“You have to be greedy when others are scared,
and get scared. when others are greedy “
Navigating the world of cryptocurrencies can be very difficult due to the widespread use of computer jargon and technical concepts that are almost certainly out of the ordinary for you. Add to this the relative youth of the technology. It can be difficult to find structured resources to help you figure things out. Market forecasting is a way to protect your investment. Do traditional analytical tools work in the crypto industry?
- 1 Analysis of the traditional market and its types
- 2 Cryptocurrency market analysis
- 3 How fundamental analysis works in cryptocurrency trading?
- 4 How is fundamental analysis done?
- 5 Conclusion
Analysis of the traditional market and its types
Investors use a number of methods to value stocks before making a decision to trade or invest long term. The two main methods can be divided into fundamental analysis and technical analysis. Both paths use different methodologies to try and predict market movements, and both can be quite valuable in helping investors make decisions..
Fundamental analysis focuses on a company’s financial and market position, growth prospects and financial results. The concept takes into account all economic factors associated with the valuation of equity. It takes into account both financial statements and the company’s position in the market, as well as the political or economic climate.
This analysis tends to move a little slower and focuses on financial performance. He can use a relative valuation such as price-earnings ratios and an absolute valuation such as free cash flow. This is invaluable for those looking for a long term investment and not overly concerned about short term market changes. The analysis works in accordance with an investment technique with a margin of safety. The idea is to buy a stock when it is worth more than its market price.
Fundamental analysis is based on two main assumptions:
- The price of this share will ultimately correspond to its intrinsic value..
- Buying an undervalued stock and holding it for long enough should be profitable when the stock price approaches its intrinsic value.
Hence why fundamental analysis is popular among investors who use the buy and hold philosophy (which we will come back to later).
Technical analysis is usually more interesting to followers of the short-term approach to investing. Technical analysis conceptually represents the analysis of charts, their changes in the past in terms of price dynamics and trading volumes. Historical data is also analyzed to find patterns, behavior patterns and fractals. This is an analysis of technical indicators such as price dynamics and trading volume and other similar indices. Technical analysis is used for short-term trading, not long-term investments. Concepts such as Dow Theory and trend following are applied to determine what to buy and sell.
There are three golden rules in technical analysis according to market consensus:
- Stock prices reflect everything that matters. All information an investor needs is reflected in the market price.
- Changes in prices are not accidental. Stock prices are trending, don’t fight them.
- Price patterns are always repeated when given enough time. The repetitive nature of price movements depends on the psychology of the market: investors are consistent in their reactions.
Fundamental factors influence value investors, but prevailing market conditions will also play an important role. The corresponding share must be available in the market at a reasonable price.
Technical analysis includes screening, charting and analysis of moving averages and stochastic oscillators. This gives an idea of where the price is in relation to its price range during the selected period. Many investors use them as market signals for when to trade..
Cryptocurrency market analysis
Cryptocurrency is a new asset class and many people see cryptocurrency as an investment opportunity. In traditional finance, the attractiveness of an asset is usually assessed using fundamental or technical analysis. Cryptocurrency traders also apply these techniques to cryptocurrencies.
So, how does this type of analysis in the crypto space differ from traditional markets??
There are three main types of cryptocurrency market analysis:
- Fundamental analysis;
- Technical analysis;
- Sentiment analysis.
It must be said (and it should be pretty obvious) that fundamental analysis in the crypto landscape is somewhat different from analysis in stock markets..
The point is that most cryptocurrencies don’t get much value, and some don’t even pass the test to become a currency. To avoid making an emotionally focused decision that could ultimately cost you a fortune, you must learn how to perform fundamental cryptocurrency analysis..
The fundamental indicators of the cryptocurrency are not financial, but technical, which are tied to the technical features of the blockchain of the coin. What are these indicators? Hashrate, block size, number of miners, mining difficulty – all this matters and significantly affects the value of a particular crypto asset.
It is also necessary to take into account the upcoming hard forks, the size of the community, the activity of the development team – important fundamental factors..
Most cryptocurrency projects lack income, profits, and other traditional metrics that people in the financial world use to value financial assets. Lacking traditional metrics on which to base their judgments, cryptocurrency investors must approach fundamental analysis from a slightly different perspective..
How fundamental analysis works in cryptocurrency trading?
It is important to remember that cryptocurrencies are not companies in the classical sense..
This means that you need a different approach and should focus on evaluating the long-term usefulness of this project..
Even if these platforms are successful, you can still lose investment if you realize that the token is not needed at all for the project to function! Doing the right fundamental analysis for cryptocurrency can protect you from projects that are not reliable in design..
How is fundamental analysis done?
Fundamental analysis is not difficult, but it takes a lot of work. The best place to start is the crypto project white paper, where you can read about the coin’s technology and the team’s plans.
To assess the state of the technical state of the blockchain, there are many different analyzer sites, but first of all it makes sense to visit the blockchain explorer site and evaluate its functionality and performance.
It is also important to assess the activity and size of the coin’s community, for this you can visit the official forums of the project community and representatives of social networks: Twitter, Reddit or Bitcointalk. You can estimate the number of subscribers, the activity in the comments, the frequency of updates and public news. If there are signs of cheating or low community activity, then this factor is clearly not in favor of the crypto asset.
But do not forget that:
- Cryptocurrencies are not corporations, but rather representations of value or assets on the web. Fundamental analysis indicators are not financial, but technical. They are tied to the technical features of the blockchain, the actual and potential demand and demand for money.
- The cryptocurrency space is in its infancy and almost all cryptocurrencies are in development. This means that there are currently limited use cases in the real world. And hence the lack of historical data to rely on.
Thus, fundamental analysis of cryptocurrencies must be performed using a different methodology. Given the complex nature of the crypt and the underlying technologies, it is even more important for us to engage in research to assess the viability and potential of the project..
Technical analysis is the forecasting of future financial price movements based on the study of past price movements. Like the weather forecast, technical analysis does not provide absolute forecasts for the future. It works because people constantly repeat behavior under similar circumstances..
The biggest mistake novice technical traders make is that they attribute too high reliability and accuracy to technical methods. Experienced technical traders know that no technical analysis strategy works all the time..
In financial markets, the value of the analytical method is determined by whether it consistently helps you make more money than you lose. Note that this statement has two components: a method and you. The “you” variable is why two traders (whether newbies or “veteran”) can use the same method, but achieve very different results..
Sentiment is one of the three main factors influencing market price trends. Sentiment analysis uses technology to decipher public perceptions at a given point in time, drawing on underlying opinions from a wide variety of sources. It has found widespread use in conjunction with social media.
Ideal for transforming unstructured data into tangible and processable information, it is an excellent analytics technique. There is no such instrument in traditional markets. It is he who allows you to conduct research on the basis of which you can make a forecast.
For example, a resource like Bitfinex provides a ton of data through its API that people have compiled into TradingView indicators and websites. This information is one of the best ways to analyze sentiment..
News, especially headlines, are often flawed at major turning points. Large media organizations are often puppets of large institutional money. They will try to keep public opinion high while the “big boys” take their time doing their thing. You shouldn’t think that all media outlets are corrupt, but large publications are often just that. So always take the news from the opposite point of view..
Another source of sentiment could be a public poll. Social media often has many surveys at the same time. Once we hit the extreme sentiment, there is no one else to buy or sell. Everyone has already bought or sold.
Social media platforms like Twitter, Facebook, Telegram and others can be seen as a cumulative indicator of thoughts and ideas, as well as public sentiment. Positive sentiments lead to more optimistic attitudes towards investment decisions. Thus, social media can be a good forecast indicator for investments in cryptocurrencies, the sizes of which are reflected in their prices..
HODL as a strategy and philosophy
Remember when we talked about fundamental analysis, we promised to return to the term “buy and hold”? In the crypto space, it is called HODL (or Hodl). The term originated in 2013 from a post on the bitcointalk forum. HODL soon became synonymous with an approach to cryptocurrency investing that avoids trading based on short-term price movements..
Short term fluctuations aside, bitcoin’s long term volatility defies familiar logic. The price rose 52,000% from 2011 to 2013 and then fell more than 80% over the next year. Since then, it has risen more than 17 times its previous high, only to fall in half again. Throughout the history of cryptocurrency, many have argued logically that it will “skyrocket” or crash to zero..
Hodlers benefit from all this volatility and forecasting. They simply buy and hold, which helps them counteract two common disruptive tendencies: FOMO (fear of missing out), which can lead to high purchase prices, and FUD (uncertainty and doubt), which can lead to low prices. The latter is sometimes called SODLing.
Staunch supporters of cryptolutes call themselves crypto-maximalists – anarchists – evangelicals. HODL for them is more than a risk management strategy. This is their philosophy or even religion. They believe that cryptocurrencies will eventually replace paper currencies and become the backbone of all future economic structures. Therefore, the current exchange rate does not matter, since in their understanding, it will still be large!
Hodlers with over 3 years of experience are particularly convinced of this, because without looking at all the ups and downs of Bitcoin, they have never been in a drawdown..
There is a lot of controversy about which type of analysis is best. While it would be ideal to have excellent knowledge and practical skills for each type, we will not claim that this is absolutely necessary. Many market participants and officials say that it would be better if the crypto trader is fully guided by all three methods of analysis. Well, this statement is hard to argue with..
In theory, yes, but we are talking about real life in general. Depending on their own tasks and the way of trading, most traders do some kind of analysis as the main one, and other types as auxiliary ones. But you must have at least a general understanding of what is happening in the market..
Disclaimer. The information provided is not financial advice and is presented for educational purposes. This post expresses the personal opinion of the author, it does not have to coincide with the opinion of the administration 3commas.io.