Investing in cryptocurrency means first learning about the industry and then researching potential and possible investments. Although there are many influencers, social media accounts, and investors looking to share their tips, buyers are always advised to do their own research before they consider pumping money into any project. While cryptocurrency has the potential to bring good returns, it also carries the very real possibility of bringing substantial losses.
Cryptocurrency Investments
Cryptocurrency is a high-risk form of investment. It isn’t uncommon to see the entire market slip 5% a day, and some days, movements can be substantially higher than this.
Established cryptocurrencies like Bitcoin and Ethereum, which are those with the longest trading history and, typically, the highest market capitalizations, can be volatile. However new cryptocurrency assets have substantially more volatility. Their prices can multiply, or virtually disappear, overnight. Regardless of the age and reputation of a cryptocurrency, though, conducting as much research and analysis as possible will help would-be investors make smart choices.
Fundamental Analysis
Fundamental analysis is the evaluation of a cryptocurrency to try and determine its true value. By determining the fair value of an asset, an investor can determine whether that asset is underpriced, and worth buying, or overpriced, and best avoided.
The fundamentals of a cryptocurrency project include the purpose and use cases of the currency, determining whether it is being used, and whether it is likely to gain further adoption in the future as a result of any deals in place. Marketing plans, tokenomics, and details of the team behind the project can also help paint a clear picture of the asset and its intrinsic value.
A lot of background information on a cryptocurrency can be found in its whitepaper, but investors are also encouraged to check out any official website, linked social media accounts, general media coverage, and followings. Some of this information is readily available, even provided by the project itself, but it should all be verified and even compared to competitors.
Finally, look at factors like the market capitalization of the project, its main competitors, and its price, as well as general economic indicators. See how the crypto has fared in recent months compared to the rest of the market. All of this can help give you a picture of whether the asset is under, over, or fairly priced.
Technical Analysis
Technical analysis is the study of charts, prices, and other data to determine where prices are likely to move next. There is a lot of technical and price data available, and there are many ways to interpret the data and forecast trends. Some of the most commonly used forms of technical analysis include:
Trend Analysis – At its most basic, trend analysis means determining whether price is trending up or down and trading in line with that. More advanced trend identification is used to identify entry and exit points.
Support And Resistance Analysis – Support and resistance are levels where prices reach. These prices act as barriers but can indicate significant movement when breached.
Chart Pattern Analysis – Chart pattern analysis means identifying patterns that emerge on price charts and represent likely future movements. Head and shoulders, symmetrical triangles, and cup and handle patterns are some examples.
Technical Indicator Analysis – Indicators are mathematical calculations that use patterns and movements to identify likely movements. RSI, moving averages, and divergence indicators are popular with technical traders.
Stochastic Oscillator Analysis – Stochastic oscillators measure movement and momentum. They can identify when assets are overbought or underbought, indicating likely entry and exit points for traders.
Candlestick Pattern Analysis – Candlestick chart patterns have been used for centuries and are among the most popular technical analysis tools today. Traders identify patterns of candlesticks like hammers and doji candles to indicate likely price movements.
Volume Analysis – Volume analysis can be used in conjunction with patterns and other forms of technical analysis to judge the power and even the motivation behind price movements.
Fibonacci Sequence Analysis – Fibonacci ratios can, according to technical analysts, be used to predict highs, lows, gains, and retracements of prices, and are best used in conjunction with other analyses.
Elliott Wave Theory Analysis – Elliott Wave theory dictates that prices follow predictable wave patterns including impulse and corrective waves. This technical analysis can be used to predict reversals as well as upper and lower targets.
On-Chain Analysis
Cryptocurrency is unique among assets in that every trade and every transaction is stored on the blockchain and can be viewed by any party. This transparency enables technical traders to determine the motivation behind certain price movements. In particular, on-chain analysis is used to determine movements by whales and miners, and whether this impacts current and future prices.
Combining Analyses
Traders can combine the different analysis methods to help get a clearer picture. Fundamental analysis can identify real or fair prices, while technical analysis can determine target prices and on-chain analysis identifies whether price movements are genuine and what the motivation behind those movements is.
Conclusion
Cryptocurrency can be a profitable form of investment but it does carry a lot of risk. Investors, whether new or experienced, should conduct thorough analysis and research before investing in any crypto. This includes fundamental analysis, to determine a fair price; technical analysis, to identify price movements and targets; and on-chain analysis to identify motivation behind price movements.
