Like most financial instruments, cryptocurrencies usually experience ups and downs, and as an investor you should be able to predict when movement comes in the market, so you can prepare your portfolio and adjust your strategies. But is there a way to tell when crypto prices are about to change?
Well, there is. But first it’s best to discuss what cryptocurrency is. Cryptocurrencies are decentralized, encrypted units of exchange which differ from fiat currencies in that they’re not controlled by central authorities. Crypto transactions are backed up by blockchain technology, hence they are publicly visible on a decentralized ledger for all users to check. Digital currencies have been developed as alternatives to payment systems and traditional banks. However, investors also see them as ideal opportunities to build and increase their wealth and complete peer-to-peer transactions without dealing with traditional financial rails.
Since the first cryptocurrency (Bitcoin) was launched, it was pretty clear for everyone that digital assets are some kind of wild “animal” in the financial sector because they are highly volatile. So you need some tools to analyze the market, and try to predict its direction.
Analyze the market
One of the first things you have to learn when joining the crypto sector is learning how to read graphs because they tell the story of assets, how they perform, and how recent events impacted them. Additionally, some graphs provide you with information about what might happen in the near future. Analysis is crucial for your success because it enables you to make informed decisions and identify the ideal moments to buy, sell, and hold crypto. Here are the types of analysis you can use:
- Technical analysis that allows you to detect statistical trends according to historical activity. For this kind of analysis, you need to examine price movements and other essential indicators. Technical analysis promotes the idea that prices follow trends and history cycles repeat, so they can predict where the market is heading.
- Fundamental analysis is different because it doesn’t focus on the prices’ direction, but at the factors that impact the assets’ value. This analysis helps you remove emotion from the process and follows the idea that the market can overestimate or underestimate a cryptocurrency’s value, and at some point, it might be subjected to correction.
- Sentimental analysis allows you to check the pulse of key players in the sector like influencers, celebrities, journalists, and investors. It promotes the idea that the data might not always tell the story, but you can pick up trends like purchasing spree and panic selling based on the public’s expectations and perceptions.
Check the supply and demand
The secret to understanding how valuable a cryptocurrency is, is to understand its supply and demand. Digital currencies differ from fiat currencies because they’re not backed by government promises or physical assets. Their price is determined by supply and demand, so it’s essential for investors to learn how they function, so they can predict price changes. When there is high demand for a coin, its price will usually go up. Therefore, when a project unveils a new utility that could attract new users to the blockchain, its value might go up. When the supply is large, so there are too many coins available on the market, the cryptocurrency’s price is low. So, when a large number of coins becomes available to investors, the project’s value will most likely drop.
Identify the factors that influence crypto prices
A series of factors impact crypto prices, and if you want to make a forecast for how a project might fare in the future, you should understand how they work, so you can tell if the crypto will gain value.
Utility – when a project has utilities, it means it enables the users to complete particular actions within its ecosystem. Cryptocurrencies with utility usually drive demand because the coin is necessary for the users to access a platform, service or product. Ethereum is one of the cryptocurrencies with increased utility because it enables people to access decentralized applications and non-fungible tokens. But the users can gain access to these tools only if they pay with Ether, so there is a continuous demand for the coin.
Market sentiment – the general market sentiment has a partial impact on the demand for crypto because it reflects the overall attitude of investors towards the projects available on the market. When the market sentiment is positive the prices usually surge, and on the other hand, when the market sentiment is negative the market usually enters a bear stage. Let’s remember that Bitcoin had a cyclical high on April 14, 2021, on the same day that Coinbase became a publicly-traded stock. The market saw this event as a landmark moment in the sector’s history, and the demand for digital currencies increased.
Competition – similarly to any other good or service, competition also influences the demand for cryptocurrencies. Different blockchains offer different features and levels of security, scalability, cost-efficiency, and speed. It’s well known that Ethereum, Solana, and Avalanche are competitors when it comes to non-fungible tokens and decentralized apps. They also compete in terms of fees and transaction speeds.
Governance – Governance refers to the mechanisms each cryptocurrency uses to make changes to its blockchain. When the cryptocurrency features a reliable governance process, it guarantees adaptability, and the level of user trust is usually higher. For example, most crypto users remember the 2016 DAO Hack, when the ecosystem was breached and all coins were stolen. At the moment, it held 14% of the entire Ether tokens in circulation, so Eth holders required for the creation of a new fork of the blockchain to roll back the history of the blockchain and undo the hack.
Tokenomics – tokenomics refers to the way in which a project manages the supply of coins and encourages demand for the cryptocurrency. You need to understand a project’s tokenomics to make accurate predictions regarding its price, and how it might evolve over time.
The bottom line is that cryptocurrencies’ prices are usually determined by demand and supply, but other factors also have a degree of impact. So it’s essential to use all the information and tools at hand when you want to figure out where the prices are heading.
