What is cryptocurrency value analysis?
How does a cryptocurrency gain value?
If you are familiar with the stock market, you probably know that a company’s worth is determined by multiplying the stock price by the number of shares to demonstrate market capitalization. A stock’s price can increase and decrease depending on the current supply and demand.
It is the same with cryptocurrency; higher demand leads to bigger prices. If there is more demand than there is supply, a cryptocurrency’s price goes up.
You probably wonder which factors drive demand? Demand within the crypto ecosystem depends on several factors such as the coin’s utility. Increased utility means that businesses have an objective to accept it which increases investment opportunities as well.
Aside from utility, there are other factors that contribute to a higher demand and determine the value of a cryptocurrency. For example, availability on several crypto exchanges, media popularity, the number of market participants with a similar product, and regulatory status all impact the value of a certain cryptocurrency.
How to analyse a cryptocurrency as a beginner?
When it comes to crypto, continuous education is a must. It may be difficult to comprehend all these economic terms within the crypto trading realm so we will start with the basics of analysing cryptocurrencies before making investment decisions.
To learn more about cryptocurrencies and crypto trading, take a look at available courses on our Learn Crypto Academy.
Check out the market cap of a particular coin first. The market capitalization of a particular cryptocurrency refers to the total value of all the coins in circulation. Simply, it tells you how popular that coin is among investors. A high market capitalisation means that the demand for that cryptocurrency is high.
Secondly, check out the technology behind a crypto project and its team and roadmap. The technology should be secure, efficient, and innovative enough to set it apart from other market participants. It is recommended to look up the team behind the project and check whether they have a good track record and clear vision for the future.
Always check the liquidity as it refers to how easily a cryptocurrency can be purchased or sold. Consider crypto coins with a high trading volume listed on notable cryptocurrency exchanges. Additionally, coins that have low bid-ask spreads encompass a lot of liquidity.
A spread is defined as the gap between the highest price someone wants to buy and the lowest price someone aims to sell. To understand this concept better, why not read this article: 'What is the spread in crypto trading?'.
Finally, don’t forget about regulatory constraints; the regulatory environment surrounding a cryptocurrency presents a significant factor to consider.
Three main types of cryptocurrency analysis
There is a wide array of trading strategies that one can use when it comes to the crypto market. To put it down simply, everyone wants to buy low and sell high.
Easier said than done; getting to know the market requires a lot of learning and monitoring. However, there are three main methods crypto traders and investors typically employ in their decision-making processes.
Technical analysis
Technical analysis refers to a strategy aimed at analysing past trading activities and price variations of a particular asset. It can be used for types of assets with historical trading data such as stocks, commodities, fiat currencies, and cryptocurrencies.
This concept was introduced by Charles Dow, the creator of the Dow theory, who is partially responsible for the creation of the first stock index.
A technical analysis is valid if the relevant market has priced in each significant data point about a certain asset, implying that the asset is valued based on that kind of information. Technical analysts tend to include fundamental analysis in their trading strategies to find out whether an asset is even worth considering.
Crypto traders use cryptocurrency technical analysis to look at past price movements to determine in which direction the market is likely to move next such as whether it is going up, down, or sideways. This method utilises several statistical and technical indicators and patterns to check out the probability of each scenario and to find buy and sell signals.
There are indicators mapped above or below the asset price such as Bollinger bands and those mapped above such as moving averages, the relative strength index, and convergent divergence.
For example, moving averages are one of the most common types of technical indicators which can be adjusted to periods and provide helpful signals when trading a crypto asset in real-time.
To learn more about all aspects of technical analysis, check out this article: 'What is Technical Analysis?'.
Market trends and the Dow Theory
The Dow theory stems from traditional financial markets, but it is also used within the crypto realm to analyse and understand cryptocurrency market trends. It is based on the notion that the market includes all information about assets in their prices.
According to the Dow theory, three kinds of cryptocurrency market trends impact the market movement – the bull and the bear market as primary market trends, and secondary trends which can be divided into corrections in bull markets and rallies in bear markets.
Signals from one market index need to align with signals from another one to confirm a new market trend. For example, if one market index signals a downtrend, and another index signals an uptrend, a new trend is not here yet. However, if both of these indexes signal the same uptrend or downtrend, traders and investors can confirm the beginning of a novel market trend.
These trends align with corresponding volumes. For example, if the market volume decreases in the bull phase, it could signal a bearish movement on the horizon. The Dow theory says that a trend persists until a clear reversal happens.
Dow theory's limitations
It is important to point out that the Dow theory and its main indices have been around for more than 100 years. Back in the 1890s when large corporations started to emerge, Dow created the Dow Jones Industrial Average and the Dow Jones Transportation Average which could naturally correlate since the industrial activity was mainly linked to the transportation market.
The theory in question can be applied to cryptocurrencies but with certain limitations. The digital environment in which crypto assets exist is featured by rapid technological innovations and unpredictable regulatory regimes – these aspects have been overlooked in Dow’s primary structure.
Due to the decentralised and speculative nature of crypto coins, Dow’s trend detection can be difficult to use. The theory also didn’t take into account catalysts driving the crypto market such as advancements in blockchain technology.
The theory presents a helping hand to other methods such as the technical analysis of cryptocurrency as a solid base to identify trends as well as learn about market movements and peculiarities in crypto markets.
Does it work?
Technical analysis is not a miracle worker; within the volatile crypto ecosystem, traders expect to be correct approximately 55% of the time. To manage risks associated with the crypto market moving contrary to their predictions and times of high volatility, crypto traders employ risk management techniques.
However, informed decision-making, efficient risk management and return maximising all depend on price analysis. Therefore, to understand future price movements, traders keep an eye on moving averages, trading volume and support and resistance levels.
Fundamental analysis
Fundamental analysis refers to taking a deep dive into all available pieces of information regarding a particular cryptocurrency. This method utilises both qualitative measures and quantitative financial metrics to establish an asset’s intrinsic value.
When traders compare the fundamental value to the current market price, they can notice whether the cryptocurrency is overvalued or undervalued on the market. An undervalued crypto asset can be seen as a buying opportunity.
Fundamental analysis has been commonly used in traditional finance to examine the intrinsic value or real worth of financial assets, sectors, and even markets. Similarly to traditional finance, a cryptocurrency analysis involves examining and verifying a lot of information about a digital asset.
The main tools of fundamental analysis are, for example, economic indicators, interest rates, financial statements, media news, and qualitative data such as management quality or competitive advantage in the market.
What is the difference between technical analysis and fundamental analysis?
Cryptocurrency fundamental analysis aids investors and traders in determining what a particular digital asset should be worth. They compare the asset’s intrinsic value with market prices to make informed decisions accordingly.
Users frequently combine the main principles of fundamental and technical analyses to leverage the strengths of both and compensate for their weaknesses.
This blended approach frequently begins with a fundamental analysis involving evaluating financial statements, and cryptocurrency market trends, reading the white paper, and employing other qualitative and quantitative methods.
After determining an asset’s intrinsic value, traders use technical analysis to identify the optimal entry and exit points by examining crypto charts, patterns, and other technical indicators.
Does it work?
If you want to trade crypto, making informed decisions is essential. That is where fundamental analysis comes in since it directs users to look deeper and assess a crypto project’s technology, team, utility, and demand.
Even though fundamental analysis is a valuable tool for investing and trading, markets may move unexpectedly and react differently in any given situation.
On-chain analysis
On-chain analysis refers to looking at the blockchain’s public data. Unlike technical and fundamental analyses that stem from traditional financial markets, this method is unique to the cryptocurrency space.
Crypto traders use on-chain analysis to better predict future price movements and measure market sentiment as well as identify the reasons divergent users are buying and selling.
On-chain analysis enables traders to see how different participants are behaving such as miners, retail traders, and institutional investors. They employ several strategies such as transaction volume, coin dormancy, and crypto wallet balances.
Does it work?
While on-chain analysis presents a valuable tool for gaining insights into a certain blockchain and learning more about price movements, it is associated with several limitations.
For example, on-chain analysis relies mainly on the information available on the blockchain and doesn’t take into account external factors such as news, regulatory updates, and macroeconomic trends on the market.
Furthermore, whales can use their influence on the market to create false signals in the available data, or malicious actors may attempt to manipulate on-chain data by artificially inflating metrics.
Is it harder to predict crypto markets than traditional financial markets?
Due to several reasons, it is still harder to predict cryptocurrency movements as opposed to more traditional trading options.
The crypto landscape is still considered a new one, and regulators worldwide are struggling to provide a balanced set of rules on trading crypto assets. This uncertainty is still able to provide severe price variations.
Another issue that causes volatility is linked to the crypto market’s vulnerability to manipulation and the impact of market sentiment on cryptocurrencies. As mentioned above, crypto whales can cause major splashes on the crypto market.
It is best to remain vigilant and educated when trading or investing in crypto assets. Within a market sentiment-driven environment, market trends can emerge in a totally new manner.
Therefore, understanding the main types of analyses and theories used in the crypto market is essential.