Technical analysis refers to the study of statistical trends collected over time to understand how a particular asset’s supply and demand affect future price fluctuations. We’ll talk about the technical analysis can help traders evaluate trends and price patterns on charts to find trading opportunities in this beginners guide to crypto market analysis.
A bullish move refers to price increases driven by bulls who are buyers of an asset. Conversely, a bearish move is a downside move that sellers of the asset trample. Moreover, the best crypto charts help monitor market movements, but there are some caveats.
Beginners Guide to Crypto Market Analysis: Technical analysis
The technical analysis is based on the premise that history repeats itself. Therefore, we focus primarily on historical market data, such as trading volumes and historical price trends, rather than what currencies and projects are doing.
Analysis of this data is used to create a clearer picture of market sentiment by identifying repetitive behavior patterns. This can help you calculate when the market will be bearish (downtrend) or bullish (uptrend). In theory, these forecasts allow you to buy when the market price is low and sell when it is high to make a profit.
This analysis method assumes that price movements are not random and that past patterns will hold in the future. While any number of factors could have influenced the price of a currency to move in a specific direction, in technical analysis, you only look at supply and demand and the price of a coin. Once money forms a trend, exponents of technical analysis believe that it is likely to follow that trend to oppose it.
Therefore, if the market is bullish for a substantial period, demand will reduce the supply of coins for sale, and also the price will increase. As the price rises, you can expect it to turn bearish as people try to capitalize on it by selling their coins. As they sell, supply begins to outstrip demand, causing the price to drop.
Does technical analysis work?
Technical analysis is such a broad discipline that it cannot be said to “work” or “not work.” Instead, its success largely depends on the person doing the analysis. That’s not to say it necessarily has to be complicated, and you have to be a mathematical genius, but it’s easy to misinterpret, and you must know what you’re doing.
TA can undoubtedly form the center of your thinking process when appropriately used, and some swear it. But likewise, looking at the past alone cannot predict the future. There are many factors to consider. Experienced technical analysts rarely look for context and trust it alone.
Beginners guide to crypto market analysis: Fundamental analysis
Fundamental analysis is a broader approach than technical analysis. It seeks a careful assessment of the intrinsic value of an asset, considering as many qualitative and quantitative factors as possible. If you judge the inherent value as less than its current market price, you can trade accordingly and, in theory, make a profit. Likewise, if you believe the asset is overvalued, you can sell for gain when the asset’s price decreases.
Fundamental analysis is not unique to cryptocurrency. It is common in all types of trading. However, it requires a different approach.
Cryptocurrencies are not corporations
They do not have public financial statements. Moreover, this makes it difficult for traders to obtain an accurate valuation of Bitcoin from future cash flows, as with any other asset.
The viability of a cryptocurrency depends on other factors to assess its potential and the current strength of the community on the network. Nevertheless, there are prospects and unique features to consider. With Bitcoin, you ask whether it will function as a medium of exchange and what sets it apart from cash. For example, the total supply of Bitcoin is fixed at 21 million units. It is, therefore, in a unique category among currencies. Moreover, unlike currency fiat, which a central bank can print at will, Bitcoin has a fixed and predictable total supply volume.
To gauge consumer demand and retail adoption, you also look at transaction volume and user activity. For example, Bitcoin has made slow but steady progress toward its acceptance by the masses as a medium of exchange. Furthermore, Crypto market analysis shows that today uses the payment method by tens of thousands of companies and e-commerce platforms worldwide fundamental analysis, helps to understand if it is performing the intended role as it looks.
Finally, events in the world economy can significantly impact cryptocurrency prices. Incorporating these economic changes is crucial when using fundamental analysis in your trading strategy. This includes both planned and unplanned events. For example, publicly announced and significant cryptocurrency-related events such as halving will clearly impact the future supply rate of coins. You can plan this and incorporate it into your model. Similarly, unscheduled events can have an even greater impact. For example, if the government decides to deregulate Bitcoin. It’s hard to explain this, but you need to know how to respond to these unplanned events when they occur.
Does fundamental analysis work?
Some argue that digital asset prices already incorporate all the disparate data points that can affect their price. This essentially makes any further attempt to assess the market redundantly. Also, as with any asset, it is impossible to predict demand accurately. And there will always be an element of chance. Therefore, fundamental analysis is primarily concerned with the hypothetical value of a digital asset rather than its actual value at any given time.
However, knowledge is power; by leveraging the insights provided by fundamental analysis. Also, Bitcoin traders and investors can understand the coin’s intrinsic price more deeply. This could help them make more informed and profitable business decisions.
Beginners guide to crypto market analysis: Metrics in the chain
And can observe on-chain metrics by looking at the data provided by the blockchain. Of course, you could do this by running the node to the required network and exporting the data, but it can be time-consuming and costly, especially if you are just considering investing and don’t want to waste your time and resources.
A more straightforward solution would be to extract the information from websites or APIs specifically designed to inform investment decisions. For example, CoinMarketCap’s on-chain Bitcoin analysis gives us a plethora of information. Additional sources include data charts from Coinmetrics or project reports from Binance Research.
Transaction count
The transaction count is a good measure of the activity that takes place on a network. In addition, we can see how action changes over time by plotting the number for set periods (or using moving averages).
Note that and should treat this metric with caution. As with active addresses, we cannot be sure that there is not just one party transferring funds between their wallets to inflate on-chain activity.
Beginners guide to crypto market analysis: Transaction amount
Not to be confused with transaction count, transaction value tells us how much weight was transacted in a period. For example, if and sent a total of ten Ethereum transactions worth $50 each on the same day, we would say the daily transaction volume was $500. Again, this can be measured in fiat currencies such as the US dollar or the native unit of the protocol (ETH).
Fees paid
Perhaps more critical for some cryptocurrencies than others, fees paid can tell us about the demand for block space. We could think of them as bidding in an auction: users compete with each other to have their transactions included promptly. As a result, higher bidders will see their transactions confirmed (extracted) sooner, while lower bidders will need to wait longer.
This is an exciting indicator to study cryptocurrencies with reduced issuance plans. Major proof-of-work (PoW) blockchains offer block rewards. In some cases, it includes block subsidies and transaction fees. However, the block subsidy is periodically reduced (in events like Bitcoin halving).
Since mining costs tend to increase over time. But the block subsidy is slowly decreasing the need to increase transaction fees makes sense. Otherwise, miners will operate at a loss and start leaving the network. This indirectly affects the security of the chain.
Beginners guide to crypto market analysis: Hash rate and the stake
Today’s blockchain uses many different consensus algorithms, each with its mechanism. Therefore, examining the data surrounding them is valuable for fundamental analysis, as they play a vital role in cybersecurity. For example, the hash rate and uses to measure the health of the proof-of-work cryptocurrency network.
The higher the hash rate, the harder it is to carry out a 51% attack successfully. However, the increase over time may also indicate increased interest in the mining industry due to cheaper overhead and higher profits. On the other hand, a drop in hash rate suggests miners are going offline (“miner capitulation”) because they can no longer secure the network.
Factors that can influence overall mining costs include the current price of the asset, the number of transactions processed, and fees paid, to name a few. In addition, the direct cost of the mining industry (electricity, computing power) is an important aspect.
Staking (in Proof of Stake, for example) is another game theory-related concept similar to PoW mining. As far as the mechanisms are concerned, however, it works differently. The basic idea is for users to stake their stakes in participating in block validation. As such, we could look at the amount wagered at any given time to gauge interest (or lack thereof).
Beginner guide to crypto market analysis: Which is right for me?
Technical analysis is designed for short-term trading. This is because the required course modifications can take days, if not hours. However, use it as a guide for general long-term uptrends and downtrends.
When they start, the main mistake you can make is relying too much on technical methods. Even the biggest TA fans recognize that you are unlikely to succeed using it in isolation. It would help if you had other information and context. Likewise, fundamental analysis is also not perfect and will often reflect the value of a security as opposed to its actual market price.
Most traders aim for a contextualized and balanced use of fundamental and technical analysis in a differentiated analytical process that also considers fundamentals and other information, such as information about the order. And ultimately, it’s up to you to determine what that looks like.
This process will be dictated by your circumstances and will often be trial and error. If you start trading, be cautious during this phase and never invest more money than you can afford to lose. And one fact remains true for any trading strategy: the usefulness of an analysis method depends on how you use it. So do your research and trust information from reputable sources. Knowledge is power in the digital currency world, so the more you know, the more successful you will be.
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