Cryptocurrencies have been making waves, capturing the attention of both investors and everyday people. It’s no secret that their prices can skyrocket or plummet in the blink of an eye. But what if there was a way for anyone to know when crypto will rise or fall? Don’t be so surprised, you haven’t met us yet.
Enter price analysis, a powerful technique that can help you make sense of the market.
As crypto experts, we’ll dive into the world of cryptocurrency price analysis, demystify the process and give you the knowledge to navigate this exciting realm of digital assets.
First things first, before we jump right into the nitty gritty, let’s divert your attention to those aspects that cause crypto to rise or fall.
What causes crypto to fall?
To understand why the value of crypto goes down, keep an eye on the exchanges where people buy and sell Bitcoin worldwide. However, it’s not just about monitoring those exchanges. There are other factors you should consider as well:
1. Excessive leverage by crypto investors
When investors take on too much leverage, it means they borrow money to invest.¹ This makes the market more vulnerable to price drops and can create a chain reaction. People who borrowed money might have to sell their assets to pay back what they owe, forcing prices to plummet.
2. Lack of liquidity in the market
When there aren’t many buyers and sellers in the market, it’s easier for big sell orders to affect prices a lot.² This lack of trading activity can create a risky situation where prices can fall quickly. It usually happens when people are worried or uncertain about the market.
3. Security breaches or network attacks
Criminals sometimes target cryptocurrencies and this makes investors worried. In cases where a major cryptocurrency exchange or platform gets hacked and people’s money gets stolen, it makes people lose trust in the security of digital assets. This loss of trust can cause people to sell their cryptocurrencies. You can guess what happens next: the prices drop.
4. Actions of big crypto influencers
People with many followers discussing crypto can affect the market. In 2021, Bitcoin’s price fell Friday morning after Elon Musk’s tweet suggested that he has fallen out of love with the world’s top cryptocurrency.³ This opinion can influence how investors feel, and the negative reaction or expression of concerns about specific crypto or the whole market forces people to panic and sell to avoid risks.
5. Influence of the stock market and Wall Street
Cryptocurrencies have become increasingly intertwined with traditional financial markets.
Things that happen in the stock market, like when the economy is not doing well or when there are new rules, can also affect the cryptocurrency market. Investors might sell to avoid losing money or to invest in something else.
6. Government regulations
Different governments have different rules for cryptocurrencies. When there is news about stricter rules or even bans on cryptocurrencies, it makes investors scared and unsure about what will happen.
What causes cryptocurrency to rise?
The value of cryptocurrency, like anything else people desire, is influenced by supply and demand. When more people want it and there’s not enough to go around, the price goes up. It’s similar to when there’s a shortage of grain and produce due to a drought, causing their prices to rise. However, there are additional factors that can positively affect cryptocurrency prices aside from supply and demand.
1. Influencers and social media
Influencers promoting or discussing a particular cryptocurrency can create a fear of missing out (FOMO) among investors. This FOMO drives up the price as investors rush to buy.
2. Cryptocurrency announcements by traditional finance institutions
When traditional finance institutions invest in cryptocurrencies, especially Bitcoin, it generates a positive sentiment in the market. This endorsement increases confidence and attracts more investors, leading to a rise in cryptocurrency prices.
3. Market events and conditions
Positive events such as new regulations supporting cryptocurrencies or technological advancements can boost investor confidence and drive up prices.
4. Increased adoption
The wider acceptability of cryptocurrencies as a viable investment opportunity or digital payment method can result in sudden price increases. As more individuals and businesses recognize the benefits and acceptability of cryptocurrencies, demand rises, leading to price surges.
5. Altcoins (alternative cryptocurrencies)
Listing altcoins on larger cryptocurrency exchanges can spike their prices. Increased visibility and accessibility on well-known exchanges attract more investors, driving up the value of these altcoins.
6. Positive developments and announcements
Positive company news, partnerships, or announcements related to specific cryptocurrencies can trigger significant price surges. New partnerships, technological advancements, or major announcements create optimism among investors and increase the value of that particular crypto asset.
Now that we’ve gotten that out of the way, it’s time to talk about the powerful tool that can help you make sense of the market- price analysis.
How to know when crypto will rise or fall
Price analysis studies the past and present price movements of an asset to help you predict its future direction. Here, you analyze factors like historical data, volume, indicators, and chart patterns.
Traders need to analyze trends carefully to make smart decisions about buying, selling, or holding cryptocurrency. Three main types of analysis finance experts have used for a long time. The oldest type started in the 18th century when merchants in Japan created candlestick charts to understand and predict rice prices.
But things have changed in modern times, especially with the advent of cryptocurrency. So now we can talk about four types of analysis:
1. Technical analysis
This involves looking at past data like price movements and trading volume to find patterns and trends. The idea is that history tends to repeat itself, so analysts use this information to guess if the price will go up or down soon. But it’s not always an accurate way to know when crypto will rise or fall, just like predicting the weather. This is just a brief introduction, we’ll discuss technical analysis in more detail later.
Charts are an essential component of technical analysis as they visually represent the price movement of an asset, such as in the cryptocurrency market, allowing traders to make informed decisions. As experts, we often use candlestick charts because they provide detailed information that’s easy to understand. The name “candlestick” originates from the shape of the graphical elements used to represent price data, resembling candlesticks with wicks.
The distinctive shape of candlesticks, characterized by two thin lines with a thicker rectangle in the middle resembling a vertical rolling pin, facilitates this comprehensive analysis.
Every candlestick represents a specific time and displays the opening, closing, highest, and lowest prices during that period.
2. Fundamental analysis
This approach focuses on understanding the factors that influence prices. Instead of predicting where prices are going, you study things like the overall economy or how well a company is being managed.
When you follow this approach to know when crypto will rise or fall, prioritize the possibility that the market may have over or underestimated the value of a cryptocurrency, and that eventually, the price will adjust to reflect its true worth.
The main difference between fundamental and technical analysis is that fundamental analysis looks at less obvious and more subjective factors, like the quality of a company’s management or the state of the economy. Unlike technical analysis which deals with the scrutinization of past data like price movements and trading volume to find patterns and trends.
The mechanics of fundamental analysis:
In order to better understand how to predict cryptocurrency trends, we’d take a look at two different approaches in fundamental analysis.
- The “top-down” approach: Focuses on big-picture factors like the overall economy, interest rates, inflation, employment, and the country’s gross domestic product (GDP). These factors can affect the cryptocurrency market as a whole.
- The “bottom-up” approach: This is about paying less attention to the overall economy and instead focusing on specific details like a company’s financial earnings or its revenue. This approach is more concerned with individual cryptocurrencies and their performance.
With that being said, when it comes to fundamental analysis of cryptocurrencies, we follow similar principles to traditional financial markets that deal with stocks and other assets. That is, instead of looking at a company’s financial statements or historical performance, we consider other factors, such as:
Factors to consider when forecasting cryptocurrency price
The hash rate represents the total computing power used to mine and process transactions on a blockchain. For example, Bitcoin uses a method called Proof-of-Work, and a lower hash rate can indicate that fewer people are interested in mining Bitcoin.⁴
- The coin’s market capitalization (the total value of all its coins)
- The circulating supply and a total supply of tokens
- How the token is used and its utility (user adoption rates). How many people are using the cryptocurrency and how widely is it being accepted? This can give you an idea of the currency’s popularity and potential for growth.
- The size of the community supporting the cryptocurrency (this helps with wider adoption)
- The leadership team behind the crypto project
- The trading volume of the token
- Whether the token is listed on major crypto exchanges
- Partnerships with reputable institutions
- The latest news related to the coin
- Government regulations affecting the cryptocurrency
Lastly, when you’re doing fundamental analysis, no single factor can give you a complete understanding of a cryptocurrency’s potential. What’s more, you can also read the company’s whitepaper to gather more information so you can set up your own strategy.
Even better, you can examine blockchain metrics, which reveal crucial aspects of a cryptocurrency’s underlying technology and processes. They can give you a better understanding of how the cryptocurrency works and its potential for success.
3. Quantitative analysis
This type of analysis looks at how a particular cryptocurrency has performed in the past. It’s often used together with fundamental and technical analysis.
Basically, quantitative analysis helps you understand how well a company is doing financially and estimate what it could be worth in the future. We’d use an example to explain this:
Let’s say you’re considering investing in a cryptocurrency project. You can look at its historical data and calculate something called “earnings per share” (EPS). The ‘EPS’ tells you how much profit the project is making for each share you own. If the EPS keeps going up over time, it’s a good sign that the project is doing well financially, and its price will go up soon.
Another tool you can use is termed ‘discounted cash flow’ (DCF). DCF helps you determine the intrinsic value of a crypto asset by giving you an estimate of the future cash flows it will generate. In other words, it discounts these cash flows to their present value. This way, you can tell whether a cryptocurrency is overvalued or undervalued- Overvalued means there might be a burst or crash anytime soon causing a drop in price, while undervalued means more people will eventually realize that crypto asset’s worth causing its price to up up.
4. Sentimental analysis
Sentimental analysis is all about understanding how people feel and what they think about a cryptocurrency. It’s important because people’s emotions can affect the market.
Now, let’s use a practical example to help you better understand how it works:
Imagine you’re following some influential people in the cryptocurrency world, like bloggers or experts. One day, they start saying positive things about a specific cryptocurrency project. They mention its potential and how it could change the industry. This positive sentiment can make other people excited too, and they might start buying that cryptocurrency. As a result, the price of the cryptocurrency could go up.
On the other hand, if negative sentiments emerge, like concerns or criticisms about a cryptocurrency project, it can make people worried. They might start selling their cryptocurrency, leading to a drop in its price.
How do I understand candlestick charts?
Don’t worry, there’s a method to this madness. Each candlestick has a thick rectangle called the “body” and two thin lines called “wicks” or “shadows” on top and bottom. The body represents the price range between the opening and closing prices, while the wicks show the highest and lowest prices reached during that time.
For example, if you see a green candlestick with a long body and small wicks, it indicates that the price went up significantly during that time. On the other hand, a red candlestick with a long body and small wicks suggests a significant price drop. These patterns can help you identify potential buying or selling opportunities.
You should also keep in mind that candlestick analysis should be used in conjunction with other indicators and research to make well-informed decisions. This is because relying on just one form of analysis is kind of like trying to eat steak with just a fork- It just won’t work. You need a knife too.
By studying these candlesticks and their patterns, you can easily figure out important things like support and resistance levels, possible changes in trends, and even how people in the market are feeling. This helps you predict what might happen with prices in the future and make better decisions. But that’s not all.
As a beginner, it’s usually advisable to start with a small investment, learn about different candlestick patterns, and take reasonable risks so you can gradually gain experience and knowledge in cryptocurrency trading.
What are the tools for technical analysis?
In technical analysis, traders use different tools and indicators to figure out if the price of something, like cryptocurrency, will go up or down. Here are some of these tools:
- Moving Average (MA): This tool calculates the average price over a specific time. It helps spot patterns in trading. Common periods used are 200 days, 50 days, and 20 days.
- Simple Moving Average (SMA): This indicator shows price trends that change slowly. It gives a broader view of long-term trends. Traders often use a 50-period SMA to find support and resistance levels.
- Exponential Moving Average (EMA): This one tracks real-time price changes and pays more attention to recent movements.
- Bollinger Bands: Bollinger Bands tell us how much the price is changing. It has a 20-period SMA and two bands that show positive and negative deviations from the SMA.
- Moving Average Convergence Divergence Indicator (MACD): MACD indicators tell investors when moving averages are getting closer or moving apart. It helps them see changes in the direction, strength, and duration of price trends. When the MACD is above 0, it means the price is going up, and when it’s below 0, it means the price is going down.
- Relative Strength Index (RSI): This measures the strength or weakness of a cryptocurrency based on recent price changes. It can show if the price has been pushed too high (overbought) or too low (oversold). An RSI value below 30 means it’s oversold, and a value above 70 means it’s overbought.
Besides these technical indicators, there are other things to consider:
Social media indicators
Keeping an eye on social media and search traffic can give insights into price movements. News about partnerships or promotions by influencers can affect a cryptocurrency’s price.
Fear and greed index
This index measures how people feel about the market. It can show if investors are afraid of missing out (FOMO) or being too greedy.⁵ It looks at things like Bitcoin’s dominance, Google Trends, polls, social media, and trading volume.
Bitcoin’s influence
Bitcoin, being the first and biggest cryptocurrency, has a big impact on the whole market. When Bitcoin’s price goes down, it often affects other cryptocurrencies too. As more coins become popular, Bitcoin’s influence may become less important, but for now, it’s important to pay attention to its price movement.
Final thoughts
The bottom line is- no one can tell exactly what will happen in the cryptocurrency market at any point in time. Nor, is there an exact way to know when crypto will rise or fall. Nonetheless, we’ve covered significant considerations you can look out for to get an idea of whether prices are going up or down. If you take the time to do your homework and pay attention to these signs, you’ll increase your chances of buying cryptocurrency at the best moment and selling it before a dip.
Read also: the skill set you need in stocks investment with little money
Resources
- Excess leverage pushes crypto prices lower. Capital.com
- What is a liquidity crisis, and what does it mean for crypto investors? CoinTelegraph
- Bitcoin falls after Elon Musk tweets breakup meme. CNBC
- What Is Proof of Work (PoW) in Crypto? The Motely Fool
- What is Crypto FOMO & How to Avoid it? The Motley Fool
Read also: save 2k $$$ in a month for crypto
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