How to Find Hidden Gems: Momentum and Blockchain Data
- The ‘Momentum’ factor can be best understood through five key blockchain metrics.
- Key metrics include changes in token price, bridge activity, protocol revenue, growth in TVL and price-to-sales over a seven-day period.
- Momentum strategies capitalise on trends, which often end with changes in market conditions.
- Hidden gems reveal themselves in the data through the commonalities they share.
The momentum factor is explained through five key metrics that best capture the fundamental narrative. This helps both crypto investors and active traders make better-informed decisions. It is important to note that the seven-day interval is used as the preferred time frame.
The first metric is the change in market cap, as it filters for the highest performing tokens. From here, users can construct a macro view on themes playing out in the market by industry vertical, market cap and performance. Keep in mind that a higher market cap translates to a higher level of blockchain security.
The second metric is protocol revenue. This metric captures the change in the underlying revenue of the protocol, which often accelerates with the advent of liquidity-mining programs. Similarly, total revenue can also be used, as it captures the same data. The goal here is to do a relative comparison of protocol revenue across high-performing tokens. This helps identify similar potential catalysts, in the interim, as trends emerge.
The third metric is changes in total value locked (TVL). This captures the adoption of a DeFi project, as it calculates the total US dollar value of all tokens locked in the project’s smart contracts. A low TVL signals low liquidity and high slippage on the protocol. Conversely, a high TVL signals high liquidity and low slippage.
The fourth metric is the price-to-sales ratio. The price-to-sales ratio compares a protocol’s market cap to its revenue. A low ratio could imply that the protocol is undervalued and vice versa. The price-to-sales ratio is an ideal valuation method, especially for early-stage protocols, which often have little or no revenue.
The fifth metric is a bridge tracker that is applicable to layer-one protocols: Ethereum, Polygon, Terra, Fanton and Binance Smart Chain. UniWhales provides a free, data-rich bridge tracker. The tool tracks the amount of deposits and withdrawals across the bridge, effectively demystifying capital flows across layer-one ecosystems. This was particularly useful in identifying Avalanche, early on, as the metric showed high levels of net deposits.
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