Introduction to Cryptocurrency Market Analysis
As with any trading, it is best to enter your chosen market armed with as much information as possible. If you go blind, you can find yourself in the role of a roulette player. Preparing to enter the cryptocurrency markets involves a thorough study of the digital assets you want to trade, their history and behaviors, and various other factors related to the coin's intrinsic value that affects the price.
Types of cryptocurrency analysis
The two main types of cryptocurrency market analysis that we need to consider are fundamental analysis and technical analysis.
Before studying technical analysis for cryptocurrency trading, it is necessary to define this term. Technical analysis is a way to predict the rise or fall of an asset's price based on patterns determined by its historical indicators, which can be seen on asset charts.
The crypto trader uses cryptocurrency analytics tools that provide various types of market information, from price trends to trading volume. Based on the historical data of the cryptocurrency market, the theory of technical analysis assumes that the patterns of price movement will be preserved and cyclically repeated. Therefore, to get a clear idea of the market mood, it is necessary to look for models in which the selected coin demonstrates repetitive behavior. Only after identifying these trends can the future direction of the asset movement be predicted.
One of the most critical data for technical analysis of cryptocurrencies is supply and demand. In a bull market, supply will decrease, stimulating demand and increasing the coin price, and in a bear market, the opposite picture will be observed: low demand and a price decrease. In such a market, participants will consider the price drop as an opportunity to buy a coin cheaply, increasing demand and increasing price. Then, when the market becomes bullish, people will sell, continuing the cycle.
Unlike technical analysis, fundamental analysis approaches the market trajectory more holistically, studying its inherent value by considering its utility. When assessing the future course of the coin, your cryptocurrency analysis will take into account the practical application of the token, the size of its community, the strength of the team behind the project, and the market for any product or service that requires a token. Unlike analyzing what the market is doing, it focuses on the causes.
Extensive research is needed to effectively identify projects that can achieve great success and distinguish them from projects that are all hype and have a disproportionately high cost. Based on this cryptocurrency analysis, you can determine whether the coin is currently overvalued or undervalued and decide whether or not you should open long or short positions.
If we talk about fundamental analysis of traditional fiat currencies, then valuable metrics are regularly published economic indicators, such as the unemployment rate, consumer price index, and GDP. They give an idea of the state of the country's economy, which, in turn, affects the price of its currency. However, when it comes to analyzing cryptocurrency, the events affecting prices turn out to be completely different.
Let's take bitcoin halving as an example - a situation where the reward for bitcoin mining is halved. Whenever this landmark event occurs, it has an incredible impact, as the rate of new bitcoins entering circulation is split, as is the inflation rate of bitcoin. In addition, these events can portend recent boom and bust cycles, which usually leads to a higher coin price than before this event.
Then, of course, there is legislation regarding this emerging new asset class. The regulation was one of the steps behind the rapid growth of the cryptocurrency market. As governments get used to the current financial reality and begin to regulate and tax crypto assets, announcements of any new development will be met with a strong market reaction.
Cryptocurrency Analysis Tools
Cryptocurrency analysis often involves the use of software to analyze cryptocurrency charts. This is because the cryptocurrency markets are moving at such a high speed, they are incredibly unstable, and there is such a vast amount of data to process that if you want to track all critical events, then you will need the help of advanced interactive software that can provide up-to-date information.
There is a wide range of tools, and you will need a convenient set of live charts and other analytical resources that will help you in technical and fundamental analysis of the market. Currently, more than 5,000 coins are registered on exchanges. Their number is constantly growing, so you need software that allows you to track and analyze as many coins as possible, providing trading volumes and data on hundreds of different exchanges, as well as providing access to base currencies so that you can compare them with the indicators of the coins you have chosen. Other valuable features include access to a news aggregator that collects information from the best news sources, asset lists, social trading tools, the ability to add charting functions such as moving averages for a specific time interval, and much more.
However, no matter how useful the software is, it will not replace your experience and judgment. Eventually, you will have to analyze and systematize the information you receive to become effective.
The Right methods of cryptocurrency analysis at the Right Time
When deciding how to analyze cryptocurrency, you should not limit yourself to only one analyzing the cryptocurrency market. Both fundamental and technical analysis can provide helpful insight into the potential future trajectory of cryptocurrency. However, depending on the type of transaction you want to make, they may have more weight than the other. For example, if you're going to make short-term trades, technical tools will be more beneficial because they can show patterns over minutes, hours, and days. Still, if you are aiming for the long term, then a cryptocurrency analysis considering the coin's total value will be the best option.
A solid understanding of how to analyze historical asset data and how to assess the inherent value of a coin is a critical skill for any investor in digital currencies who wants to increase their income potential and reduce risk.
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