Methods You Can Use to Analyze Crypto Markets
In the realm of cryptocurrency trading, strategy is king. With the right trading strategy, your opportunities to earn a profit may be more secured. However, with the wrong approach, the outlook probably wouldn’t look too good.
We could talk all day about which trading strategy to use—with options ranging from the classic HODLing to more sophisticated approaches like day trading—but none of that matters if you don’t know how to read the market.
Being able to read the market is crucial in choosing which strategy to use. We understand that all the lines, numbers, and abbreviations can get a little intimidating, so we’ll break down the two primary forms of analysis: technical and fundamental analysis.
The premise of technical analysis is simple: history repeats itself. Analysts who use this style look at historical market data (trading volume, past Bitcoin pricing trends, etc.) instead of looking at the specific purpose of a coin/project.
Analysts aim to build a clear picture of the market’s sentiment by looking at historical market data. To do this, they try to identify patterns of repeated behaviors. Once they do so, they make calculated predictions based on the market’s bearish or bullish trends.
The very nature of technical analysis assumes that price movements in the market aren’t random—past patterns will repeat themselves and will hold in the future.
Mainly, with technical analysis, people look at the supply and demand of a specific coin. As soon as a coin forms a trend, technical analysts follow that trend to oppose it. Let’s say that the market has been bullish for a while now. That may result in a reduced supply of coins due to high demand. In turn, the price may increase. When that price goes up, people will try to make their profits by selling their coins and expecting a bearish market to come. As more and more people sell, the supply will eventually begin to outweigh demand, prompting a decrease in price. And from there, the cycle continues.
Fundamental analysis, as compared to technical analysis, is a more “big picture” approach. Instead of looking at historical statistics, fundamental analysts do a thorough investigation of an asset’s intrinsic value. They do this by gathering all of a coin’s possible qualitative and quantitative factors.
Let’s say you see an innovative coin/project that has many real-world applications. If you feel the coin’s price is undervalued in comparison to its intrinsic value, you could invest in it and, in theory, make a profit.
At the same time, if you see that an asset is overvalued, you could trade to make a profit when the price decreases. This is called shorting. In simple terms, shorting is a trading strategy that speculates on the decline of an asset. However, this style of trading is risky and should only be done by experienced traders.
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Using fundamental analysis for cryptocurrencies
Although fundamental analysis isn’t exclusive to cryptocurrencies, using it for cryptocurrencies requires a different approach. With cryptocurrencies, you might gauge its value by looking at its potential applications, as well as the strength of its community.
Let’s use bitcoin as an example. With bitcoin, you might look at how feasible it is to use it as a medium of exchange. What makes bitcoin different from traditional money? We could say that its fixed supply of 21 million coins makes it unique. We could also point to its ability to simplify cross-border payments. These types of actors could eventually cause a rise in adoption. And as bitcoin adoption rises around the world, its intrinsic value may increase as well.
Another factor that determines intrinsic value is global crypto-related events like the BTC halving. Highly-publicized and anticipated events have the power to impact the price of a coin.
However, sporadic and unannounced ones can also have the same effect. It could even be argued that unscheduled events can affect the price even more, like a government’s decision to deregulate bitcoin. Although these events are nearly impossible to predict, they still happen and you’ll need to be prepared.
The concept of fundamental analysis is simple: if you see a coin with a value that isn’t proportional to its price, it may be worth looking into. The challenge with fundamental analysis is identifying projects with high potential. And to accurately determine their future value, you’ll need to do a lot of research.
Fundamental vs. Technical Analysis
Technical analysis may be used more for short-term trades since course corrections take place within days, if not hours. However, it may still be used for general long-term upward and downward trends.
With technical analysis, the biggest mistake you can make is to rely too heavily on the method. Using it alone could be a mistake—you need more information and context. The same can be said for fundamental analysis. It will often reflect what an asset should be worth instead of what the actual market price is.
Most traders use a balance of both methods, so they look not only at historical statistical data, but also each asset’s intrinsic value.
Essentially, it boils down to how you use each method. As with anything cryptocurrency-related, you’ll need to do a lot of research. The more you know, the more you minimize trading risks.