The Cryptocurrency market is one of the most volatile and unpredictable Financial Marekts. Prices can soar to new highs one day and plummet to all-time lows the next. Therefore, investors need to be well-informed and skilled to make the best investment decisions, especially when determining the bottom of the market.
In this article, we will share how to analyze crypto market trends and a range of strategies and tools to help investors make informed investment decisions in the volatile Cryptocurrency world.
What are market trends?
A market trend means that market prices move in a specific direction over a period of time. The bull market and the bear market represent upward and downward market trends respectively. It is very helpful to be able to identify different types of market movements, as this can help you make trading decisions, such as what trend to trade in or what strategy to use.
Investing in blockchain can be a wild ride that triggers our emotions and controls our decisions. When prices rise or fall rapidly, we may become impulsive and react accordingly. However, investments like these can be risky. Instead of making decisions based on emotions, the best thing you can do is take the time to analyze market trends.
Cryptocurrency Market Trends
There are two main types of Cryptocurrency market trends: bull market and bear market. A bull market consists of a continuous uptrend with prices continuing to rise. A bear market consists of a continuous downtrend with prices continuing to fall. In addition, we can also identify "consolidating" or "sideways" markets with no clear directional trend.
It is worth noting that market trend does not mean that the price always goes in the direction of the trend. A long bull market will have a smaller bear market trend and vice versa. Cryptocurrencies such as Bitcoin have been in the market bull market for a long time, but it is not ruled out that there will be a downward trend for several days or weeks in a row.
How to Analyze Market Trends
The two main methods of analyzing market trends are fundamental analysis and technical analysis. With these two methods, there are several tools and calculations to analyze prices and whether to buy or sell.
Fundamental analysis
Fundamental analysis (FA) is a method by which an investor determines the "intrinsic value" of an asset or business. By studying a range of internal and external factors, the investor's main objective is to determine whether an asset or business is overvalued or undervalued, and then develop a buying and selling strategy based on this information. Ideally, every trader should understand basic technical analysis. The more you know, the better. However, there are countless successful traders who do not understand any technical analysis.
To conduct fundamental analysis, investors can evaluate the project's whitepaper, check its GitHub development activities, and join the community to learn about the community. In addition, investors can analyze the project's partners, teams, and consultants to determine the credibility of the project and its potential for success.
Analysis of encryption technology
Technical analysis is a complex topic that requires a deep dive into tools and chart patterns. Unlike fundamental analysis, technical analysis is entirely based on reading charts. Technical analysis means finding patterns in charts that will help you develop your trading strategy. Such as the Moving Average line, oscillators, support and resistance levels, and many other analytical charting tools such as price action and volume, chart patterns, etc. to identify key price levels and trends. For example, if the price of Cryptocurrency has been rebounding from a specific support level in the past, investors can use this as a key indicator to predict a market bottom.
Fundamental Analysis Vs Technical Analysis
New traders and investors who are new to Cryptocurrency , Forex or the stock market are often confused about which approach to take. Fundamental analysis and technical analysis are in stark contrast and analyze different matters in very different ways. However, both provide trading-related data. Which method is better?
In fact, it may make more sense to focus on the information provided by each method in combination. Essentially, fundamental analysts believe that stock prices do not necessarily represent the true value of stocks, and use this as the philosophy behind their investment decisions.
Technical analysts, on the other hand, believe that future price movements can be predicted based on historical price action and volume data. They are not concerned with external factors, but rather pay more attention to the price charts, quotes, and trends of the market, hoping to determine the ideal points for buying and selling positions.
Obviously, there is no objective advantage or disadvantage between the two methods, as both can provide valuable insights into different fields. Some people may be better suited to certain trading styles. In practice, many traders use a combination of the two to analyze and judge from a more comprehensive perspective. This is true for short-term trading, as well as long-term investing.
Next, we will explore three types of Cryptocurrency Fundamental Analysis (FA) indicators: on-chain indicators, project indicators, and financial indicators. The indicators listed above are not comprehensive, but they are enough to lay a solid foundation for subsequent indicator creation.
On-chain metrics
On-chain metrics are metrics that can be observed based on the data provided by the blockchain. We can run our own nodes for the desired network and then export the data, but this process can be expensive and time-consuming. A more straightforward solution is to extract information from professional investment decision information websites or APIs. For example, CoinMarketCap's on-chain analysis of Bitcoin provides a huge amount of information.
Number of transactions
The number of transactions is a good way to measure network activity. Observing the number within a specified period of time through an image (or using the Moving Average line) can understand the change in activity over a period of time. However, it should be noted that caution should be exercised when referring to this indicator. As with active addresses, we cannot determine if it's just the same group of people transferring money to each other between wallets, resulting in a moisture in the amount of activity on the chain.
Transaction value
Not to be confused with the number of transactions, the transaction value represents the total value of transactions over a period of time. For example, if a total of 10 Ethereum transactions are sent on the same day, each worth $50, the daily volume is $500. The unit of measurement can be a fiat currency such as the US dollar, or the native unit of the protocol - Ether (ETH).
Active address
An active address is a blockchain address that remains active within a specified period of time. There are many methods for calculating active addresses. The common method is to calculate the number of senders and receivers of each transaction within a certain set period of time.
Pledge (such as POS)
The basic idea of staking is that users participate in block verification by pledging their assets. Therefore, we can study the amount of staking in a given time and judge whether investment interest is high (or lack thereof).
Project indicators
White paper
It is highly recommended that you read the project white paper before investing. This technical document can give us an overview of the Cryptocurrency project. A quality white paper will clarify the network objectives and preferably also give us insight into the following: the technology used (is it open source?), the use cases it aims to meet, the roadmap for upgrades and new features, the supply and release plan of the currency or token. In addition to referring to this information, it is best to explore around the project. What do others think? Are there any red flags? Are the goals realistic?
Team
If there is a specific team behind the Cryptocurrency network, the track record of its members can reveal whether this team has the necessary skills to carry out the project. Have members previously participated in successful investment projects in the industry? Is their expertise sufficient to achieve the stated goals? Have they been involved in any questionable projects or scams? If there is no team, what is the situation of the developer community? If the project has a public GitHub, check its number of contributors and activities. Tokens that are continuously developing are definitely more attractive than tokens that have not updated their repositories for two years.
Competitors
A detailed and authoritative white paper can give us an understanding of the target use cases for Cryptocurrency assets. An important task at this stage is to identify the competitors of the project and the traditional infrastructure it is trying to replace. Ideally, fundamental analysis of this information should be carefully and thoughtfully implemented. Some assets may seem very attractive, but when measured against the same metrics as Cryptocurrency assets, they are likely to reveal deficiencies compared to others.
Token Economics and Initial Allocation
Some projects create tokens to find solutions to problems. This is not to say that the project itself is not feasible, but that the tokens associated with it may be useless. Therefore, it is important to clarify the actual utility of the token. This raises questions about whether this utility is widely recognized by the market and how much value the market sees in this utility.
In this regard, another important factor to consider is how the funds are initially distributed: is it distributed through an initial token publish (ICO) or an initial exchange publish (IEO), or is it earned by user mining? If the former, the whitepaper should clarify how much money the founders and team keep, and the amount of money available to investors. If the latter, we can look at evidence of asset creators pre-mining (mining in the network before the asset comes out).
For example, if the vast majority of funding comes from a very small number of individuals and organizations, we may conclude that these individuals and organizations will ultimately manipulate the market and therefore determine that the investment is risky.
Financial indicators
Market value
The market cap is equal to the circulating supply multiplied by the current price. The market cap essentially represents the hypothetical cost of purchasing each unit of Cryptocurrency asset (provided there is no sliding spread).
Market capitalization itself is somewhat misleading. In theory, it is very easy to publish 10 million units of useless tokens. If one of the tokens is trading at a unit price of $1, the market capitalization is as high as $10 million. This valuation method is obviously distorted. Without a strong value proposition, tokens simply cannot be widely recognized by the market.
It should also be noted that we cannot determine the actual amount of a particular Cryptocurrency or token in circulation. Tokens are destroyed, keys are lost, and funds are forgotten. Conversely, if you can filter out tokens that are no longer in circulation, you can roughly estimate the amount in circulation.
Liquidity and Volume
Liquidity is a measure of how difficult it is to buy and sell an asset. Liquid assets can easily be sold at an ideal trading price. A related concept is a liquid market, a market where there is fierce competition between asking and offering prices.
In illiquid markets, we may not be able to sell assets at a "fair" price. This means that there are currently no buyers willing to trade, and there are only two options: reduce the asking price or wait for market liquidity to increase.
Volume is an indicator that helps determine liquidity. This indicator can be measured in a number of ways, showing the value of trades over a specific period of time. Charts usually show daily volume (denominated in native currency units or US dollars). Familiarity with the concept of liquidity is helpful for fundamental analysis. At the end of the day, liquidity can be used as a measure of the market's interest in potential investments.
Supply mechanisms
The maximum supply, circulating supply, and inflation rate can all be used as a basis for decision-making. Over time, some tokens will reduce the production of new coins, further attracting investors who believe that new coins will be in short supply.
On the other hand, many investors believe that strictly capping supply will actually do more harm than good in the long run. They worry that users are hoarding tokens and hindering the circulation and use of tokens. Another critical voice believes that the reward ratio for early users is unbalanced. After all, only a stable inflation policy can protect the rights and interests of new users.
Fundamental analysis tools
Common Technical Analysis Indicators
There are six tools and indicators that you can use when trading cryptocurrency.
1. Candle chart
Charts represent a graphical representation of price information on an asset over time. Charts draw historical data based on price, volume, and time intervals. Many traders prefer candle charts because they show more information about price movements. Each candlestick represents the activity when you select a trading analysis.
The green candlestick indicates that the Closing Price is higher than the opening price. The red candlestick indicates that the Closing Price is lower than the opening price. In addition, the wick shows the lowest and highest prices in the same period. Therefore, the wick is a representative of market volatility.
2. Support and resistance
They are specific price levels that are difficult for the market to surpass. Support price levels are the points at which prices stop moving lower, while resistance is the levels at which market prices can no longer rise. Support levels are the rebound points for asset prices, i.e. when the market falls to this point, it will rise again, indicating a bull market reversal. On the other hand, once the price rises to resistance levels, it falls back because it acts as an upward barrier, indicating bullish pressure.
3. Trend lines
They mainly indicate underlying market trends and can take different forms. In addition, they can be used to draw multiple trend lines to draw more complex patterns. Trend lines usually connect different high and low price points. The more price points are connected to the line, the stronger the trend.
4. Moving Average (MA)
Typically, traders use a variety of technical analysis indicators and parameters to identify and discern market trends, such as charts and historical price action. Among the many technical analysis indicators, the simple Moving Average Line (SMA) is one of the most widely known and commonly used methods. Assist in tracking price trends by calculating the average of past prices of crypto assets over a specific period of time. Periods can be adjusted to appropriate time frames to generate reliable signals in real-time trading charts. The Moving Average line helps traders gain insight into the market and quickly determine a reasonable entry price for a trade.
5. Relative Strength Index (RSI)
Another commonly used indicator is the Relative Strength Index (RSI), which belongs to the category of oscillators. Unlike the simple Moving Average line, which simply tracks spreads over time, oscillators use mathematical formulas to calculate price data and then generate parameters within a predefined range. The Relative Strength Index (RSI) ranges from 0 to 100, where 50 is neutral. Higher values of the Relative Strength Index indicate that the asset is overbought, while lower values indicate that the asset is oversold.
6. Bollinger Bands
The Bollinger Bands (BB) indicator, which is also a type of oscillator, is also popular among traders. It is mainly an indicator that helps people measure the price movement of an asset. It mainly uses a simple 20-day Moving Average line, which is measured by adding and subtracting a Standard Deviation from the Moving Average line. When the market price is above the upper limit of the Bollinger Bands, it is overbought. On the other hand, when it is below the lower band, it is considered oversold.
Finally
The above technical tools and indicators will be helpful in your Cryptocurrency trading strategy. Many traders rely on technical analysis to make trading decisions. In fact, some people only believe in technical analysis. Combining technical analysis with fundamental analysis is considered a more rational approach to trading. Fundamental analysis and technical analysis are both important skills for people who invest in Cryptocurrency. No matter how much one knows, it never hurts to know a little more.
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