While Bitcoin is an alternative asset, an innovative approach to finance, the market is ultimately driven similarly to other financial markets, where the price of the asset is moved according to supply and demand. Using tools to conduct a market analysis, like you might use to analyse the traditional market, is a great way to get to grips with the industry and make the best decisions of when and how much Bitcoin to buy and trade,
Technical Analysis
Technical analysis is used to examine its price trends and determine potential buy or sell signals. Common tools to conduct a technical analysis are:
Chart Patterns
Chart patterns give insight into the trend of Bitcoin price as the movements are plotted over time and can be used to see historic trends.
Relative Strength Index
The RSI is a momentum oscillator that measures the strength of a price trend. It compares the magnitude of recent gains to recent losses to determine if an asset is overbought or oversold.
Bollinger Bands
Bollinger Bands are plotted two standard deviations away from a simple moving average and provide a range for the asset’s price movements. They can help traders identify trends and potential market reversals.
Trend Lines
Trend lines connect a series of highs or lows to show the direction of the trend of the asset. They can help traders identify entry and exit points and also provide information on potential support and resistance levels.
Moving Averages
This indicator is calculated by taking the average closing price over a specified number of days. This can help traders identify trends and make informed decisions about when to buy and sell.
Fundamental Analysis
Conducting a fundamental analysis helps to evaluate Bitcoin’s inherent value as the market sees it. This takes into consideration different factors such as macroeconomic events, news and announcements and general and overall sentiment of users in the market.
Macroeconomic Events
The state of the global, macro-market has an impact on the price of all assets, including Bitcoin. As the value of fiat currency decreases, demand for Bitcoin as a hedge against inflation may increase, leading to an increase in its price.
Market News and Updates
Changes that occur in the industry can shift the price of Bitcoin. This can be an update to a project, such as a Bitcoin fork, regulatory updates, or security issues linked to exchanges, such as the crash of FTX.
Market Sentiment
The overall attitude, emotions, and opinions of people in the industry can play a major part in the performance of Bitcoin. Market sentiment represents the general feeling of the market and can drive the demand for an asset and influence its price. When sentiment is positive, investors tend to buy more, pushing the price up, and when sentiment is negative, investors tend to sell more, pushing the price down.
Market sentiment can be influenced by various events such as:
Regulatory Developments
Changes in national regulations can have a massive impact on the sentiment. Positive developments such as increased legal recognition and adoption can boost sentiment and drive up demand. Negative developments such as stricter regulations can lead to lower demand and a drop in price. For example, when China banned Bitcoin, it took a major toll on the market at the time.
Adoption by Mainstream Businesses and Financial Firms
When large corporations adopt or invest in Bitcoin, it can increase market sentiment and drive up demand. People learn to trust Bitcoin more when leading institutions see value in the crypto market and more people who might have been sitting on the fence if investing will be influenced to buy.
News Bias and Media Coverage
Media coverage and news about Bitcoin can impact the sentiment and perception of Bitcoin and the crypto market. Positive news can boost sentiment and drive up demand, while negative news can reduce sentiment and scare investors that might have been considering buying Bitcoin.
The way financial moguls talk about Bitcoin can also have an effect on the market as people tend to trust the opinions of those in the financial industry.
There are different ways to measure the market sentiment of Bitcoin. Staying updated with news, both in the crypto space and the overall financial market helps to navigate how people are feeling about the cryptocurrency and whether market sentiment is good or if people are uncertain about investing. Using a metric like the Fear and Greed Index is also a good way to stay in touch with the sentiment of the market.
Why Is It Important To Conduct Market Analysis?
Conducting a market analysis is important to understand the behaviour and potential trends of the market. By analysing the market and finding patterns, you can make the most informed decisions about when to buy, sell, or trade Bitcoin. Ultimately, a market analysis provides you with the knowledge and tools needed to navigate the complex and rapidly changing world of cryptocurrency.
