Tokenomics part 2 – Crypto Daily Volume

In part 2 of our Tokenomics series, we are covering crypto daily volume and how to use it to start the process of due diligence when looking into a crypto project.  In part 1 of our Tokenomics series, we examined crypto market cap and its importance in understanding the ‘realistic’ possibility of a coin reaching a desired price target.  Will Ethereum hit $10,000?  Will bitcoin hit $100,000?  Will Cardano hit $100?  In Tokenomics part 1 – Crypto Market Cap Explained, we go into all that and give you a simple formula you can use to analyze any crypto project you’d like.  So be sure to check it out.

Before we get started on Tokenomics part 2 – Crypto Daily Volume, we first want to stress that we are not financial advisors and this is not financial advice.  This article is for informational purposes only, and is what we’ve learned that has helped us in our own crypto journey.  In fact, when starting out, we had losses, so by no means are we experts you should try and glean financial advice from.  This site was created so we could have all our own crypto due diligence tools in one place.  When we started building out the site, we then thought it may be helpful to passersbys for us to share what we’ve learned during our crypto journey that turned our losses into gains.  Lastly, as full disclosure, we will always let you know if we are holding any cryptocurrency mentioned in the article, or plan to in the near future.  At the time of this writing, 9/4/2021, we don’t hold any of the coins mentioned except for a small amount of Ethereum, and depending on our mining rigs, may intermittently gather some Ethereum Classic in the near future (but likely will not HODL it).

With that out of the way, let’s begin and take a look at how we at UnderstandingCrypto.info use crypto daily volume.  It may be different than how others use it, but for us, this process works well.

Let’s quickly recap what we defined crypto daily volume as in Tokenomics part 1: Crypto Market Cap Explained. 

Crypto Daily Volume is how much value is bought and sold of a coin over a rolling 24-hour period.

Crypto Daily Volume is how much value is bought and sold of a coin over a rolling 24-hour period.  This number is important, because it gives you a starting point in doing due diligence on the 2^nd of the three things to look at when deciding what cryptocurrency to invest in – adoption and sentiment.  (For more on the three things, check this article out here.)  The more people are talking about it, using it, investing in it… or exiting out of it, the more daily volume (kind of).  Not all daily volume is created equal.  So what do we mean by that? 

Let’s refer to the same chart we used in the last article, with a data snapshot from 9/1/2021:

Price and supply both affect crypto marketcap, and all of that was covered in Tokenomics part 1.  However, without examining crypto daily volume as well, you are doing your due diligence a disservice.  Part of what can make a cryptocurrency increase in value is adoption/usage.  The more it is used, the more need there is for it. The more need, the more demand. 

The simplest way we like to use daily volume, (and please know there are other, more detailed approaches), is to take the crypto daily volume and divide it by the (coin) altcoin price. The formula for this is simply Daily Volume (DV) / Price = Daily Volume Unit (DVU). 

The simplest way we like to use daily volume, (and please know there are other, more detailed approaches), is to take the crypto daily volume and divide it by the (coin) altcoin price. The formula for this is simply Daily Volume (DV) / Price = Daily Volume Unit (DVU). 

We can use the numbers as is, or we can ‘normalize’ them.  Both measurements are valuable for our research.  As discussed in Tokenomics part 1, we current use bitcoin as our baseline and as such, compare everything to it.  For more on ‘why’ we do that, check out the other article here.  To normalize, we take the DVU and divide it by the placement difference between the altcoin price and the bitcoin price.  The formula we use would like: DVU / (Factor difference) = DVN (Daily Volume Normalized)

To normalize, we take the DVU and divide it by the placement difference between the altcoin price and the bitcoin price.  The formula we use would like: DVU / (Factor difference) = DVN (Daily Volume Normalized)

Using the chart above, this comes to:

• Bitcoin: (807,799 (DVU) / 1) = 807,799 (DVN)
• Ethereum: (9,102,417 (DVU) / 10) = 910,242 (DVN)
• Cardano: (1,342,657,342 (DVU) / 10,000) = 134,265 (DVN)
• Polygon: (1,082,191,780 (DVU) / 10,000) = 108,219 (DVN)
• Ethereum Classic: (84,622,118 (DVU) / 1,000) = 84,622 (DVN)

We define Daily Volume Unit (DVU) as how many total coin ‘units’ were bought or sold in a 24 hour period.  Obviously, the less value a coin holds, the more movement units it will have.  This is why if you compare Bitcoin (800k+) with Cardano (1b+) there is such a large difference.  People may use either coin fractionally.  Remember, a lot more goes into crypto daily volume, but when we wanted to find a quick and easy way to give an indicator of how much a coin was used, we broke it down into daily volume units.  Taking it a step further, we then created the daily volume normalized metric. 

It must be clarified that neither metric is better than the other.  DVN gives you an easy way to compare all coins at is simplest level.  However, sometimes the benefit of a coin is the fact it is light, fast and inexpensive.  This helps adoption.  If one of these coins becomes over-priced or bloated, it may forcecast a down trend.  Using the pure DVU metric will help you get a more detailed view of that.

Looking at the results of the DVN, it all comes together.  Using the metric, our takeaway would be that Ethereum had a larger flow of in/out or buy/sell traffic than bitcoin.  This is important, because not only does it show adoption, but also liquidity.

Crypto liquidity is defined as the availability and volume movement possibility in a cryptocurrency.  The more crypto liquidity means the easier you can get in and out of the coin.  

Crypto liquidity is defined as the availability and volume movement possibility in a cryptocurrency.  The more crypto liquidity means the easier you can get in and out of the coin.  Being the two most popular, Bitcoin and Ethereum should score high in the DVN metric.  What is interesting is the larger ETH-DVN, which would signal it gaining in crypto daily volume at a higher rate than Bitcoin.  If you trended this out for a few days in a row you could start getting a feel for the overall adoption / sentiment of the coin.  Please note though, this should only be part of your crypto due diligence.  Other factors could completely impact a DVN trend, such as a media release.  Good or bad press can often impact a cryptocurrency faster than anything else (more on that in another article). But as a first step, DVN is a great metric to use.

Now let’s take a look at ETC.  Even though it has a significantly higher price than ADA and MATIC and a higher crypto daily volume, its DVN is lower.  As an alone metric, a single snapshot for a single day, I would want to stay away form HODLing this coin.  If you trended it out over a time frame, you would be able to see if that DVN was increasing over the last week, or decreasing, which may help you in anticipating price movement.  Past results don’t impact future results, but as a reflection of overall usage and sentiment, it could be a piece of the puzzle.

That leaves Cardano and Polygon, both of which have similar DVNs.  Remember though, at the time of the snapshot, ADA was the 3^rd ranked by crypto marketcap and MATIC was the 19^th ranked by crypto marketcap.  When combined with our takeaway from Tokenomics part 1, it further cements why we are so bullish on MATIC.  The fact that a 19^th ranked coin has a comparable DVN to the 3^rd ranked coin, with a much more favorable crypto marketcap breakdown, was a big factor in why we had a position in MATIC.

Over the 4 days between when that snapshot was taken (9/1/2021) and now (9/5/2021), MATIC had gone from $1.46 to $1.72, a 17.81% increase, exceeding the other 4 in the example. 

Over the 4 days between when that snapshot was taken (9/1/2021) and now (9/5/2021), MATIC had gone from $1.46 to $1.72, a 17.81% increase, exceeding the other 4 in the example.  By using crypto marketcap and crypto daily volume normalized, we anticipated a move.  We have since gotten out of MATIC as a HODL at the time of writing for a coin with even more upside.  However, as a crypto project we like, Polygon MATIC still checks all the boxes.

The important takeaway here, aside from trying to realize crypto gains, is all your involvement in the crypto space should come AFTER you do solid due diligence.  For us, that crypto due diligence starts with the 4 essential crypto metrics: altcoin price, supply, crypto marketcap and crypto daily volume.

Lastly, I know it’s been mentioned a few times, but these metrics are how we use crypto daily volume and how we ‘normalize’ it between coins.  How you or someone else in the space may use them/view them may be different.  This method has worked for us and proven itself through both crypto bear and crypto bull runs.  The important thing for you is to make sure you do your own crypto due diligence, using whatever tools/methods work for you. Hopefully though, this article helps put you on the right path.

If you have any questions, drop a comment below or reach out to us directly.  Thanks for stopping by UnderstandingCrypto.info! 

Helpful Information

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