Factor Analysis Investing & Trading: Picking The Right Investments

Bitcoin had a bit of a rough ride at the end of last year. It went up in price 88% from December 1st to the 19th and then fell 23% by the 30th of December — making for a 44% net gain. This adjustment got everyone’s attention, with some speculating that a Bitcoin bubble was bursting. This was mostly due to the fact that BTC is the gold standard that each currency is measured against, so it should come as no surprise.

Although the rise and fall of Bitcoin is what everyone seems to be talking about these days, and is a reflection (somewhat) of the health of the market, looking at the growth of cryptocurrencies as a whole is a more realistic model to see their potential for the future.

The Growth of Cryptocurrencies

To put things into perspective, the growth of all non-BTC tokens grew 153% during Bitcoin’s rise, and even 4% during its price correction drop. This amounted to a 162% net percent increase in December.

Over 2017, the cryptocurrency market value increased more than 3000%. This led to an explosion of ICOs and altcoins available for purchase.

Today, there are more than 3,000 different currencies and ICO tokens to choose from, with each having their own networks, blockchains, communities, and objectives. Although some of these assets may share similarities, not all of them are identical: as each leverages a different kind of technology and end user applications. The result of these factors is that it can be impractical for the everyday investor to mix and choose the best coins to invest in.

Choosing the Right Currency With Factor Analysis

However, there are some tools that investors can use to pinpoint what are likely to be the best assets. One of these techniques is called factor analysis. Factor analysis identifies features in the user’s experience of the coin to predict the growth of asset.

Factor analysis is used in statistics for calculating both the long and short positions in the majority of cryptocurrencies.

As an example, if a coin functions well despite regulations such as Ripple or Cardano, then these coins could be considered public-friendly. Whilst privacy-centric tokens such as Dash or Monero would have the opposite quality.

It’s interesting to note that both Ripple and Cardano experienced a slight dip in value in value for December, only to recover later in the month. One theory is that these coins increased in value thanks to Bitcoin’s expected adoption by the public, hastened by the CBOE and CME futures trading, as well as a possible EFT later this year.

The more accepting governments and regulators are of currencies such as Bitcoin, the less of a demand there is for private coins such as Monero. But this optimism quickly waned near the end of the month however, sending the price of privacy-centric altcoins to increase. The spike of these coins near the end of this month could imply that Bitcoin is still largely for early adopters in the market, and that it will need much more time for the rest of society to see it as a reliable means of payment.

Speed and Ease of Use

Other factors that work to classify coins are speed and ease of use. Fast currencies are those such as Bitcoin, Ripple, and Ethereum. An example of a slow coin is Bitcoin.

The user-friendliness of a coin is also important, with tokens such as Bitcoin leading the way.

The tokens that scored highly on Speed and Ease of use all suffered in the first few weeks of December. This was apparently in response to Bitcoin’s anticipated adoption by the masses.

Bitcoin is still seen by the public as a speculative instrument that threatens the status quo. All of the lingo and technical details that must be absorbed in order to buy and sell the coin is enough for everyday people to avoid it. This perception is made worse thanks to Bitcoin’s volatility and the frequent price corrections of the virtual currency.

Most people want to play it safe with their money, so Bitcoin could still be too risky for the everyday person to stomach, especially when there are safer alternatives out there.

Community

The next variable, Community, describes the dimensions, quality and excitement of the developer and service community for the particular currency. A cryptocurrency isn't just a thought experiment, it requires a lot of code — that must be preserved — and also extensive hardware in 1 kind or another.

It wants a wide foundation of advanced users to test new attributes and supply feedback. It requires dedicated, long-term funding and a wide foundation of holders. There are negative burdens on monies which have little if any active growth, or less than stellar reputations, or even have experienced hacks or even scandals or disputes within their own past.

Those coins with great community backing are some of the most popular that we know and trust today, while some of the newer coins critically lack this foundation.

The community is the beating heart of any new venture, be it a cryptocurrency or something else. When a truly disruptive idea comes along, it can alter the landscape of the world of cryptocurrencies, which is every ICO’s dream.

Factor Analysis Investing & Trading Summary

None of the above should be considered investment information, nor as advice for someone to invest their hard earned money into.

However, using the above factors as a benchmark, one could help to filter through all the different coins to find to concentrate on the vital tendencies, but they can not let you know what those tendencies will do in 2018.

If someone is looking to get a feel of how each currency will perform in the real world, it could be best to pay careful attention to historical graphs and charts of each token, as these could give the investor an inside track as to how the coins have performed in the past, and what their performance could look like in the future.