Is it a good time to purchase Bitcoin or is it better to wait? What to expect from the Bitcoin price in a week, month, year? Is it worth trading Bitcoin or is it better to buy and forget about it for 5-10 years? These are some of the most popular questions Bitcoin investors have whether they are beginners or professionals.
Trying to find answers to these questions, people begin to collect information. They start asking others, along the way getting acquainted with the ideas of market analysts, sometimes they make their own analysis, diving into the latest market events, similar situations, and so on. It means people are analyzing the market situation all the time, sometimes even unconsciously. The only question is how much effort and knowledge they put into this analysis before taking any action.
Here’s what you need to know about Bitcoin analysis and its methods.
Market efficiency and how it affects Bitcoin price analysis
There are a lot of different opinions on where the price of Bitcoin “should” go, and sometimes those who make such predictions support their statements with certain arguments. But the market price does not always move according to these forecasts. And many may have a question — why then analyze and who to believe?
By itself, the Bitcoin market analysis is about assessing the past asset performance, the current market situation, as well as its future potential. This is done in order to find the right moment to enter the market, sell an asset for a better price, or choose a suitable strategy. The right approach in each case can give more chances to make successful investments in Bitcoin. Therefore, analysis is very important if you want to make a profit.
But analysis may also lead to the wrong track. If you ask why the analysis may not justify itself, the answer is quite simple — the market is efficient (most of the time). This means that the current market price reflects all available market information. If there is new information which is relevant to the asset being traded, this information tends to be included in the asset price rapidly.
The market does not wait for events to happen but anticipates them. For example, the next Bitcoin halving will take place in 2024. And this event will affect the price before the very moment of halving comes, as buyers and sellers will prepare for it in advance. If today unexpectedly some news comes out and it can change the status quo for Bitcoin, then the market will immediately react following future expectations from this news.
No one knows all the factors that affect the Bitcoin price at the moment and which will affect it in the future. If this was the case, then there would always be one “efficient analysis” and the price would move according to it. In reality, people predominantly take into account only a fraction of the available information, trying to isolate the main factors. And what part of the information to take and how to analyze it is everyone’s personal business.
Market efficiency should be considered when creating your own analysis. And several methods are already being used to make analysis efficient as well. Let’s consider the main ones.
The importance of fundamental analysis
The goal of fundamental analysis is to understand whether an asset is overvalued or undervalued. To do this, you first need to understand where cryptocurrencies generally get their value which requires a deep dive into the technical features of Bitcoin.
In the context of fundamental analysis, cryptocurrencies are unique assets that have no analogs in traditional financial markets. Here crypto-native indicators come to the fore, such as — network hash rate, mining difficulty, average number of transactions, number of active addresses, the average commission, and so on. And these are only the so-called on-chain metrics.
Fundamental analysis can also consider analyzing the success of the development team in fulfilling their plans and network support of these plans, trading volume and liquidity changes, regulations, and much more.
Fundamental analysis is important for evaluating the asset value, but it is also time-consuming and requires checking a lot of information. If we take only separate metrics and focus on them, then the fundamental analysis may be considered half-hearted and may not reflect the real situation. Such partial analysis may be not so useful to the investor and give dubious hints.
Is technical analysis for Bitcoin worth it?
If the main question in fundamental analysis is whether the current price is a reflection of the real asset value, then in technical analysis more attention is paid to price movements.
This type of analysis is based on the fact that price movement is not random. Instead, the price frequently follows certain trends that can be either short-term or long-term. Through technical analysis, professionals seek to identify trends and profit from them, using the same tools in the cryptocurrency market as in traditional markets.
Bitcoin technical analysis is often criticized as the cryptocurrency market is quite emotional and volatile. By itself, technical analysis is self-replicating. That is, the more market participants see a pattern and act according to it, the more likely it is that the pattern will be confirmed.
The crypto market is dominated by retail investors and they rarely focus on price patterns, making it less efficient. At the same time, the same price chart can be interpreted in different ways, relying on a different set of indicators and oscillators.
But do not underestimate technical analysis as it helps to gauge market sentiment. Besides, history tends to repeat itself and quite often people act in the same way in similar situations, including in the cryptocurrency market. Technical indicators can help determine whether to buy or sell an asset now, but the decision remains only with the investor. In turn, more and more institutional investors enter the Bitcoin market and it may increase the impact of technical analysis on the price.
The bottom line
The importance of the analysis depends on the approach the investor takes. If you plan to buy Bitcoin and forget about it for 5-10 years, then the technical analysis will hardly be interesting and important to you. Perhaps only when looking for a good entry point.
If you are an active trader or want to be one, then the best option is a combination of technical and fundamental analysis. This will increase the amount of information for analysis and help make trading more well-informed.
Analysis is not aimed at outplaying the market, but rather to understand why the price is moving in one direction or another and how justified it is. Monitoring the outcomes of certain events can help an investor in the future when similar situations arise.