With the exponential growth of the market over the past eighteen months, speculators now find themselves in the difficult position of attempting to narrow down and select altcoins of significant promise amongst the sea of… well, shit.
This short document will seek to shine a light on what can be considered low-risk, high-reward and high-probability. And believe me, there is a plethora of altcoins that fit the bill, at least for our speculative purposes.
On the following pages, I have provided a (somewhat shoddily-designed but nonetheless useful) checklist of the 23 criteria I consult, calculate and determine prior to entering a position. Use this as a framework for your own research; the exact figures provided are not the most critical part of the framework, but rather the process of whittling down a list of potentials via selective criteria itself is what matters.
At first, I suggest you work with the checklist as closely as possible, until the approach itself becomes second nature, and then feel free to play around with it to discover an approach that suits your risk profile more aptly.
The layout of this document is as follows:
- The Checklist: Here, you’ll find all 23 criteria that I focus on in my research.
- The Approach: Here, I outline my approach to working with the checklist, given the near-infinite possible approaches to such a list.
- The Theory: Here, I break down each criterion, expanding on each and providing all necessary calculations, the methodology and other relevant information.
Onto The Checklist…
- Circulating Supply: 500,000–1,000,000,000
- Maximum Supply: 1,000,000,000 (except in rare cases)
- Network Value: $1mn — $1bn (or 250 BTC — 250k BTC)
- Exchanges Listed: Binance, Bittrex, Poloniex, CryptoBridge, KuCoin, Livecoin, TradeOgre (must be listed on one of these)
- % Max. Supply Minted: 10% (to limit inflation — except in rare cases)
- Premine: Maximum 5%
- BitcoinTalk activity: At least 30 posts in past 90 days.
- Social Media Audience Size: At least 1,000 on any of the platforms the coin is present on.
- Average Exchange Volume-to-Network Value: 0.5%
- Volatility: -0.0625 (50% range from average price over the past 30 days)
- Liquidity %: 0.25%
- % of Circ. Supply on Exchanges: less than 3%
- % from ATH: At least 50% (against Bitcoin)
- Annual Inflation Rate %: Less than 50% (unless it is a brand new project)
- Average Exchange Volume-to-Average Daily Supply Emission: 5
- Liquidity-to-Average Daily Supply Emission: 2
- Supply Held by Top 100 Addresses %: Maximum 66%
- Twitter Engagement Rate: 1%
- Facebook Engagement Rate (if applicable): 1%
- Staking/Masternode ROI (if applicable): Maximum 100%
- Masternode Network Value-to-Network Value (if applicable): 33%
- Technical Analysis: Range-bound price at historical support.
- Distribution Evaluation: At least half of top 20 address adding to positions over past 30 days. Less than 5 addresses distributing over the same period.
You may now be thinking “Jesus Christ, that’s a lot of work”… and it is. In fact, not only is there 23 highly specific criteria to contend with, but you also have no idea how to approach such an extensive list.
There are virtually limitless approaches one could employ to tackle this checklist: one might begin with a list of altcoins of interest, then run through each criterion, one-by-one, for each coin on the list, making sure that each adheres strictly to the checklist; one might begin at a screening website, such as Coinmarketcap or CoinGecko, filtering the innumerable altcoins available by more readily accessible metrics like market cap or circulating supply, proceeding to continue with deeper research on those that remain; one could choose to remove coins from a list of potentials that strays from the criteria; some might be more forgiving; some might be less so; the approaches are innumerable.
As such, I believe it will be useful for me to outline my own approach to the checklist, which is as follows:
- I begin at Coinmarketcap, as, despite its somewhat sketchy reputation, it remains a catalogue of high-potential altcoins with readily accessible data that is necessary for our purposes.
- I then filter by market cap. Coinmarketcap offers limited functionality here, with several bands of market cap available but no option for $1mn-$1bn. As such, this step is repeated for each relevant band.
- I then look through the list, writing down which coins adhere to the circulating supply metrics for each market cap band. This takes a few hours, and gives you a list of several hundred altcoins that match the first two criteria from the checklist. (Keep in mind, whilst labour-intensive — though I’m sure some of you will automate this — this process needs only be completed once to find a list of “potentials”.)
- Following this, I remove all coins from the list that are not listed on one of the exchanges mentioned in the checklist. This reduces the list significantly, though there will undoubtedly still be over a hundred altcoins remaining.
- The next step is to remove coins that have a maximum supply of 1bn or greater; this can often be found natively within Coinmarketcap, but sometimes you will have to click through to the BitcoinTalk thread that is linked.
- Which brings me to the next step — any coins without a BitcoinTalk thread are also removed, as this is a hub of necessary information.
- At this point, I may still have between 50–100 altcoins on my list. The next step is to remove coins that have minted less than 10% of their maximum supply, as per the checklist. This will often cut the remaining list by at least a quarter, if not a third, at which point I have a base for deeper research.
- Following this, I use the BitcoinTalk threads to find out which of the remaining coins have a premine greater than 5%. These are removed from the list.
- I reduce the list further by removing those coins without 30 posts on their BitcoinTalk threads in the past 90 days. Further, I cut any coins that do not have an audience of at least 1,000 on any social platform they are present on — links to these platforms can also be found on the BitcoinTalk threads. At this point, I may have between 30–50 coins left.
- Now, things get a little more complicated, and I get a little more metric-focused in my research. For the remaining coins, I calculate the Average Exchange Volume-to-Network Value (over a period of 30 days) by using the Historical Data tab for each coin on Coinmarketcap. I’ll go into how I approach these calculations in latter pages of this document. Any coins that have a ratio of less than 0.5% are cut.
- At this point, I will usually have a maximum of 25 altcoins remaining, and these are the ones I focus all efforts on for the rest of the research process. These are also the coins that I continue to monitor, even if they do not adhere to the remaining criteria in the checklist.
- Using the Historical Data tab, I also work out the Volatility of each of the remaining coins, removing those from the list that have a ratio of -0.0625 or greater.
- At this point, I calculate all of the remaining metrics in the checklist: Liquidity; % of Circ. Supply Available on Exchanges; % from ATH; Annual Inflation Rate %; Average Exchange Volume-to-Average Daily Supply Emission; Liquidity-to-Average Daily Supply Emission; Supply Held By Top 100 Addresses %; Twitter Engagement Rate %; Facebook Engagement Rate % (if applicable); Staking/Masternode ROI % (if applicable); and Masternode Network Value-to-Network Value % (if applicable). I write down all of these figures for the corresponding altcoins in a spreadsheet, for ease-of-comparison. I do not get rid of any coins that do not adhere to all of these criteria, for the simple reason that I’d likely be left with zero altcoins.
- The importance of these metrics is for comparative purposes, so I can determine which are the strongest across all criteria.
- Following this, I focus my attention on the altcoins that perform the strongest across the broadest range of these criteria; though I do not remove the weakest from the remaining list, I do ignore them for the time being.
- The final step — now that I have a list of altcoins that possess the bulk of the traits I deem necessary for a low-risk, high-reward and high-probability position — is to evaluate the rich-list and the chart. I am looking for range-bound prices at historical support levels, coinciding with at least half of the top 20 richest addresses for the coin adding to their positions over the past 30 days, with less than 5 (ideally none) distributing. This is the ideal setup. No doubt, this is a rarity, and I must often compromise a little…
Circulating Supply: The reasoning here for selecting 500,000–1,000,000,000 as the circulating supply range is largely arbitrary: most coins, in my experience, with lower than 500,000 circulating supply are often novelty coins or coins that seek to artificially inflate price due to extreme scarcity; coins with higher than 1bn circulating supply are often priced in single-digit satoshis, clogging the orderbook and making orderbook analysis near-impossible. I believe the sweet spot is actually 1mn-100mn circulating supply, as this allows for breathing room in the orderbook for entries and exits plus creates some degree of scarcity.
Maximum Supply: Whilst I stipulate that the maximum supply should be no greater than 1bn, for the reasons stated above, there are exceptions; if a coin has large market cap and strong fundamentals, such as Siacoin, for example, then I am willing to compromise. These are rare cases, and you shall have to be the judge of what you consider to be worthy of exception.
Network Value: I have mentioned that the range for Network Value (market cap) should be between $1mn-$1bn, or 250 BTC-250k BTC. Whilst this may shock those of you that read my Picking Out Microcaps article from early in 2018, given the trajectory of the cryptosphere since, I believe there is equally significant value and opportunity to be found without needing to look at micro-caps at present. This is because the entire market is down 90% or greater from January 2018 highs, and even large-caps are now offering high-rewards for speculators.
Exchanges Listed: I have chosen these exchanges because they have proved themselves (mostly) reliable in the past, plus these are simply the exchanges that I am comfortable trading on. You may have your own list of exchanges that you find a similar degree of comfort in — opt for those. This also filters out much of the rubbish that is traded on unknown/lower-volume exchanges, whilst also providing a range of opportunities; from large-caps on Binance to low-caps on TradeOgre.
% Max. Supply Minted: This is simply to limit inflation, and can be calculated by taking the total supply (not circulating) and dividing it by the maximum supply.
Premine: Though times have changed since 2014, where any premine was considered suspicious and unnecessary, I do still believe that a large premine is not required to launch a successful project. Undoubtedly, a coin must have a stable means of funding to ensure continued development, but a large premine is the least acceptable means, as it enables a large portion of circulating supply to be held by the team in the earliest stages of the project, when price is likely also to be high due to this restricted supply. 5% is an acceptable premine. A preferred means of funding is an ongoing percentage of the block reward being distributed to the team over time.
BitcoinTalk activity: The requirement for a BitcoinTalk thread is a personal choice for efficiency’s sake. As I complete my research manually, the thread is a great place to find a lot of insightful information on a coin in one place, much like Coinmarketcap. The activity threshold is to ensure present interest in the project. The caveat here would be if a coin is no longer using BitcoinTalk for expressed reasons, and the team have provided other links to social hubs that remain active.
Social Media Audience Size: Audiences on social media platforms are essential for the growth of a coin, though these are not the be-all, end-all — engagement is equally, if not more, critical. An audience size of at least 1,000 individuals on a single platform should not be difficult for a coin any degree of legitimate community interest. Some may think this is too small — and by all means feel free to increase this threshold — but I often like to see a solid base with lots of room for growth.
Average Exchange Volume-to-Network Value: This is a metric that indicates the level of interest in a coin at current prices over the past 30 days. It can be calculated by: copying all of the data in the Historical Data tab for the coin on Coinmarketcap; pasting this into a spreadsheet; calculating the average exchange volume for the period by adding all 30 days worth of volume data and dividing by 30; calculating the average network value by doing the same for the market cap data; and dividing the average exchange volume by the average network value to find a percentage. A figure above 0.5% over the past 30 days indicates that there has been continued, consistent interest in the coin at recent prices, and thus we should perhaps be paying attention.
Volatility: This is a crude but useful relative measure of volatility, and can be calculated using the same data that has been copied into the spreadsheet for the above metric. Instead of focusing on exchange volume or market cap, we are concerned only with the Close price data. Calculate the average price for the past 30 days by adding all of the Close prices and dividing by 30. Then calculate the difference between the highest Close price for the period and the average price you have just determined. If X is the average Close price, and Y is the highest Close price, this can be calculated as follows: (Y-X)/X. Now do the same for the lowest Close price. If A is the lowest Close price, this can be calculated as follows: (A-X)/X. Multiply the two resulting figures together to find a Volatility ratio. What this figure represents is the range of prices over the past 30 days from the average price. The closer to 0 the figure, the lower the volatility for the period. The further away from 0, the greater the volatility. A figure of -0.0625 or lower represents a maximum range of 50% from the average price for the past 30 days, which I consider acceptable. We don’t want much more volatility than this if we are looking for an entry — we want relatively stables prices. You can compare the Volatility ratios of various coins for greater clarity.
Liquidity %: Liquidity is a measure of the buy support available across all exchanges within 10% of current prices. In short, it gives some indication as to demand at current prices. As orderbooks are dynamic, this must be calculated across several days for more accuracy. To determine liquidity, simply calculate the sum of all the orders within 10% of current prices in BTC, and divide that by the coin’s Network Value. Do this on three separate occasions and take the average of the three results for a more accurate measure. A result lower than 0.25% indicates low demand at current prices, and such coins should likely be avoided.
% of Circ. Supply on Exchanges: If Liquidity is a demand-side metric, this is a related supply-side metric. To calculate it, simply work out the sum of all the supply in the sell-side of the orderbook on listed exchanges for the coin. Divide this by the circulating supply to determine how much of it is available for purchase at present. Again, this is dynamic, so it makes sense to calculate it on several occasions and take the average. Greater than 3% of the circulating supply on exchanges is indicative of a lack of willingness to hold the coin.
% from ATH: This is a simple metric, used to determine a potential buying opportunity, or, ideally, a bargain. Price paid is the single most important aspect of any speculative position, so I don’t like to buy coins that are anywhere near their all-time highs. If current prices are below half of their all-time high against Bitcoin, there may be an opportunity.
Annual Inflation Rate %: Inflation comes second only to price when it comes to importance in assessing the validity of entering a position. It is often overlooked in the fervour of bullishness, but it is the single most certain killer of a project (and a speculator). Use the block reward schedule to determine the supply emission for the following 365 days and divide the result by the circulating supply to determine a coin’s annual inflation rate. Anything greater than 50% is often an instant no. Price in annual inflation when you consider an entry — you want the least headwinds possible for price growth.
Average Exchange Volume-to-Average Daily Supply Emission: This is a rather convoluted but insightful metric I devised to indicate whether current prices are sustainable, and thus whether an entry is a wise decision. Divide the annual supply emission you calculated in the prior step and divide it by 365 to determine the average daily supply emission. Now, take the average exchange volume figure you will have already calculated and divide it by the average daily supply emission. You want average volume to be at least 5 time greater than average daily supply emission to be certain that current prices are sustainable. With such coverage of volume, it is highly unlike that price would drop significantly even if the entire average daily supply emission was dumped on a daily basis. Thus, price depreciation in such environments is likely the result of either manipulation by sharks and whales or panic selling by plankton. Both can be identified by rich-list evaluation and volume tracking.
Liquidity-to-Average Daily Supply Emission: This metric is used to provide confluence to the above, taking the liquidity figure we calculated (in BTC-terms, not the percentage of the Network Value this represents, of course) and dividing it by average daily supply emission. A result of 2 or greater indicates that demand at current prices is more than sufficient to weather the coin’s inflation, and thus an entry is likely to be better protected from downside risks.
Supply Held by Top 100 Addresses %: Distribution amongst the top 100 richest addresses is an arbitrary metric but I do like to find that two-thirds or less of the circulating supply is in the hands of the top 100, after discounting exchange-held and team-held addresses. Most block explorers will provide this information in the Top 100 or Rich List sections.
Twitter Engagement Rate: Engagement is paramount for community growth and subsequently price growth. To calculate a coin’s Twitter engagement rate, I simply calculate the sum of the number of engagements (likes, retweets and replies) for all tweets over the past 30 days, dividing this figure by the number of tweets. I then divide the result by the number of followers to determine an engagement rate. Greater than 1% is a solid level of engagement amongst altcoins on Twitter.
Facebook Engagement Rate (if applicable): Theory here is the same as above, with the engagement rate calculated in the same way. A rate greater than 1% is my threshold if a coin does have Facebook.
Staking/Masternode ROI (if applicable): For coins that have staking functionality or a masternode network, you want to make sure ROI is not too high, as this can be an indication of high inflation; this, in turn, can be confirmed by working out the annual inflation rate. 100% has, in my experience, been the maximum ROI that is reasonable without incurring too much inflation. What is more important, however, is comparing the ROI figures against annual inflation rates to determine whether ROI is greater or lower, and thus whether there is any value to be captured here.
Masternode Network Value-to-Network Value (if applicable): Masternode Network Value is calculated by multiplying the price of a coin by the supply locked in its masternode network. Dividing this by the coin’s network value gives you a ratio that is indicative of the strength of a coin’s masternode network. Anything above 33% is considered a strong and stable network. This is equivalent to working out the percentage of circulating supply that is locked in masternodes, which also provides us with an indication as to the willingness to hold the coin and the sell-side liquidity of the market.
Technical Analysis: My primary stipulation regarding a chart is that price be range-bound at historical support prior to entering a position. There are innumerable methods for actually picking an entry, but I have found this method to offer the highest reward-to-risk ratio and the highest probability of success. When price is range-bound at a level of historical support, it is indicative of active accumulation taking place, suggesting that we too should perhaps be looking to accumulate here. Further, there is clearly defined downside risk, as soft stop losses can be placed on a higher time-frame candle close below range support. In such cases, one would wait until price reclaimed the range or formed a new range — again on the higher time-frames — before re-entering.
Distribution Evaluation: The rich-list is the perhaps the most overlooked but the most eye-opening aspect of analysis. The transparency of the blockchain makes it so that we can monitor the behaviour of the largest holders of any given coin over any period of time, thus allowing us to determine higher probability entries (when used in conjunction with technical analysis). If at least half of the top 20 addresses are adding to their positions whilst price is range-bound at historical support, it is likely that smart-money accumulation is indeed underway, and we too should be buying.
To conclude, I hope this short ebook has proved insightful, and that those of you that have struggled to find a framework for altcoin selection now feel as though there is a clear and practical path to follow.
As mentioned earlier, do not think that the checklist provided must be strictly adhered to; often, the best opportunities fail in one criterion or other but outperform amongst the rest.
Please feel free to tweet me @cointradernik if you have any questions you’d like answered.
For more material on altcoin speculation, go to my blog: altcointradershandbook.com