To predict a quantity, we need to understand how it fluctuates. A cryptocurrency is a digital currency that is secured by cryptography, which provides following benefits to cryptocurrencies:
Low Transaction costs
Near-Zero Associated costs like transportation & storage costs etc.
Majority of cryptocurrencies in the world are valueless, only a handful of them (eg. Bitcoin, Ethereum etc.) have an economic value due to high demand. The price of any crypto commodity is driven by the demand for it and the existing supply for it.
In case of Cryptocurrency, the supply quantity is fixed due to a strong incentive-built model and inherent transparency of the cryptography process. However, estimating demand is the tricky part which ultimately decide the success or failure of any cryptocurrency.
Estimating Demand ->
There are hundreds of cryptocurrencies, which one are popular? We can estimate the popularity using the social analysis via NLP. The result would show us the popularity trend for a cryptocurrency. But unfortunately, the public perception and the price do not always go together.
The prices for any commodity with a limited supply is decided by the trade volume quantity. To any cryptocurrency it needs to be listed on stock exchange.
Economic trading volume includes the trade volume where a cryptocurrency is traded using fiat money or stablecoins. Breaking down the market exchange volume to the economic trade volume is the first step to understanding the any cryptocurrency’s value.
Step 1 – Identify a rising cryptocurrency using social analysis via NLP. Identify social media platforms like Reddit (r/Wallstreetbets), Twitter, etc. Factors to consider:
Following factors could be considered:
· Market capitalization
· Sentiment analysis
· Demographic analysis
Step 2 – Not all cryptocurrency exchange platforms are equal. The cryptocurrency market is growing and there exists a lot of exchange platforms for its trading.
Identifying reliable market sources for the data analysis is very important. which actively trade that cryptocurrency. For example, for Bitcoin the exchange platforms can be found at: https://markets.bitcoin.com/exchanges. Execute social and financial analysis to find authenticity of any exchange platform.
The Social analysis of an exchange platform can be considered using features like:
Web searches and internet traffic
Funds raised by an exchange platform.
The Financial analysis of a exchange platform can be considered using features like:
Trade Size Histogram (% of volume trade vs Amount of cryptocurrency traded)
Volume Spike Alignment (Number of Cryptocurrency vs Time)
Step 3 – Once most authentic crypto exchanges have been identified, then add the total trading value for all authentic exchange platforms. This total volume value = Economic Trading Volume.
Step 4 – Now the NLP analysis (social & financial) on data for such authentic exchange platforms will provide more accurate data.
Step 5 - Perform time analysis on the datasets like order book data and recent trades data from such platforms and estimate the future demand for that cryptocurrency.
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