Whenever it comes to crypto trading, the most important thing is strategy. Choosing the right strategy provides you with reliable income, while choosing the wrong strategy can backfire.
You can endlessly discuss and try out different strategies, from a simple “hodling” to more advanced methods (such as day trading), but none of them will work if you don’t know how to analyze market trends.
Market analysis is extremely important for choosing the right strategy. All these lines, numbers and abbreviations look a little scary, but in general it all comes down to technical and fundamental analysis.
The basic principle of technical analysis is quite simple: everything is repeated. Analysts who use this approach
- Study market data for past periods (volume of transactions, price trends, etc.), and
- Not the specific goals of a particular cryptocurrency or project.
They try to predict market behavior using historical data. To do this, they identify repeating patterns and then perform theoretical calculations based on bullish or bearish market trends.
Technical Analysis Fundament
Technical analysis is based on the assumption that price fluctuations in the market are not random and are caused by recurring trends, which can be relied on when making forecasts.
As part of technical analysis, it is necessary to consider supply and demand for a specific cryptocurrency.
A Technical Analysis Example
Suppose we’ve been watching a bull market for some time. It can lead to a decrease in the supply of cryptocurrencies due to high demand, which leads to higher prices.
When prices tend to rise, people will start selling their cryptocurrency in order to make a profit, and this will mean a transition to a bear market.
At some point, supply will exceed demand, and then cryptocurrency prices will begin to decline. After that, the cycle is repeated again.
If we compare fundamental analysis to the technical one, then it gives a more general idea of the market situation.
Fundamental Analysis Base
Fundamental analysis is not based on historical data, but on the intrinsic value of a particular asset, which can be learned by collecting quantitative and qualitative factors.
Let’s say you’ve found a new cryptocurrency/project that can be used in many areas. If you think that the price of this cryptocurrency is understated compared to its intrinsic value, then you can invest in it and—in theory—make a profit.
If you see that the price of an asset is overpriced, you can enter into a deal in order to capitalize on a decrease in its price. This is called short. In other words, it is a trading strategy that allows you to make money on the decline in asset prices.
This strategy carries a high level of risk and should only be used by experienced traders.
Using Fundamental Analysis for Cryptocurrencies
Fundamental analysis is used not only in relation to cryptocurrencies, however, if you use it to analyze the cryptocurrency market, you need a different approach.
In this case, you can estimate the value of a cryptocurrency based on its possible uses, as well as the potential of its community.
Consider Bitcoin to exemplify. You can see if you can use it as an exchange tool. What makes Bitcoin different from regular money?
It could be its limited supply of 21 million coins, or the ability to make international payments faster and more efficiently. Thanks to this application, bitcoin is becoming more widespread, which, in turn, leads to an increase in its own value.
Another factor that affects its own value is such global cryptocurrency events as, for example, Bitcoin halving. Thus, events that receive wide publicity can affect the price of a cryptocurrency.
Unplanned events can also lead to this result. Perhaps they can even further affect the price of cryptocurrencies (for example, the government’s decision to weaken control over bitcoin). While these events are almost impossible to predict, they can happen at any time, and you need to be prepared for this.
The principle of fundamental analysis
If you see a cryptocurrency whose value does not match its price, you should take a closer look at it. The main difficulty in fundamental analysis is identifying projects with high potential. To correctly predict their future value, you need to do a lot of work.
Fundamental and Technical Analysis
Technical analysis is better suited for short-term trades, as the rate can change over several days or even hours. However, it can also be used to identify long-term up and down trends.
When using technical analysis, you should not rely too much on this method. To avoid mistakes, you need to consider different data and context. The same can be said for fundamental analysis. It often shows what the asset should be worth, rather than reflecting its real market price.
Traders usually use both methods, analyzing not only statistics for past periods, but also their own asset value.
Basically, it all comes down to how you use these methods. For correct market analysis, you need to study a large amount of information, because the more you know, the less risk you take.