3 Key Types of Trading Analysis for Cryptoassets
The dream of every trader is to have complete insight into what causes crypto prices to rise and fall.
Crypto markets are infamous for being unpredictable, making price prediction a challenge for even the most experienced traders. As markets mature and the adoption of cryptocurrencies increases, however, price stability has increased at the same time.
This has opened up the possibility of using traditional trading analysis to more accurately inform decisions and profit from cryptocurrency trading, particularly with the right data.
The Vital Role of Trading Analysis in Crypto Markets
Cryptocurrency traders do need to act intuitively in many scenarios, but they can only act effectively if they have the data, skills, and expertise to do so effectively. This is where trading analysis comes in.
Trading analysis is a vital tool in any successful cryptocurrency investor’s arsenal. Historical price charts, identifying market trends, and sentiment analysis are some of the information traders use to make better trading decisions with trading analysis.
Trading analysis also helps with risk management. With thorough analysis, traders can place effective stop-loss orders to prevent losses from fast-moving price changes. Risk management — like trading analysis — is another important skill to master if investors want to profit consistently from crypto markets.
These and other trading analysis tools are the same tools used in traditional markets, but there are a few key differences in how they’re used. Below we’ll go over some of these differences and then explore the different types of trading analysis.
Crypto Analysis vs. Traditional Market Analysis
Speculation is Higher in Crypto Markets
In the past, many new crypto investors traded largely by trial and error due to the high level of speculation in crypto markets. This was a major mistake in hindsight, as blind trading is purely luck based — almost akin to gambling — meaning that the majority of traders lost more than they earned unless they were lucky enough to get in and out of markets at the right time.
As alluded to, traders can prevent this costly mistake by crafting effective strategies through analyzing the market.
Crypto Markets Never Stop
Crypto markets work 24/7. Significant price changes can happen anytime unlike traditional stock markets. There have been countless horror stories of traders losing their investments overnight and similarly, extravagant cases of investors profiting tenfold without them even realizing it.
This is another reason why traders need to perform analysis — it helps them gauge possible market changes that counteract the unpredictability of cryptoassets. Of course, trading bots are not affected by this problem as they work around the clock as well.
No Exchange Brokers
Crypto trading is fully peer to peer, assuming investors don’t engage with a firm. Trading decisions can be made within seconds, unlike traditional markets that rely on brokers to execute buy and sell orders.
Trading analysis presents a unique advantage in crypto markets as traders can identify opportunities and react instantly to turn a profit without having to wait for brokers.
The Different Types of Crypto Trading Analysis
Technical Analysis
Technical analysis (TA) dives deep into a cryptocurrency’s history through analyzing price charts and trading volumes. This type of analysis leverages past prices to predict future price action based on two core concepts:
- Human behavior in markets is predictable and,
- Price history tends to repeat itself.
In TA, price movements are identified by patterns and trends, both of which may be long or short-term. The idea is that once a trend is formed by a coin, it will continue to follow that trend over time.
Good analysts understand that while they cannot predict price movements with certainty, they can have a good estimate of what could happen in the market with the findings gathered from TA.
There are many tools TA traders use, including traditional candlestick charts, Elliott Waves, oscillators (RSI charts), and even Fibonacci levels, which are based on the principles of Elliott Waves.
Fundamental Analysis
Fundamental analysis (FA) looks at cryptocurrencies with a broad view. Instead of only focusing on prices, every aspect of a crypto asset is factored in when determining its overall value.
The idea behind FA is straightforward: if a crypto asset is not aligned with its fundamental value, traders can make an informed trade to turn a profit based on that value gap.
So, for example, an FA trader may try to identify underrated projects or hidden gems that have a chance of major success. Ethereum is a popular example as investors would have earned 2,000 times their initial investment if they bought ETH during its first token sale in 2014.
Likewise, FA traders are also on the lookout for overvalued projects to identify price bubbles so they can exit a trade or bet against the cryptocurrency before the asset inevitably crashes.
For example, say a coin called ABC Coin has the potential to revolutionize enterprise payment systems, but it’s severely undervalued at $0.013 per unit due to a lack of exposure. The fundamental trader identifies this opportunity and puts in a massive buy order for ABC Coin in hopes that it will skyrocket in value if the project works out.
However, traders need to realize that FA must take into account the possibility of price manipulation and hype in the cryptosphere. A cryptoasset with lots of hype and funding will still have its price pumped up even if FA traders feel it’s worthless.
Several common indicators that FA traders use to invest in cryptoassets include:
- Identifying the asset’s viability in real-world use cases
- Comparing competitors and alternative assets
- Determining whether the team can meet its goals
- Assessing the project roadmap and whitepaper
- Checking development status (e.g. is its GitHub active?)
- Assessing the asset’s demand, token allocation, and utility
- Checking whether the community is active and users are satisfied
- Assessing price history and other details (e.g. volume, past prices, token burning)
- Ensuring that the asset meets regulations
Sentiment Analysis
Sentiment analysis (SA) utilizes market sentiment in determining the value of cryptocurrencies. This is aided by the use of technology and alternative data providers to understand the public perception of a crypto asset. In SA, alternative data like social media, community feedback, and media outlets are factored in to evaluate an asset.
SA measures sentiment levels by assessing whether market participants are mostly buying or selling.
For example, a SA trader identifies 70% of sellers in an exchange are shorting ABC Coin. This is likely to result in a price correction as supply overwhelms demand significantly due to the coin being oversold. As a result, the trader buys more ABC Coins at lower prices to be resold at a higher value in the future.
Bear in mind that SA functions best as a complement to TA and FA strategies since relying on market sentiment alone is not reliable enough to make informed decisions. Also, price movements can sometimes go in the opposite direction of SA finding implications, as in the case of Bakkt’s launch, which impacted the Bitcoin market less positively than expected.
That said, assessing market sentiment does give investors a more thorough understanding of cryptoassets that TA and FA alone cannot provide, particularly in gauging alternative data like community sentiment. This enables investors to make smarter decisions regardless of the trading strategy they’re using.
Whatever types of analysis you use as a crypto trader, a challenge with analyzing markets is that information can be manipulated to benefit certain parties. Rating sites, for instance, may deliver biased opinions to benefit advertisers and sponsors, which makes it impossible for investors to accurately gauge the potential of a project.
This makes trading analysis difficult since traders have to spend valuable resources to ensure that their data is genuine and unbiased. In a market where cryptoasset prices change every second, traders cannot afford to waste time in verifying the authenticity of data.
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