What is Smart Money? Why is it Important in Cryptocurrency Investment and How Can It Be Tracked?

What is Smart Money?

In many trading markets today, including the cryptocurrency market, about 90% of market prices are influenced by algorithms from major institutions. The market has evolved far from original human participation and is highly manipulated.

“Smart Money” signifies professional investment entities or individual investors in the market who have distinct research and informational advantages. They come with rich trading experiences and exceptional historical performances. Generally, they have larger capital, mature investment philosophies, and a more comprehensive understanding of the market than average investors.

The term is often used to differentiate from those who invest based on intuition or luck. For instance, consider a successful entrepreneur who has achieved remarkable accomplishments in his field and decides to invest a portion of his funds in other companies. Given his expertise and business experience, his choices in investment targets, risk assessment, and potential future gains will likely be more precise.

Derived from “Smart Money” is the “Smart Money Concept.” This concept strategizes based on the trading behavior of market makers and big players, focusing on supply, demand, and market structure. It seeks to identify the manipulative traces of these market giants, thereby finding the best market entry points for trading.

Is Smart Money Important in the Cryptocurrency Investment Market?

The movements of “smart money” hold significant implications for ordinary cryptocurrency market investors.

Given the high volatility of crypto assets and the pronounced information asymmetry in the market, coupled with the ever-evolving nature of technical knowledge and regulatory landscape, investment risks are heightened. Under these conditions, smart money investors, possessing in-depth industry knowledge, are better equipped to understand market trends and technological advancements, thus making more informed investment decisions.

Moreover, as the variety of crypto assets grows, and the “Matthew effect” in the crypto market intensifies, it becomes increasingly challenging for regular investors to achieve market alpha. In contrast, a minority of smart money reaps substantial rewards. This edge arises because smart money can access information and resources that average traders might not easily acquire, granting them a competitive advantage in the cryptocurrency market. Considering the extreme volatility of the cryptocurrency market, where prices can fluctuate dramatically in short time spans, investors need a steady hand. Smart money investors usually base their decisions on analysis and research, rather than just market sentiment, ensuring they remain grounded during market turbulence.

Furthermore, the involvement of smart money helps bolster market confidence. These investors undertake thorough research and analysis, opting only for projects with long-term potential. Such participation can draw more investors, enhancing the market’s stability.

In summary, for the average cryptocurrency investor, monitoring the movements of smart money in the crypto market can enable earlier identification of market trends, timely discovery of superior investment opportunities, and either achieving returns comparable to smart money or minimizing the gap in returns.

How to Track Smart Money?

In the crypto market, thanks to the transparent nature of the blockchain, users can view every transaction made on the blockchain. Theoretically, transactions made by smart money are entirely identifiable.

To track smart money, one first needs to locate and identify it. Investors can achieve this through blockchain browsers, Dextool, or other third-party tools related to smart money. Based on individual goals and requirements, one can filter and select the right smart money to track.

The method for filtering smart money relies on its past on-chain interactions, transactions, and other on-chain information. By considering the type of transaction, quantitative performance metrics, fund flows, and the protocols interacted with, investors can align their selections with their investment goals. Once identified, tracking smart money begins. For the average crypto market investor, monitoring smart money means they can benefit directly from these experts’ insights and skills, possibly maximizing returns and more efficiently capturing the market’s alpha.

To help in tracking, several tools are available:

1. Nansen

Nansen is an on-chain data analytics platform, aimed at providing in-depth insights into blockchain data and the cryptocurrency market. Its primary function is to track and analyze the flow of funds on the blockchain, revealing relationships between traders and assets and supplying data for wiser investment decisions. Nansen has tagged over 100 million wallets, monitoring inflows and outflows for specific addresses, and providing users with data analysis, whale trends, smart money alerts, and more. Its most relevant feature, “Smart Money,” allows users to track a vast number of tagged wallets on-chain, further enabling users to filter smart money addresses by types, such as funds, smart DEX traders, airdrop experts, smart NFT traders, IDO specialists, and staking experts. Nansen’s smart money tracker offers three primary pieces of information about on-chain activity:

• DEX trades: DEX trades track smart money trades on top DEX markets.
• Transfers and interactions: These track all recent transfers and contracts the smart money has interacted with.
• Token holdings: These explore the token holdings of smart money and their profit leaderboard.

While Nansen’s smart money tracker is available to paying users at a relatively high price, they do offer a 7-day trial for $9.

2. CryptoRank

CryptoRank is a cryptocurrency data analytics platform that identifies recent capital trends. The platform offers various data and insights into the crypto market, assisting users in spotting new market trends and opportunities. One of its features, “Crypto Funds and Investors,” allows users to gain insights into the investment strategies of renowned funds and angel investors. Users can access information about these investors, their total investments, market share, primary investment categories, and, most importantly, their portfolios.

3. Chainalysis

Chainalysis, by tracking and analyzing on-chain transaction activities, aids users in monitoring smart money behavior and provides information about market participants and investment strategies. Designed specifically for Web3, Chainalysis Storyline visualizes smart contract transactions, including those in DeFi and NFTs. It offers an overall view of all cross-chain transactions for an address, letting users focus on significant smart money transactions and funds.

4. Dune Analytics

Dune Analytics provides users with real-time market dynamics and price trends. On the Dune website, various trend dashboards display on-chain statistics for numerous DApps, including Ethereum, Arbitrum, and Optimism. Investors can feel the market’s pulse by observing trading volumes and trending projects. Additionally, its ‘smart money tracker’ lets users monitor the activities of the market’s most successful traders. In this data panel, users can observe projects with the highest participation from top traders in the past two days, adding potential opportunities to their watchlist.

Conclusion

Smart money can be a reference for general investors when considering investment directions. However, it’s vital to note that not all smart money is as savvy as it appears. Blindly mimicking their every trade without thorough research is typically unwise, as these traders often enter the market at more favorable prices, while later entrants face different market conditions.

Furthermore, some smart money entities maintain multiple accounts. The actions of a single account might not truly reflect the overall strategy of smart money. Determining how many accounts a single smart money entity has is currently challenging. A better approach would be to use the tracking of smart money strategies as an essential reference. By integrating their perspectives, other indicators, and analyses, investors can make decisions tailored to their circumstances.