As most market participants are aware, there are two main types of analysis traders use to monitor markets and give them more detailed trade ideas. Technical analysis and fundamental analysis are the main areas of study that can be used for any markets, including new ones like “cryptocurrencies”.
This generic analysis is the study of everything that can affect an asset’s value, from economic to political to social factors. Essentially, a fundamental trader will try and figure out the supply and demand reasons as to why a cryptocurrency is rising or falling, which will cause changes in price.
Determining the true value of a relatively innovative asset, like Bitcoin, can be more tricky as economic data, figures and earnings results will be less relevant for analysis, than when calculating the value of a stock or currency. Bitcoin doesn’t produce revenue or earnings numbers, so it can be tough to derive a precise valuation.
Supply and Demand Always Matter
Bitcoin has a controlled supply, meaning the number of coins mined is finite up to an amount of 21 million. With accidental loss and willful destruction also to be factored in, the actual units in circulation are far lower. So, the rate of new supply is determined by the bitcoin protocol, in sharp contrast to the fiat system currently in place where central banks can print whatever they want.
There are numerous variables that affect bitcoin demand such as adoption, trading and transaction activity and the hash rate. The second half of 2020 has seen adoption of bitcoin increase rapidly with eBay and PayPal agreeing to accept the cryptocurrency. Similarly, transactions have surged in recent times and significant market players like the activity of bitcoin whales can be tracked.
Traders use technical analysis to look at bitcoin’s price movements for patterns and trends to determine future price action. As with currencies and indices, the same principles apply when evaluating signals and indicators to identify price targets, support, and resistance.
Potential Entry Levels
Bitcoin’s push to new all-time highs in December 2020 above $20,000 has pushed the crypto into uncharted territory. This break beyond the previous record price printed in 2017, coupled with such a fast move higher means some momentum indicators like the well-known relative strength index (RSI) and stochastics are less useful, as they are more effective in range-bound markets. To paraphrase a legendary economist, an indicator can stay overbought longer than sellers can stay solvent.
When markets surge in either direction beyond or below previous record prices, there are no ‘higher price lows’ or ‘lower price highs’ that can be referred to either as support/resistance or targets beyond current prices. But traders can refer to retracements and extensions based on the classic 23.6%, 38.2%, and 61.8% Fibonacci levels, deciding on the most relevant price points. For example, using a Fib extension to determine more upside gives a level based off the 38.2% move from the March bottom to November high. On the flip side, retracements are worked out by connecting the low and high points to get levels of support below current prices.
Cryptocurrencies are subjected to high market risk and volatility despite high growth potential. Users are strongly advised to do their research and invest at their own risk. BitMart will do its best to list only high-quality coins, but will not be responsible for your investment losses.
All content produced by BitMart is intended solely for educational purposes. This should not be taken as financial or investment advice. Individuals are advised to perform due diligence before purchasing any crypto as they are subject to high volatility.