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Trading Cryptocurrencies Using Technical and Fundamental Analysis

As most market participants are aware, there are two main types of analysis traders use to monitor markets and give them more detailed trade ideas. Technical analysis and fundamental analysis are the main areas of study that can be used for any markets, including new ones like cryptocurrencies.

Fundamental Analysis

This generic analysis is the study of everything that can affect an asset’s value, from economic to political to social factors. Essentially, a fundamental trader will try and figure out the supply and demand reasons as to why a cryptocurrency is rising or falling, which will cause changes in price.

Determining the true value of a relatively innovative asset, like Bitcoin, can be more tricky as economic data, figures and earnings results will be less relevant for analysis, than when calculating the value of a stock or currency. Bitcoin doesn’t produce revenue or earnings numbers, so it can be tough to derive a precise valuation.

Supply and Demand always matter

Bitcoin has a controlled supply, meaning the number of coins mined is finite up to an amount of 21 million. With accidental loss and wilful destruction also to be factored in, the actual units in circulation are far lower. So, the rate of new supply is determined by the bitcoin protocol, in sharp contrast to the fiat system currently in place where central banks can print whatever they want.

There are numerous variables that affect bitcoin demand such as adoption, trading and transaction activity and the hash rate. The second half of 2020 has seen adoption of bitcoin increase rapidly with eBay and PayPal agreeing to accept the cryptocurrency. Similarly, transactions have surged in recent times and significant market players like the activity of bitcoin whales can be tracked, as well as the mempool where unconfirmed transactions are held.

Technical Analysis

Traders use technical analysis to look at bitcoin’s price movements for patterns and trends to determine future price action. As with currencies and indices, the same principles apply when evaluating signals and indicators to identify price targets, support and resistance.

Potential entry levels

Bitcoin’s push to new all-time highs in December 2020 above $20,000 has pushed the crypto into uncharted territory. This break beyond the previous record price printed in 2017, coupled with such a fast move higher means some momentum indicators like the well-known relative strength index (RSI) and stochastics are less useful, as they are more effective in range bound markets. To paraphrase a legendary economist, an indicator can stay overbought longer than sellers can stay solvent.

When markets surge in either direction beyond or below previous record prices, there are no ‘higher price lows’ or ‘lower price highs’ that can be referred to either as support/resistance or targets beyond current prices. But traders can refer to retracements and extensions based on the classic 23.6%, 38.2% and 61.8% Fibonacci levels, deciding on the most relevant price points. For example, using a Fib extension to determine more upside gives a level based off the 38.2% move from the March bottom to November high. On the flipside, retracements are worked out by connecting the low and high points to get levels of support below current prices.

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