An essential step in trading efficiently in the crypto market is being familiar with the common types of cryptocurrency analysis. The CEO of a large crypto hedge fund, Su Zhu, believes, “If you don’t understand crypto and refuse to learn, it’s gonna be a tough century for you.”
Investing in cryptocurrency is risky and volatile, and while there is the risk of losing, many believe that crypto is the way to the future. Therefore, as you analyze any crypto asset, think of the market as a stock exchange and apply any methods of crypto analysis that will provide you with the proper understanding of future trends and activities.
Let’s discuss the common types of cryptocurrency analysis. Fundamental, technical, on-chain analysis, and sentimental analysis.
Fundamental Analysis
As the most common crypto analysis option, fundamental analysis focuses on all the information available on cryptocurrency. Using quantitative financial metrics and qualitative measures, it strives to conclude with an intrinsic price of the cryptocurrency. Once the fundamental value is determined, you can compare it to the current market price and determine whether the crypto asset is undervalued or overvalued.
An undervalued asset represents the trader with a buying opportunity, whereas an overvalued asset can mean its time to take profits.
Technical Analysis
Technical Analysis is the following well-known option for cryptocurrency analysis. This form of crypto analysis looks at previous price movements in the crypto market. It concludes with results on which direction the market is going next.
Each event’s likelihood is calculated using various statistical indicators and trends. Even though they utilize statistical measurements, traders primarily rely on visual charts to help them recognize necessary signals like support and resistance. Technical analysis is ultimately used to identify buy and sell signals.
Of course, no form of analysis is 100% full proof. Therefore, even if a trader is correct 55% of the time, that is already a success. Traders often use risk management practices to prevent losses and manage risks when these forms of analysis contradict their predictions. Such as the option of setting auto sales as well as choosing to portion off their assets on a trade.
On Chain Analysis
This analysis differs from the previous two because it looks at public data in the blockchain network. The most common use for on-chain analysis is identifying the reason behind market participants and why they are buying or selling. When using this analysis, traders examine the differences between market users and their behavior. Whether institutional investors, miners, or retail traders, some of the standard signals they use to identify this are wallet balances, coin dormancy, or transaction volume.
Sentimental Analysis
An additional approach is known as Sentimental Analysis which pertains to stock investing. This method requires a lot of caution and pertains to crypto exchanges. Sentimental analysis requires you to look past the numbers to see what certain market players think and feel. These players can be journalists, investors, influencers, economists, or hedge fund managers.
The caution with this analysis is that the data doesn’t always indicate what’s going on in the market.
If you notice a significant increase in trust (or a decrease), it may indicate that rapid growth or drop is imminent and that the market hasn’t yet reacted.
A Combination
While each method of is to be used alone, combining them makes for a powerful crypto analysis. A single metric by itself might not be helpful. But by combining all of your analysis techniques, you can create a captivating market image.
Of course, not all three must align for your trade to go through. You can enter and exit positions as the market shifts by maintaining your risk management procedures and making the proper allocations.
As often thought, a cryptocurrency exchange is not the same as a stock market exchange. Although there is undoubtedly more upside, there is also a severe downside due to the increased volatility. You can improve your chances of success by using technical, fundamental, sentimental, and on-chain analysis when trading.
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