How Are Crypto Prices Analyzed?

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How Are Crypto Prices Analyzed
(Image via Pixabay)

Every day analysts are touting their prediction of the price of BTC. But how do they get to their numbers? Can you do your own analysis? 

With major financial institutions now predicting Bitcoin prices above $50,000, many novice crypto investors will be wondering how analysts make their predictions. It can seem easy with online brokers offering sleek technical charts. But they are all but useless by themselves.

Understanding the methodology behind price analysis and learning to read charts is an essential skill for any serious cryptocurrency investor. With that in mind let’s dive into the world of crypto price prediction. 

How Technical Analysis Is Undertaken 

The Dow theory forms the foundation of all technical price analysis. It assumes that the market takes everything into consideration during its pricing, including existing or upcoming “news.” This means that the current market price of the asset is its fair price. The market’s concerns or hopes are already factored in. 

The theory breaks the market up into three price movements, defining how an asset changes over time and asserts that price movements aren’t random and that price movements can be analyzed to understand future shifts. 

We won’t go too deep into the Dow Theory for this article but it is important for you to understand that the market is broken into three phases:

  • Accumulation: when knowledgeable (or brave) investors start buying or selling an asset against the general mood of the market. This has no significant impact on the price as these investors are in the minority. 
  • Absorption: the point where the market catches on and follows the trend, this has a bigger impact on price and marks the beginning of speculation. The 2017 bull run of Bitcoin was the absorption phase. 
  • Distribution: the point where knowledgeable investors begin to liquidate or divert their holdings, this eventually causes the market to retrace. 

These trends themselves can be broken into three timescales, the long-term trend, medium-term trend, and short-term trends. Which timescale you’re interested in will depend upon whether you are a HODLer or day trader, but the principles we are learning today will apply to you no matter how you invest in cryptocurrency. 

How Are Crypto Prices Analyzed
(Image via Alternative.me)

For the cryptocurrency market, a good summary of the drivers can be found by looking at the cryptocurrency fear and greed index. This takes various factors, such as volume, volatility, and Google search trends, and uses them to make an estimate for where the market will go. This kind of tool is useful for testing the mood in the crypto market, but serious investors and analysts will use charts, typically a candlestick chart. 

How to Read a Candlestick Chart 

One of the most useful tools for a crypto investor is a candlestick chart. These are charts that show all of the transactions in a given timescale. These charts are broken into two kinds of candles. The green are bullish candles, representing positive price growth. And the red are bearish, representing negative. Each candle has all of the information that an investor needs to understand what is happening: 

How Are Crypto Prices Analyzed

In other words, a series of red candles means that the price of the asset is consistently falling, whereas a series of green candles means that the price of the asset is increasing. So far, so simple.

The next thing to watch out for are shadows (the arms). These represent the high and lows for a particular session (eg, days). Long shadows indicate a shift in market control from bears (sellers) to bulls (buyers) or visa versa. Let’s look at this in action. 

How Are Crypto Prices Analyzed
(Image via Coingecko.com)

The above chart, taken from Coingecko, shows the January bull run, and consequent correction quite clearly. You have a period of long green candles where the bulls are very much in control of the price movement. This continues until January 10th where we see a reversal begin.

To understand this reversal let’s take a moment to talk about hammers and shooting stars: 

How Are Crypto Prices Analyzed
(Image via commodity.com)

The hammer candlestick: Typically indicates the reversal of a bear market and the beginning of a new bull market. Both the red and green candlesticks are considered bullish, although the former is less so. The hammer indicates that the price dropped significantly during trading but rebounded before the trading period ended, putting price momentum in favor of the bulls. 

How Are Crypto Prices Analyzed
(Image via commodity.com)

The shooting star candlestick:  Is the opposite of the hammer. The shooting star indicates the reversal of a bull market and typically appears just before a bear market cycle begins. Both green and red shooting stars are considered bearish, although a red one is more-so. The shooting star indicates that the price increased significantly during trading, but collapsed before the trading period ended, putting price momentum in the hands of the bears. 

How Are Crypto Prices Analyzed
Zoom of coingecko chart period – Jan 7th to 15th 12 hour candles (Image via Coingecko.com)

Now that we understand how shooting stars and hammers work, we can get a stronger understanding of the chart. Starting from January 8th, we begin to see a number of shooting star candles. This indicates the beginning of a bearish market, which takes form on January 10th. This continues for a number of trading sessions before a red hammer appears on January 13th, which indicates the beginning of a bull trading cycle. 

How Are Crypto Prices Analyzed
BTC market volume just before and after the correction (Image via Coingecko.com)

What does this tell us? That the moment for profit-taking was on January 10th, when the selling pressure on the market began to increase significantly.  This analysis is confirmed by the market volume, which slowed significantly just before the correction. 

There is more to technical trading than we can go into here. For more information, check out commodity.com’s technical analysis pages. 

Crypto Investors Can Use Technical Analysis to Predict Trend Reversals 

This information can be used by savvy investors or traders to predict trend reversals, so they can either buy low or sell high. Another common strategy used by investors is the four candle strategy, a pullback strategy utilized by many hedge funds.

Technical analysis is useful because it enables traders and investors to ignore the “noise” of the market, and focus on the actual numbers, allowing you to gain an edge over the market with a clear head. 

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