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How To Predict The Crypto Market

Henning Taeger
Henning Taeger
Henning is a writer and editor here at Dollargeek who is passionate about personal finance and cryptocurrency. He enjoys sharing his knowledge about financial management and cryptocurrency with readers, helping them make informed decisions about their money. In his spare time, Henning can be found playing the latest video games or jamming on his guitar. He is constantly on the lookout for new ways to improve his financial literacy and stay up-to-date on the latest trends in the world of cryptocurrency.

DollarGeek's goal is to help you make the best financial decisions. To help us do this, many or all of the products featured here are from our partners. However, this doesn’t influence our evaluations or ratings.

How to predict Crypto Markets
Table of Contents

Introduction

Cryptocurrency has become one of the largest financial markets in the world, with a myriad of people trying to get involved with the overarching goal of being profitable. 

The flagship currency, Bitcoin, has rapidly risen to a market capitalization of $370 Billion in over a decade, while the overall market capitalization, at the time of writing, is over $950 Billion.

Year after year, the crypto market continues to expand, which reflects in its underlying technology and prices. Different aspects, like non-fungible tokens, metaverse, and Decentralized finance, have spurred reliance on coins or tokens as a powerhouse to back its operation. 

It has become increasingly important to know how to spot and predict the best crypto market because, despite being a lucrative market, it causes bleeding.

Some research by experts suggests that millions of people have lost to the cryptocurrency market. In a survey conducted by YouGov in 2021 across Mexico and America, 90% of those who took the survey didn’t know Bitcoin has a fixed supply of 21 million— a shocking result.

A set supply matters because it makes Bitcoin a deflationary asset. Unlike the dollar, whose supply can be increased with the Federal Reserve’s monetary policy.

Understanding the simple basics of crypto is essential to remain profitable, protect against market volatility, and predict price movement. This article helps you discover how well to forecast the cryptocurrency market direction.

How to predict cryptocurrency prices

Several tools and techniques exist currently to assist in determining the prices of cryptocurrency. Cryptocurrency trading entails speculating the price of each asset to be bought, sold, or held. To optimize profitability for Investors and traders, two main methods for analyzing the price direction are used, which are:

  1. Fundamental Analysis: also known as FA, is a method of analysis that peeks into available information about an asset, such as the use cases, the team behind it, the market capitalization, etc., to determine, in this scenario, whether the crypto asset is undervalued or overvalued. 
  2. Technical Analysis: also known as TA, is a method of market analysis involving the use of price action and volume data to predict the future price of an asset. 

FA and TA can be used jointly or independently. However, it is crucial to understand that each has pros and cons. As an investor or trader, recognizing how to wield either or both methods increases your opportunities. Let’s outline each of these methods in detail. 

What is Fundamental Analysis In Crypto

Crypto Investors use fundamental analysis to scrutinize and evaluate the intrinsic value of a cryptocurrency through a series of factors, like its use cases, the team behind it, the total supply of the coin or token, etc.

If properly conducted, Investors and traders participating in the market can discern whether the cryptocurrency is undervalued or overvalued and use this to make an informed decision.

Fundamental analysis considers external as well as internal factors to help investors make a verdict; these can as well be seen as macroeconomic and microeconomics factors that might influence the value of the assets. 

Macroeconomic factors take a big picture of external economic factors that affect a coin’s value, such as interest rate and inflation. Microeconomic factors, on the other hand, consider a small image of the crypto, including supply, demand, market capitalization, competitors, and trading volume.

Ultimately, you want to determine a price for the crypto assets and compare them with the current price. In a scenario where the price you come up with is much higher than the current price, it’s an excellent signal to buy; however, if the reverse is the case, you’ll consider selling the asset. 

The Mechanics Used In Fundamental Analysis 

Fundamental analysis is split into discrete parts to help you. These discrete types or approaches to fundamental analysis are what make it mechanics. The two mechanisms are Top-down and Bottom-up.

Your fundamental analysis can take a Top-down strategy—from the big picture to the small one—or a Bottom-up approach where the more minor details are considered first, before the bigger one. Either way, you choose to approach it, you want to be sure to understand the health of the market to keep your portfolio healthy in turn.

The Top-down approach gives prominence to macroeconomic details mentioned earlier; this includes inflation rate, interest rate, and unemployment data, among others. This is a general approach, especially in other financial markets, like the stock market and the forex market. 

Note that tokens and coins are used interchangeably, though there’s a difference; in this context, both hold the same meaning.

The Bottom-up approach seeks to keep up with underlying details of the cryptocurrency. In particular situations, it’s considered tokenomics, combining token —the coin— and economics. So, you either call it the Bottom-up approach, or you refer to it as tokenomics; either way, it covers every detail from a token supply to its utility. In the world of crypto

This information can be simple on the surface and intricate, depending on how much further an investor investigates—examples of these include:

  • The coin market capitalization
  • The Maximum available and the total supply of the token in circulation
  • The trading volume of the token
  • The core team behind the cryptocurrency
  • The whitepaper and road map for the cryptocurrency
  • How strong the community of the project is. This is considered a critical metric for NFTs projects.
  • Listing on top cryptocurrency exchanges
  • The news surrounding the coin
  • Partnerships with notable brands and individuals, etc. 

Intricate details to watch for include:

  • Fully diluted valuation
  • Stock-to-flow model
  • Network value-to-transactions (NVT) ratio 
  • Price-to-mining-breakeven ratio
  • Market Value to Realized Value Ratio (MVRV), etc.

In the crypto space, investors pay more attention to the bottom-up approach because it gives more context to evaluate ideally and proffer outcomes that determine whether a coin is undervalued or overvalued. 

Some helpful tools have been developed for investors to make concrete fundamental decisions. Some of these tools include Base rank, which aggregates reviews from investors and traders about crypto assets; Crypto Fee, which uses sophisticated algorithms in calculating blockchain traffic and usage; and Glassnode studio, which provides several on-chain metrics and data.

Regardless, a comprehensive approach will combine both details as it gives you a better insight. Fundamental analysis is a very robust approach that successful investors don’t take for granted.

What is Technical Analysis In Crypto

Technical analysis is a method of market scrutiny that involves the use of price action and volume data in determining a cryptocurrency value. The technical analysis turns from fundamental analysis by focusing on historical data to assess future tokens’ prices.

Technical analysis was reported in the 17th and 18th centuries in Amsterdam and Japan, respectively. 

However, the more polished form of technical analysis is traced to Charles Dow, a financial analyst and the founder of the Wall Street journal. Dow eventually created the Dow theory— a foundation for other technical analysis methodologies. 

How Does Technical Analysis Work?

Technical analysis is built on the notion that the market is fractal, meaning patterns that have happened before tend to be repeated. This is why it studies an asset’s current and previous price movement to conclude.

Technical analysis works under the assumption that human psychology is the same—and the price of any crypto is driven by buyers who demand it and sellers who are concerned about selling, thus, supplying the market with an influx of the crypto. 

This exchange between buyers and sellers is what TA capitalizes on and uses to determine a pattern that predicts whether a coin should be bought or sold.

Technical analysis in crypto is best utilized when the market is under normal circumstances, that is, regular liquidity, supply, trading volume, etc. When these factors are extreme, it tends to cloud an investor or trader’s decision as the patterns tend to fail.  

What types of Technical Analysis Indicators are there?

Several technical analysis indicators have been developed for traders and investors to help them optimize their decision to buy or sell an asset. Each indicator uses historical price action to assume the possible direction or trend of a market. 

Some technical analysis indicators include Bollinger Bands (BB), Stochastic, Relative Strength Index(RSI), Moving Average, Moving Averages, Moving Average Convergence Divergence, and Fibonacci Retracements.

Moving Average: This is a prevalent indicator, not just for crypto technical analysts, but among other financial market analysts. There is more detail on price data by calculating the average costs of the crypto asset. The two most common moving averages are Simple Moving averages and Exponential moving averages. 

Bollinger Bands: This indicator is used to give a sign of an oversold or an overbought market. It consists of a two-lines forming an upper and lower band pacing around the moving average located in the middle.

Relative Strength Index: This technical indicator works based on momentum. It measures whether a security is oversold or overbought. It is oversold when the RSI is below 30 and overbought when the RSI is above 70. RSI is used with other technical indicators or patterns. 

Stochastic: This technical indicator works in an oscillator-kind manner. It uses momentum to determine a trend reversal and to spot an oversold or overbought region. Stochastic is combined with other tools like the relative strength index (RSI).

Fibonacci Retracement: This type of indicator doesn’t rely on momentum, instead is dependent on identifying significant levels on a price chart. This is done by connecting a low and high in the market to find suitable places for entry. Fibonacci, to some traders, is used to mark possible support and resistance regions.

Technical Vs. Fundamental Analysis 

There is a debate on which one of these types of analysis [Ta or FA] is the best in determining the direction of the market. Both types of market analysis have specific cases where they are helpful; however, both can be adopted.

Technical analysis, on the one hand, is practical for short-term frame market movement, and fundamental analysis, on the other hand, is suitable for a more extended and intermittent time frame market determination. When combined, investors can make more precise decisions.

Fundamental analysts believe that external factors determine the price of crypto assets. In contrast, technical analysts have the impression that in forecasting crypto prices, one must draw a correlation from previous price data. 

Pros of Fundamental Analysis: 

  • Fundamental analysis is done quickly by following a series of techniques and using the correct data.
  • It’s a reliable method for determining what will happen to the crypto prices for long-term investors.
  • It is usually a basis for making a rational decision, whether a coin is valuable.

Pros of Fundamental Analysis: 

  • Crypto assets are still burgeoning, and finding data to help make rational investment decisions are limited.
  • If data is misused, it can skew into a disastrous decision choice.
  • Fundamental focus on long-term, making investors forgo short-term profitability.
  • It dismisses the advantage of market trends and recency bias.

Pros of Technical Analysis: 

  • Technical analysis makes analysis faster and the decision to invest quicker, since it deals with the short term. 
  • Technical analysis filters the noise that comes with external factors by simply following a well-defined trading plan.
  • The short-term approach opens traders to earn without waiting for an extended period.
  • It uses indicators that provide results originating from previous price data.

Cons of Technical Analysis: 

  • Technical analysis can sometimes be rigid, thereby making historical price data ineffective. 
  • Fundamental events such as macroeconomics might significantly affect a technical analyst’s structured plan.
  • Indicators used for analysis tend to give the wrong signals occasionally.

Closing Thoughts

Predicting the price of crypto assets can be pretty tricky, considering the large volume traded daily. The best way to get ahead isn’t sure; regardless, combining fundamentals and technical analysis can be a guaranteed choice. 

You combine long-term and short-term insights to forecast the market condition when best to buy or sell crypto assets, among many other reasons.

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