiment. It calculates the total amount of profit or loss in the market. The NUPL value oscillates between 1 and -1.5, and contains bands within each representing market sentiment at that point. The market is in a state of euphoria when the NUPL value is above 0.75 and is shown by the colour blue. Green stands for belief, orange hope and red capitulation. Below is a view of the NUPL plotted with price after bitcoins second halving. Note the capitulation values shown by the NUPL metric are at the exact bottoms of price during the 5 year period. Furthermore, the cycle top of 2018 could have been predicted by the <0.75 reading on the NUPL, turning the bar blue. Selling at euphoria and buying at capitulation seems to be a solid macro strategy. 


As seen from the view, euphoria states are almost never reached, with the last time being in December of 2017, at the peak of the previous bull market. Previously euphoria was reached in 2013 and 2014, both occurring at the absolute top price points of their periods. The last 2 capitulation periods found in the data were the march 2020 crash and the 2018 bear market trough. These were the best buying opportunities for bitcoin in the last 5 years. 


Fear and Greed

Finally, we explore the fear and greed index. The cryptocurrency market is very emotional, consisting largely of retail investors easily spooked by negative price action. Since the asset class could still be considered in its infancy, the lack of liquidity on the order books leads to massive sell-offs in times of crisis or extreme fear. The retail reaction to fear is to sell and “take what you can while you still can”. Similarly a rising market brings strong emotions of greed and FOMO, oftentimes leading investors to overexpose themselves to risk through leverage and derivatives. During these times, the market is usually due for a correction. 

Since the market fluctuates between fear and greed, never staying at one end of the spectrum for too long, we can map the data and extrapolate the best course of action based on the values of this index. Data is gathered from five sources (volatility, market momentum, social media, dominance, trends) and combined to give a fear and greed value between 0 and 100. 

On the view above, the fear and greed values are shown by their marker colour, red indicating a fearful value and green a greedy value. It is clear to see when mapped onto price, that periods of fear are often good buying opportunities. This view shows price action between 2020 until current day. It seems that a cluster of 2 or 3 fearful bars are often followed by a mark up phase in price. Select fearful markers followed by the next greedy ones to see the % change in price had you bought at fear and sold in greed.


Here is the interactive report: Crypto Report

… and the video explainer



N.B. This article does not constitute financial advice

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