Navigating Crypto Markets: State of Crypto Index Explained
A new interactive analytic tool developed by the Venture Capital firm a16zcrypto is now freely available to the public. Learn how to use it for insightful analysis.
The State of Crypto Index is a complex indicator tracking the innovation and adoption of Web3. Users may view activity, track supply and demand, set different parameters to suit their needs, and so on. This tool is available for free by a16zcrypto, which means everyone can use it to gain a deeper understanding of the crypto and Web3 market field. We will have a look at how to understand the index, the unique components, and ultimately how to apply the insights.
TL;DR:
- The State of Crypto index aggregates multiple data sources from the supply and demand side and creates one straightforward metric.
- The adoption indicators (demand) include aspects such as active addresses, transactions, DEX volume, paid fees, and so on.
- The innovation side (supply) follows active developers, academic publications, Web3 job interests, verified smart contracts, etc.
- Investors may use the index for free to gain fundamental long-term insights and compare them with speculative price movements.
What is the State of Crypto Index?
The State of Crypto Index is a powerful tool designed to provide users with an insightful overview of the crypto industry. Visualizing the balance of supply and demand offers a comprehensive understanding of the current state of the Web3 and crypto markets.
The index is calculated based on the weighted average monthly growth of various adoption and innovation metrics, providing a holistic view of the industry's progress.
A16z Introduction
A16zcrypto is a crypto division of the venture capital firm Andreessen Horowitz, which was founded in 2009 and has over $35 billion worth of assets under management. A16zcrypto invests in bold Web3 and crypto startups that build innovative products.
How does it work
Aggregating multiple data sources into a single index can really take the hard work off your back. The Index works by combining various adoption (demand) and innovation (supply) indicators, providing users with a clear view of the crypto industry's current state.
Adoption and Innovation
The adoption component: of the index includes several parameters that reflect the growing user base and usage of cryptocurrencies. It tracks active addresses, transactions, DEX volume, mobile wallet users, transaction fees paid, stablecoin volume, and NFT buyers.
The innovation component: focuses on the development and progress of the crypto ecosystem. By monitoring active developers, interested developers, contract deployers, verified smart contracts, developer library downloads, job search interest, and academic publications, the index offers a comprehensive overview of the cutting-edge advancements and intellectual contributions driving the Web3 space.
Customized parameters
Users can easily change the weight and threshold values of the different innovation and adoption aspects to get different results for their use case.
- Weight - determines how much will the specific aspect influence the overall index result. If you consider for example active addresses important, you can assign them bigger weight.
- Threshold - specifies the minimal value that the aspect has to reach to participate in the index.
Using the State of Crypto Index for Macro Analysis
The index is much more suitable for long-term investments than for short-term speculations. If you use for example DCA strategy, the State of Crypto index may be a good indicator of when to accumulate larger chunks of crypto assets.
Similarly, when planning to sell some portion of your portfolio, you can use the demand indicator and plan your sales to periods of high demand. The index can also serve as an important fundamental indicator to counter speculative price movements.
A lot of price action happens without any fundamental reason - the State of Crypto Index may help to distinguish if those price movements are a result of technological innovation or just a speculative bubble. This kind of assurance can help you make informed decisions based on logic and leave out the FOMO/panic sell.
This post is based on the State of Crypto 2023 report by a16zcrypto and their State of Crypto Index. Go check them out! Of course, none of this is financial advice and always DYOR.
