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SI GN U P

A beginner's guide to crypto market

 Back to blog

6 AUG 2020 • 5 minute read

There are a wide variety of investment and trading strategies that you can employ when

it comes to cryptocurrency, from HODLing to day trading. If your goal is to make a profit,

though, only one thing really matters – buy low and sell high.

This is, of course, easier said than done. If it wasn’t, we’d all be rich. Identifying when

the lows and highs will come is exceptionally hard and doing so with any degree of

certainty is impossible – no-one can truly predict the future.

 
But there are certain methods of market analysis that crypto traders and investors

commonly use in their decision-making processes to give them a better idea of when to

enter and exit their positions (in other words, to buy and sell). The two most common of

these are technical analysis and fundamental analysis. Both have their limitations, but

used in the right way, they can help you make better informed trades.

The legal stuff: The content of this article is for information purposes only and is not

investment advice or any form of recommendation or invitation. Luno always advises

you to obtain your own independent financial advice before investing or trading in

cryptocurrency.

Technical analysis
 

What is it?
 

Technical analysis is built on the premise that history repeats itself. It’s focused primarily

on historical market data, such as trading volume and past pricing trends, rather than

what a coin or project actually does. Analysis of this data is used to build a clearer

picture of market sentiment by identifying patterns of repeat behaviours. This can then

help you to make calculated predictions about when the market will be bearish (trending

down) or bullish (trending up). These predictions should, in theory, allow you to buy

when the market price is low and sell when it’s high in order to make a profit.

 
This method of analysis essentially assumes that price movements aren’t random and

that past patterns will hold in the future. Although any number of factors could have

influenced the price of a coin to move in a specific direction, in technical analysis you

really look only at supply and demand and the price of a coin. After a trend is formed by

a coin, technical analysis’s exponents believe that it’s probably going to follow that trend

to oppose it. So, if the market is bullish for a substantial amount of time, demand will

reduce the supply of coins for sale and the price will increase. As the price goes up, you

can expect it to become bearish at some point as people try to capitalise by selling their

coins. As they sell, supply begins to outweigh demand, causing the price to go down.

And the cycle continues.

Does it work?
 

Ultimately, technical analysis is such a broad discipline that it can’t be said to simply

“work” or “not work.” Its success depends largely on the person doing the analysis. This

isn’t to say that it necessarily has to be complicated and you have to be a mathematical

genius, but it is easy to misinterpret and you have to know what you’re doing.

If used correctly, TA can certainly form a pillar of your thought process and there are

some that swear by it. Equally, you can’t predict the future simply by looking at the past.

There are many factors to take into account. Expert technical analysts rarely rely on it in

isolation, they’ll also look for context.

 
Fundamental analysis
 

What is it?
 

Fundamental analysis is a more ‘big picture’ approach than technical analysis. It strives

for a thorough evaluation of an asset’s intrinsic value, considering as many qualitative

and quantitative factors as possible. If you judge the intrinsic value to be lower than its

current market price, you can trade accordingly and, in theory, make a profit. Equally, if

you believe the asset to be overvalued, you can actually trade to make a profit when

assets decrease in price. This is known as ‘shorting’.

Fundamental analysis is not exclusive to cryptocurrency. It’s common to all kinds of

trading. However, it does require a different approach. Cryptocurrencies are not

corporations. They do not have public financial statements. This makes it hard for

traders to derive a precise valuation for Bitcoin from future cash flows in the way you

can for other assets.

A cryptocurrency’s viability depends on other factors to gauge its potential and the

current strength of the community in the network. There are future prospects and unique

features to consider. With Bitcoin, you would ask whether it will function as a medium of

exchange and what sets it apart from money. For example, Bitcoin’s total supply is fixed

at 21 million units. It's therefore in a unique category of its own among currencies.

Unlike fiat currency, which a central bank can print at will, Bitcoin possesses a fixed and

predictable total supply volume.

You also look at things such as transaction volume and user activity to gauge consumer

demand, as well as retail adoption. Bitcoin has made slow but steady progress toward

mass adoption as a medium of exchange. Today, it has been adopted as a payment

method by tens of thousands of businesses and e-commerce platforms worldwide. In

fundamental analysis, this might help you understand whether it is performing its

intended function as you saw it.

Finally, global economic events can exert a powerful influence on cryptocurrency prices.

It’s important to incorporate these economic shifts when using fundamental analysis in a

trading strategy. This includes both scheduled and unscheduled events. A highly-

publicised and important crypto-related event such as the halving, for example, has a

clear impact on the future supply rate of the currency. You can plan for this and

incorporate it into your models. Equally, an unscheduled event could have an even

greater impact – for example, a government’s decision to deregulate Bitcoin. This is

obviously harder to take into account, but you still need to know how to respond to such

unplanned events if and when they occur.

Does it work?
 

There are some that argue the prices of digital assets already incorporate all of the

disparate data points that could possibly affect their price. This essentially renders any

further attempt to assess the market redundant. Furthermore, as with any asset, it’s

impossible to accurately predict demand and there will always be an element of chance.
Fundamental analysis is primarily concerned with a digital asset's hypothetical worth,

rather than its actual value at any given point in time.

However, knowledge is power. By leveraging the insights delivered by fundamental

analysis, Bitcoin traders and investors can gain a deeper understanding of the intrinsic

price of the currency. This could ultimately assist them in making more informed and

profitable trading decisions.

Which is right for me?

Technical analysis is designed more for short-term trading. This is because the course

corrections it looks for can happen within days, if not hours. However, it is also used for

guidance on general long-term upward and downward trends.

The main mistake that you could make when they are starting out is relying too heavily

on technical methods. Even TA’s biggest fans acknowledge that it’s unlikely that you will

be successful using it in isolation. You need other information and context. Equally,

fundamental analysis isn't perfect either and will often reflect what a security should be

worth, as opposed to what what its actual market price is.

Most traders aim for a contextualised and balanced use of fundamental analysis and

technical analysis, in a nuanced analytical process which also takes into account

fundamentals, as well as other information such as order flow info and Smart Money
participation. Ultimately, it's down to you to figure out what this looks like. This process

will be dictated by your personal circumstances and will often be trial and error. If you

do decide to take up trading, make sure to be cautious during this phase and never

invest more money than you can afford to lose. One fact remains true for any trading

strategy: the usefulness a method of analysis has depends on how you use it. Do your

own research and rely on information from trustworthy sources. In the world of digital

currency, knowledge is power, so the more you know, the more successful you will be.

Keep reading...
 

Top crypto trends to watch out for in 2020

Bitcoin halvings through history

A beginner's guide to crypto trading strategies

Hot topics

Start your crypto journey

AUTHOR

Team Luno
On our way to the moon, we write about all things crypto. And don’t forget we’re
humans too. Our blog conveys the views of Luno and the many unique opinions and
characters within our team. We’ll never provide you with financial advice, and we urge
you to conduct your own research before purchasing or trading any cryptocurrencies.
It’s a brave new world out there, and the market can be volatile at times, so never trade
with funds you can’t afford to lose. Want to let us know how much you love our blog?
Tweet us @LunoGlobal.

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