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What is the importance of understanding your counterparty when investing in a crypto asset?

June 9, 2020

What is the importance of knowing and understanding the counterparty when considering an investment in a crypto asset? To answer this question, Cointelegraph consulted Daniel Ferraro, Marketing Director at IntoTheBlock in Spanish.who shared a comprehensive analysis on the subject.

“”There are many different factors to consider before investing in a crypto assetand one that we at IntoTheBlock attach great importance to is understanding your counterpart, “said Ferraro.

But what do you mean? He explained it like this: “When you buy an asset, someone sells it. Liquid markets give the impression that there is a floating pool of assets from which you can draw. However, this is not the case. There is always a real seller. When you invest in a campaign, you don’t know who is on the other side, and a clear example of this is the “dark pools”, which by definition lack transparency. Analysis and investment in traditional markets is generally limited to prices, volumes, fundamental analysis and order book records“”

What is the importance of understanding your counterparty when investing in a crypto asset?What is the importance of understanding your counterparty when investing in a crypto asset?

Then he added: “In contrast to conventional assets, blockchain offers a different and much more comprehensive overview of an asset. because one of the biggest advantages of this market compared to a traditional market is transparency. Using machine learning in a blockchain and complementing it with other data sets, we can determine how many investors are in a particular asset, when they bought it, what its cost base is, and based on this data, we have a complete overview of the Stack of token holders“”

According to these principles, they created so-called real estate and financial indicators at IntoTheBlock, which give an insight into the profitability of a crypto asset, the “capital stack”, based on concentration and holding period. Some crypto assets can be looked at more closely with these indicators and some important data points.

A good example of decentralization: Bitcoin

At IntoTheBlock, they measure the concentration of an asset and divide it into three categories.

  • Whales: Addresses with more than 1% of the current offer

  • Investors: Addresses that contain 0.1% to 1.0% of the current offer

  • Retailer or retail: all remaining addresses

If you look closely at Bitcoin, you will see that there is only one address that contains more than 1% of the circulation offer. Although this address is only 1.4%, it has an amazing 255.5 thousand bitcoins. According to IntoTheBlock studies on entry and exit patterns of exchanges, it belongs to a Huobi wallet and has only 376 transactions since its inception.

If you take a closer look at the concentration of Bitcoin, there are only 42 addresses between 0.1% and 1% (which IntoTheBlock calls investors). They own 9.57% of the circulating supply, but an important thing to consider is that only 5 of these 42 addresses are active, which means that a large amount of Bitcoin is not moving.

Bitcoin is not only decentralized, but the “HODLING” period is in your ATH.

The Bitcoin blockchain has 673.51 million addresses, but only 30.21 million of them currently have a USD BTC balance.

And from these addresses with balance:

  • Hodlers: 64.9% or 19.61 million addresses have been maintained for 11.01 million BTC for more than a year

  • Kreuzer: 25.98% or 7.85 million addresses have between 1 and 12 months with 5.8 million BTC

  • Traders: 9.12%, or 2.76 million addresses, are held with 1.59 million BTC for less than a month

Based on data from IntoTheBlock, it can be seen that the number of addresses where Bitcoin has been stored for more than a year has been increasing steadily and has increased by 96% compared to the previous year.

And to provide more specific information, the IntoTheBlock UTXO age indicator shows that the number of Bitcoin that hasn’t moved in over five years has increased from 3.69 million BTC in June 2019 to 4.05 Million BTC in June this year.

This gives a clear idea of ​​how concentrated Bitcoin is and what investors are doing with the asset. In view of this, however, Ferraro suggested analyzing a bad example, which is explained below.

Avoid the following: Few addresses control a large part of the asset

“Imagine being on the board of directors of company” X “and inviting you to invest, but claim that the majority of the investors in the company lose money and that these four directors control the majority of the asset. What would you say Would you invest? Who would sell you Probably one of the insiders, right? Said Ferraro.

He then carried out a quick analysis using a token available on the IntoTheBlock platform, but without giving the name, in order not to affect the current headlines.

With the “Global In / Out of the Money” we can analyze how many addresses would make a profit today if they sold their positions. In this case, 76.03% of the addresses that own this asset lose money, but not only that if we use the same analysis, but by volume, you will see that 23% of the addresses “in the money” 79.12% have circulating care, ”he specified.

This asset is highly concentrated and works actively.

Then he said that of the 92.91 thousand addresses that have this asset, only 38 control almost 85% of the current offering. And not only that. There is an address with 27.48% of all assets and over 40,000 transactions. If someone were to buy this asset, that address would likely be the one that would sell it to them at a profit.

“Although there is still a lot to think about and to improve, the counterparty analysis with regard to blockchain offers a clear advantage over traditional markets. To determine how concentrated an asset is, how sensitive it is to price movements caused by large-scale trading, or to see how safe investors are in a given asset for the time they have it. Important data points to consider when choosing the asset to invest, ”he noted.

“That’s why At InTheTheBlock is focused on creating signals that are easy to understand to achieve the efficiency required to make crypto assets a relevant asset class,” he concluded.

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