Oct 21, 2021
7 signs that a cryptocurrency is already too expensive in the markets
As investment becomes more democratic, there are more users interested in investing in cryptocurrencies.
But there is always a doubt about whether you are buying a token at a very expensive price or with good long-term possibilities. It is like someone looking to buy a house he needs: he has to do it, but the time to take the step is important from a financial point of view.
Cryptocurrencies are a very volatile asset, so it is very difficult to define the perfect time to invest in them. Without warning, a rumor or a tweet is enough to sink or skyrocket their value. “Anyway, we can identify certain cycles that are repeated over and over again, so if you have a history, it is worth documenting and observing at what point a particular value is at,” Ramiro Martinez-Pardo, CEO and Co-Founder of HeyTrade, tells Business Insider Spain.
Therefore, when investing in cryptocurrencies it is important to understand what you are investing in, accept the risks and learn how to manage them.
“If what we want is to invest our savings so that they yield us more than in the bank, there are other investment options on the market that are less volatile and that will allow us to live with more peace of mind,” explains Martínez Pardo.
Experts agree on a very similar idea: be careful with the search for the right prices. “There is no ‘the right price’ for a cryptocurrency, but rather it is the market, the confidence of investors in a project, which marks its value,” they tell Business Insider Spain from Bitpanda.
“It is true that there is a sector of investors who invest or disinvest driven by the variation in value, which makes each of these variations even more radical,” they add.
Javier Castro-Acuña, head of business control at Bitnovo, believes that thinking that a token is expensive or cheap is relative: “Is a bitcoin expensive today at $45,000? If we compare it with the 63,000 in April, maybe it is cheap; with the 10,000 it was worth in September of the year it is very expensive and with the 500 dollars it was worth 5 years ago, it is very expensive,” he describes.
“One of the most basic tips to know if it is not the best time to buy a cryptocurrency is to analyze on the one hand the historical price evolution of the cryptoasset; and on the other hand, to make a compilation of the most important news that have occurred around the project and check how they have affected the price of the same”, considers in the same line in statements to Business Insider Spain Raul Lopez, head of business of Coinmotion Spain.
For this reason, it is necessary to be cautious and follow the metrics with caution.
However, there are some indicators that can warn of a certain overvaluation in cryptoassets when it comes to investing, as analyzed for Business Insider Spain by Isamel Santiago, professor and PhD in finance at the University of Seville and CEO of Olivachain I+D+i; and Alberto Fernández, professor of the Specialized Program in Blockchain and Digital Innovation at the IEB.
Low degree of user adoption
According to Fernandez, when a cryptocurrency has a high value driven by speculation, it usually comes hand in hand with poor user adoption.
“Normally these cryptocurrencies focus a lot of their efforts on marketing in order to achieve a higher valuation than what they really offer,” he says.
Within this category we find cryptocurrencies that do not have a differentiating value with the rest and that only have a small part of the promised functionality in production. To measure adoption, indicators of the number of applications in production and under development can be used.
“The data on the number of wallets and the capital locked in this cryptocurrency for decentralized finance are also significant,” the expert adds.
El ratio MVRV (Market-Value-to-Realized-Value)
This ratio measures the relationship between the market capitalization of an asset and its market capitalization. D. in finance, considers this to be a key benchmark. “A cryptoasset will generally be considered overvalued when the MVRV indicator exceeds a value 3.7 times,” he assures.
“When we get a negative MVRV ratio, it tells us that market participants are making no or minimal gains,” he specifies.
Meanwhile, if the MVRV is positive, it indicates that cryptoasset holders are likely to make profits.
“Summarizing, a cryptoasset will generally be considered overvalued when the MVRV indicator exceeds a value of 3.7, and undervalued when the value is equal to or below 1,” describes santiago.
Liquidity less than 5% of market capitalization
Although it is not a binding signal to an excessive value, cryptocurrencies that have low liquidity have a greater amplitude between the offer to buy with the sale.
As Fernandez points out Large-volume buying causes spikes to the upside with which the user can “get their hands caught.”
“It is better to study their behavior and understand what are good times to enter avoiding the peaks of overvaluation,” he advises.
Non-existent innovation and development
If a cryptocurrency, which is a 100% innovative tool, does not have a continuous development, it will run the risk of falling into oblivion and therefore of having a gradual depreciation.
“We only have to open the historical CoinMarketCap to see that many cryptocurrencies of the years 2014–2016 have fallen behind in competitiveness and value to the rest,” says the IEB professor.
“The only currency that is spared from this problem is Bitcoin, as it has worldwide acceptance as a store of value,” he adds.
Mayer’s Multiple
This metric serves as an indication of whether a token is in a bearish phase when its value is below 1.
According to Santiago, the Mayer Multiple is an indicator that allows us to establish when is the best time to buy and sell Bitcoin and other cryptocurrencies.
“This indicator compares the current price with the 200-day moving average, telling us how close or how far the current price is with respect to such indicated moving average,” he comments. “It will indicate that we will be in a bullish phase when its value is above 1 and in a bearish phase when it is below 1,” he adds.
Focus on SOPR (Spent Output Profit Ratio) values
This is an indicator that reflects the degree of realized gains and losses for all currencies moving on the chain.
“During a bull market the SOPR values is above 1 and during a bear market the SOPR values is below 1, so, based on this, the ideal time to sell is when SOPR is above 1,” highlights Santiago.
Excessively inflationary protocols
From Fernandez’s point of view, next year will most likely be the year in which staking will have high prominence and profitability above current margins.
“Protocols that do not achieve a balance between demand and the issuance-supply combination will fall in price until they adjust appropriately,” he concludes.
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