If you’re an intrepid investor but missed the crypto train in early 2021, you may just be taking a second look at the market.
Crypto assets have experienced an epic dip since May. Most assets have retraced 50% to 80% of their YTD peaks. A opportunity maybe to ‘buy the dip’?
If you are thinking of investing in crypto this post will help you learn the crypto market fundamentals before you take that leap. If you don’t know the market basics, you may be taking more investment risk than you’re aware of. You’re also investing uninformed, which in our humble experience never ends well. So read on wannabe crypto investors, and make sure you get to the end to find out the next steps you should take to invest successfully in crypto.
‘Coins’ versus ‘tokens’
Before we get into the crypto asset ecosystem, let’s talk about the difference between coins and tokens. This can confuse people when they’re first starting out. In short, coins are assets on their native blockchain. For example Bitcoin on the Bitcoin blockchain and Ether on the Ethereum blockchain. Tokens are assets foreign to the blockchain they live on. Examples are Tether which is a second-layer token on multiple blockchains.
In this article we’ll refer to all crypto assets as coins, but in some cases the use might be interchangeable with tokens.
Investing in cryptocurrency – market fundamentals
Fiat currency (USD etc) flows into cryptocurrency according to the market capitalization of different crypto assets. This is because investors typically enter a new asset class looking for the lowest risk assets in the class. Investors will generally also equate highest market cap with lowest risk asset.
Then, when the investor becomes more knowledgeable or informed about and comfortable with the investment space, they branch out. By understand how the crypto market structure impacts the flow of money into and out of crypto, you can make more informed investment decisions when you’re first starting out.
#1 Crypto price trends start with Bitcoin
Bitcoin is the highest market cap and lowest risk crypto asset (barring stablecoins). This is because it is the most well-known and has the greatest ‘trust’ or ‘authority’ score. Bitcoin dominates the total cryptocurrency market capitalisation by a long way and it leads price trends in the market. Because Bitcoin is the headline crypto asset – some say the reserve currency of the crypto asset ecosystem – money generally flows into crypto assets from the fiat money system starting with Bitcoin.
Money flowing into and out of Bitcoin can have a massive impact on price movements in other coins.
#2 Money flows from Bitcoin into large cap Altcoins
Next, as Bitcoin investors become more informed about other crypto assets, they tend to diversify. The money starts to flow from Bitcoin into large cap Altcoins (alternative coins to Bitcoin are called ‘Altcoins’). Large cap Altcoins are the top altcoins by market cap, led by Ethereum (ETH). As the money flows into these coins from Bitcoin, the price of this bag of coins can often move AFTER a Bitcoin move, with a lagging effect.
Large cap altcoins are more volatile than Bitcoin and can even include some ‘sh*tcoins’ among them – meme coins like DOGE coin with little real utility or project value. This is a characteristic of crypto and something to be aware of as an investor. Crypto is not like other investment markets. Market cap is not necessarily an indicator of strength, or value, or lower risk. It can equally be an indicator of sentiment and the kind of ‘social trading’ popular in crypto culture.
#3 The wild, wild west of small cap Altcoins
Finally, there are the small cap Altcoins. Money can often flow from large cap to small cap altcoins. These are the riskiest and most volatile crypto assets by far. They also bring the promise of the greatest investment gains. No risk, no reward hey peeps!
#4 Money also flows by crypto asset class
The other way that money can flow in crypto is in and out of different asset classes. The asset classes are generally grouped by crypto use cases. For example, the Stablecoins such as USDC and USDT that provide a peg to the USD as a safehaven from crypto market volatility. Non-fungible tokens (NFTs), Decentralised Finance (DeFI) and Oracles are well known asset classes. You can think of these classes as similar to the different industries you see in the stock market. Typically money flows in and out of assets by class in either a cyclical or ad hoc manner, meaning ‘like coins’ in the same class can move together. It’s common to have leading coins in each class (by market cap) and instances where pairs of coins with similar use cases move together.
Investing in cryptocurrency – how to track the money flows
If you’re investing in cryptocurrency you need to know about some critical ‘tickers’ or trading indexes, to help track the flow of money by market cap and use case. Keep an eye on these indexes and understand what each represents. They can help you understand what part of the investment cycle crypto assets are in, and therefore the near, medium and longer-term prospects for particular investments.
TOTAL
TOTAL is the ticker that measures total market capitalisation and the very first index to take a look at if you’re considering investing in crypto. This ticker will show you whether the total investment in cryptocurrencies is in an upward trend. If ‘the trend is your friend’ in investing, then this chart matters. It will help you understand both bullish and bearish macro views of crypto, based on what you see on the chart.
Here it looks to be forming a possible falling wedge on the daily chart, and could also be on the verge of setting a higher low after the February 2021 low. Or it could be in a major downtrend lasting for some time. I don’t have a crystal ball y’all – it’s more about making informed decisions.
Bitcoin Dominance (BTC.D)
Probably the most important index to understand and follow is Bitcoin Dominance (ticker BTC.D). BTC.D measures Bitcoin’s share of the total market cap of the cryptocurrency market. It’s a good idea to understand the relationships in movements between Bitcoin Dominance, the Bitcoin price and Altcoin prices. For example, when people are buying Bitcoin but the total crypto market cap is not growing, then Bitcoin’s share of that total market cap increases and the BTC.D chart goes up. This is bad for Altcoins in general because it signals that Bitcoin is outperforming them.
When people are buying Bitcoin (the trading pair BTC/USD is rising) but BTC.D is trending downward, this is generally because the total crypto market cap (TOTAL) is also rising. A rising tide floats all boats. This trend is good for ALT/USD trading pairs but less good for ALT/BTC trading pairs because Bitcoin is rising.
The movements of BTC.D fundamentally define movements and trends across the crypto market for different coins on all timescales. I personally wouldn’t invest in any cryptocurrency without first checking this chart.
TOTAL2
The next is TOTAL2. TOTAL2 measures the total market cap of all coins except Bitcoin. It’s a measure of the money flow into and out of Altcoins. TOTAL2 trending higher when BTC.D is trending lower is an indicator of what’s commonly referred to as ‘Altcoin season’. This is a time in the market cycle where you can expect Altcoins to outperform Bitcoin.
DEFIPERP
This is an index made up of a bag of the largest Decentralised Finance crypto assets. It uses a weighted average of the prices of DeFi crypto assets including KNC, MKR, ZRX, REN, REP, SNX, COMP, TOMO, RUNE, CRV, DOT, LINK, MTA, SOL, CREAM, BAND, SRM, SUSHI, SWRV, AVAX, YFI, UNI, WNXM, AAVE, BAL. It tracks the movement of money into DeFi as a proportion of the total market capitalisation.
The final word – crypto is an ecosystem so take it one step at a time
There is a lot to learn about the crypto asset ecosystem. We’ll do our best here to spread the love with information we wish we had before we started investing. These basics will give you a shot at:
- working out, based on how much risk you want to take, whether large or small caps are your cup of tea
- what coin categories you might be interested in investing in
- when is a good time to buy crypto based on how the money flows.
If you want to take the next step and start making money with crypto, then get yourself along to this entirely online Rich Dad Summit.
You’ll get 2 days worth of great investment content including successful entrepreneur and investor Robert Kiyosaki covering topics how to invest in Bitcoin and how to easily get around some of the beginner challenges with buying and owning crypto.
The cryptocurrency market is the wild west of investing so if your risk appetite is not up to investing in cryptocurrency then head over and take a look at some of our other traditional financial freedom investing ideas.
Until next post – have fun, be happy and do good!
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