Market Prediction - A Way to Protect Your Investments

January 30, 2020   Bitcoin

Navigating the world of cryptocurrencies can be very difficult due to the widespread use of computer jargon and technical concepts, which are almost certainly a curiosity for many beginners. Taking into attention the relative youth of cryptocurrency technology, it can be difficult to find structured resources to help an investor figure it out. Market forecasting is a way to protect your investments. Do traditional crypto analytic tools work?

Analysis of the traditional financial market and its types

Investors use a number of methods to evaluate stocks before deciding whether to trade short-term or make long-term investments. The two main methods can be divided into fundamental analysis and technical analysis. Both methods use different methodologies to try to predict market movements, and both can be very valuable in helping investors make decisions.

Fundamental analysis

Fundamental analysis focuses on the financial and market position of a certain project or company, its growth prospects and past financial results. The concept takes into account all economic factors associated with the valuation of equity. It takes into account both the financial statements and the current company’s position in the financial market, as well as the local political and economic climate.

This type of analysis tends to move a little slower and focuses on overall financial performance. It can use a relative valuation, such as a price-earnings ratio, and an absolute valuation, such as free cash flow. This is invaluable for those investors who are looking for long-term investments and not really worried about short-term market changes. The fundamental analysis works in accordance with the investment methodology, which has a margin of safety. The idea is to buy a stock when it costs more than its price in the market.

Fundamental analysis is based on two basic assumptions:

  • The price of this stock will ultimately correspond to its intrinsic value.
  • Buying an undervalued stock and holding it long enough should be profitable when the stock price approaches its intrinsic value.

Therefore, fundamental analysis is so popular among investors who use the “buy and hold” philosophy (which we will return to later).

Technical analysis

Technical analysis, as a rule, is more interesting to followers of a short-term approach to investing. Technical analysis conceptually represents the analysis of assets’ charts, their changes in the past in terms of price dynamics and trading volumes. Historical data is also analyzed to find behavior patterns and fractals. This is an analysis of technical indicators, such as price dynamics and trading volume and other similar indices. Technical analysis is more suitable for short-term investing or trading and is rarely used for long-term investments. Concepts such as Dow theory and trending are applied to determine what to buy and sell.

There are three golden rules in technical analysis according to market consensus:

  • Stock prices reflect everything that matters. All information that an investor needs is reflected in the market price.
  • Changes in prices are not accidental. Stock prices are moving in a trend, do not fight with it.
  • Price patterns are always repeated when there is enough time. The repeating nature of price movements depends on the psychology of the market: investors are consistent in their reactions.

Fundamental factors affect investors in value, but the prevailing state of the market will also play an important role. The relevant stock should be available on the market at a reasonable price. Technical analysis includes screening, graphing and analysis of moving averages and stochastic oscillators. This gives an idea of where the asset’s price is relative to its price range during the selected period. Many investors use oscillators as market signals for when to complete transactions.

Cryptocurrency Market Analysis

Cryptocurrency is a new financial asset class, and many people see cryptocurrency as an investment opportunity. In traditional finance, the attractiveness of an asset is usually measured using fundamental or technical analysis. Cryptocurrency traders also apply these methods to cryptocurrencies. So, how does this type of analysis in the crypto space differ from traditional markets?

There are three main types of cryptocurrency market analysis:

  • Fundamental analysis;
  • Technical analysis;
  • The analysis of moods.

Fundamental analysis

This must be pretty obvious that the fundamental analysis in the cryptocurrency market is somewhat different from the analysis in the stock markets.

The fact is that most cryptocurrencies do not obtain great value, and some of them do not even pass the test to become a currency. To avoid making an emotionally oriented decision, which may ultimately cost you a fortune, you must learn how to perform a fundamental analysis of cryptocurrency.

The fundamental indicators of cryptocurrency are not financial, but technical, which are tied to the technical features of the coin’s blockchain. What are these indicators? Hashrate, block size, number of miners, mining complexity - all this matters and significantly affects the cost of a particular crypto asset.

It is also worthy to take into account the upcoming hard forks, halvings, airdrops, the size of the community, the activity of the development team. All of these are important fundamental factors.

Most cryptocurrency projects do not have revenues, profits, or other traditional metrics that people in the financial world use to evaluate financial assets. Without the traditional metrics on which to base their judgments, cryptocurrency investors should approach fundamental analysis from a slightly different point of view.

How does fundamental analysis work in trading digital currencies?

It is vital to understand that virtual currencies are not companies in the traditional sense. This means that an investors need a different approach, and they have to focus on assessing the long-term usefulness of a certain project.

Even if some blockchain platform is successful, you can still lose you your funds if you don’t understand that its token is not needed at all for the functioning of the project! Doing the right fundamental analysis for a certain altcoin can protect you from projects that are not reliable in its nature.

How is fundamental analysis carried out?

Fundamental analysis is not complicated, but requires a lot of work. The best place to begin is a document on a crypto project - White paper, where you can learn about coin’s technologies and team plans.

To assess the technical state of the blockchain, there are many different analyzer sites, but first of all, it makes sense to visit the block explorer site and evaluate its functionality and performance.

It is also important to evaluate the activity and size of the coin’s community, for this you can visit the official forums of the project community and representative pages of social networks: Twitter, Reddit or Bitcointalk. You can estimate the number of subscribers, the activity in the comments, the frequency of updates and public news. If there are signs of cheating or low community activity, then this factor is clearly not in favor of the cryptocurrency asset.

But do not forget that:

  • Cryptocurrencies are not corporations, but rather representations of value or assets on the network. The indicators of fundamental analysis are not financial, but technical. They are tied to the technical features of the blockchain, the actual and potential demand for an altcoin.
  • The cryptocurrency space is in its infancy, and almost all cryptocurrencies are under development. This means that there are currently cases of limited use in the real world and, therefore, the lack of historical data to rely on.

Thus, a fundamental analysis of cryptocurrencies should be performed using a different methodology. Given the complex nature of the crypto and the underlying technologies, it’s even more important for invertors to do research in order to assess  the project’s viability and potential.

Technical analysis

Technical analysis is the prediction of future movements in financial prices based on a study of past price movements. Like weather forecasts, technical analysis does not provide absolute forecasts for the future – near or distant. It works because people constantly repeat behavior in similar circumstances.

The biggest mistake made by novice technical traders is to attribute too high reliability and accuracy to technical analysis methods. Experienced cryptocurrency traders understand that no technical analysis strategy works all the time.

In any financial markets, traditional or cryptocurrency, the value of the analytic method is determined by whether it helps to constantly earn more money than an investor loses. Note that this statement has two variables: the method and the investor. The variable “investor” is why two traders (whether beginners or professionals) can use the same method, but achieve rather different results.

Mood analysis

Mood is one of the three main factors that can influence the price trends of the market. Sentiment analysis uses technology to decipher public perceptions at a particular point in time, drawing on fundamental opinions from a wide range of sources. It has been widely used in combination with social media.

Being an ideal tool for converting unstructured data into material and processed information, this is a great analytics method. There is no such tool in traditional markets. It is it which makes it possible to conduct a study on the basis of which a reliable forecast can be made.

For example, a resource such as Bitfinex provides a huge amount of data through its API, which people have compiled into TradingView's indicators and websites. This data is one of the best methods to analyze cryptocurrency market moods.

News headlines

News, especially headlines, are often mistaken in key turning points. Large media are often puppets of major financial institutions. These institutions try to maintain a high level of public opinion on certain matters on the market, while the “big boys” are slowly doing their business. You should not think that all media are corrupt, but large publications are often just that. Therefore, always take the news from the opposite point of view.

Public polls

Another source of sentiment may be a public poll. In social networks, many surveys are often conducted simultaneously. Once we reach the limit of sentiment, there is no one else who can buy or sell. Everybody has already bought or sold the asset of interest. Social media platforms, such as Twitter, Facebook, Telegram and others, can be considered as a combined indicator of thoughts and ideas, as well as public mood. Positive sentiments lead to a more optimistic attitude towards investment decisions. Thus, social networks can be a good indicator of the forecast for investments in cryptocurrencies, the sizes of which are reflected in their prices.

HODL as a Strategy and Philosophy

Remember, when we talked about fundamental analysis, we promised to return to the term “buy and hold”? In crypto space, it is called HODL. This term arose in 2013 from a post on the Bitcointalk forum. HODL soon became synonymous with a cryptocurrency investment approach that avoids trading based on short-term price movements.

Leaving short-term fluctuations aside, the long-term volatility of bitcoins does not lend itself to familiar logic. The price increased by 52,000% from 2011 to 2013, and then fell by more than 80% over the next year. Since then, it has risen more than 17 times compared with the previous maximum, to fall twice again. Throughout the history of cryptocurrencies, many investors have made logical arguments in favor of the fact that it will “fly to heaven” or collapse to zero.

Hodlers benefit from all this volatility and forecasting. They simply buy and hold, which helps them counteract two common destructive tendencies: FOMO (fear of missing an opportunity), which can lead to a high purchase price, and FUD (uncertainty and doubt), which can lead to a low price. The latter is sometimes called SODLing.

Convinced supporters of cryptocurrency call themselves crypto maximalistss. HODL for them is more than a risk management strategy. This is their philosophy or even religion. They believe that cryptocurrencies will eventually replace fiat currencies and become the foundation of all future economic structures. Therefore, the current exchange rate does not matter, as it is in their understanding, it will still be higher. Hodlers with an experience of 3 years are especially convinced of this, because without looking at all the ups and downs of Bitcoin, they have never been in a drawdown.


There is much debate about which type of analysis is better. Although it would be ideal to have excellent knowledge and practical skills for each type, we will not say that it is absolutely necessary. Many market participants and officials say that it would be better if the crypto trader was fully guided by all three methods of analysis. Well, this statement is hard to argue.

Theoretically, yes, but we are talking about real life in general. Depending on their own tasks and the method of trading, most traders do some specific type of analysis as the main one, and other types as auxiliary ones. But you should have at least a general understanding of what is happening in the cryptocurrency market.

Author: Kate Solano for С

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