In the 21st century, few inventions have garnered as much attention as cryptocurrencies. Ever since Bitcoin’s inception, there has been a lot of confusion amongst investors, who want to capitalize on the rapidly growing crypto industry but lack the necessary know-how to make the most out of cryptocurrencies. Gaining returns out of your crypto investments requires you to carry out a thorough crypto technical analysis, which is definitely not everyone’s cup of tea. However, in this blog, I will try to provide you with the basic information that you need to predict crypto prices and make informed investment decisions accurately. So, without any further ado, let me familiarize you with the whole nine yards of crypto trading and price prediction.
How Crypto Investment Decisions Are Made
If an average person were to be asked to carry out Bitcoin technical analysis today, it would surely give them cold feet. However, crypto investment is quite similar to investing in any other asset. The factors that you’d otherwise take care of for usual investments apply to crypto investments too. Now, if you are someone who has never put money in any project or asset, you need to learn how investment decisions are made or ought to be made.
Any investment is made via two methods, which are as follows.
- Running a thorough fundamental analysis of the financial statements of the company that you will be investing in to get a substantial idea about the value that the project would generate.
- Running a technical analysis of the company to get an idea of the underlying market sentiment, which determines the future price trends.
An asset’s price, therefore, is not merely a combination of digits but the overall estimation of all market elements.
Introduction to Technical Analysis
Technical analysis basically refers to an in-depth examination of statistical data collected through various market trends, volume data, and past prices. This analysis helps in the identification of trade opportunities. The analysts, who make these observations keep a keen watch on price patterns, trade indications, and other trends to accurately gauge the strong and weak aspects of an asset. Therefore, one can apply it to any security, which has historical trading information such as stocks, forex, commodities, and cryptocurrencies too.
How Does Crypto Technical Analysis Function?
A price and volume chart provides an idea about all the previous sale and purchase decisions made by the market participants. This information consequently impacts the future investment decisions of the participants in the following ways.
Psychological: How an asset has performed in the past affects how the investors would react to future situations. For instance, when investors purchase a cryptocurrency, they tend to sell it at the best price as soon as they see a decline in its prices.
Reflexive: Traders often turn to common patterns and trends and make investments based on that. If a substantial number of traders follow the same method, these patterns might perform along the expected lines and deliver the anticipated results. Also, if an increasing number of traders join the growing bandwagon, the trend will be sustained an extended period.
How do Trends Determine Value?
Before we delve into this question, let’s understand the different types of trends and what they indicate.
Uptrend: When the asset is witnessing an uptrend, it means that their value is on an upward trajectory.
Downtrend: When the asset is witnessing a downtrend, the asset’s value would undergo a downward trajectory.
Sideways trend: The asset’s value is said to be witnessing a sideways trend when there is uncertainty about its prices. In short, the price neither qualifies for an uptrend nor a downtrend.
Terms like an uptrend or downtrend may sound a bit technical. That is why many traders also use words like ‘bullish’ and ‘bearish’ to allude to an uptrend and downtrend, respectively. Wondering why is that the case? Well, the term ‘bullish’ alludes to the bull, whose horns point upwards. On the contrary, the term ‘bearish’ refers to the bear, which swipes its paws downward to attack its prey.
Understanding Resistance & Support Prices
Prices do not move in a linear progression. When the prices move in an upward trajectory, they face resistance. When moving in a downward trajectory, prices encounter support. So, let’s try to declutter these terms and acquire a better understanding of these terms.
Resistance: The resistance is a point where we can expect the uptrend to come to a halt or rebound, thereby indicating a concentration of different sellers. The resistance is also indicative of the ‘ideal’ time when the investors should exit the scene as the halt in the upward trend might lead to slow or negative growth.
Support: The support level is a point where we can expect the downtrend to come to a halt or rebound, thereby indicating the concentration of different buyers. The support level indicates investors’ interest and trust in the market, which is why the support price is when investors should consider buying an asset.
What Impact Does News Have on Cryptocurrency Prices?
Media plays a very critical role in influencing public opinion. Sensationalizing headlines and breaking news may trigger instant panic in the masses, leading to euphoria. Some of the top cryptocurrency events around the world reflect the impact that news create on the investment world. The way geopolitics plays out also creates a massive impact on the crypto world. For instance, Bitcoin prices in Iran spiked by 3 to 4 times after the U.S. forces assassinated the top Iranian General Qasem Solemani in January this year.
Also, cryptocurrency prices can see significant ups and downs because of measures taken by specific governments. For example, when the Chinese authorities banned ICOs in September 2017, Bitcoin saw a drastic fall in its prices from $5000 to $3000. The prices also saw a significant surge after eBay and Dell made public their plans to accept Bitcoin.
Hopefully, this blog will have given you a basic understanding of how the crypto market functions and what factors determine its value. Obviously, there is a lot more to crypto price predictions than what ha been covered in this article. But I’ve tried to declutter the fundamental principles and factors that you should watch out for while doing crypto technical analysis. Doing a technical analysis for cryptocurrencies is the same as running a technical analysis of any other asset. Therefore, if you have got your investment basics right, you won’t have much difficulty in doing a technical analysis of cryptocurrencies either.