Cryptocurrency has been rising in popularity over the past few months especially with the Dogecoin storm and Bitcoin plunge. It has been traded in large volumes ever since. Cryptocurrency works on blockchain technology and is independent of any governing authority. Many people have started investing now in cryptocurrency, so everyone wants to know about the trends that cryptocurrency values follow. We see graphs, predictions and so many other crypto-related statistics. Are they actually accurate?
How is a technical analysis done for cryptocurrency?
Technical analysis of cryptocurrency is where statistical and real-world data is used to predict how a cryptocurrency will fare in the market. Certain aspects of the cryptocurrency like volume, nodes, movement, and all will be considered. The main input would be the basic cryptocurrency value and algorithms predicting its value considering all the factors would give you an assumed value. This is how it is done even for stocks, currencies, futures, and commodities. It is a basic predictory technique to give an idea of what the future value of the cryptocurrency would be. For Bitcoin, go URL for a more detailed explanation
Now, the basis of technical analysis is said to be the Dow Theory. This theory says the current pricing of any cryptocurrency or stocks is always based on factors like current value, past values, regulations, trader demand and supply, knowledge, popularity, and other statistics. Including this while constructing algorithms to predict will give you a near-perfect assessment of the performance of the cryptocurrency. There are two types of technical analysis too: long-term technical analysis and short-term analysis. Analyzing these trends gives insights to traders on whether to convert crypto to fiat or buy more crypto. There are various ways by which this is represented.
Candlestick charts also exist where there are bars on the graphs that look like candlesticks. The top represents the opening prices and the bottom represents the closing prices. If the candlestick is green in color, it is positive and depicts that the value is rising. Red indicates negative and that the crypto’s prices have fallen. The wick-like lines indicate the volatility. A large line as the wick shows that the prices have varied considerably. A short wick shows stability and indicates a bearish market.
Trendlines also are widely used and are easier to read. We know the basic ups and downs, but trends can even go sideways now, where the value doesn’t change much but circulation does. The software for technical analysis incorporates all this to give you an accurate prediction and summary of what the crypto is undergoing now. Resistance and support are also important factors here. Support is when demand is less and prices are less, thus crypto would be at high value later. Resistance is when there is heavy supply with no demand and this is because the prices would be really high. Buying at the support line and selling at the resistance line is when you can get high returns.
How does all this help?
All this leads to a perfect calculation of market caps and relative strength index (RSI). Traders often consider this when purchasing crypto. They even look at the moving averages to understand the predicted values. There are various types of moving averages too, like exponential moving averages which tell you the value in x number of days that you want to find out. This helps you predict the returns you may get. You can input any time frame and get an approximation of how your crypto would fare.
Does this analysis work accurately?
Well, no predictions are 100% accurate ever. The future is ever-changing and the factors that determine the cryptocurrency value are not concrete. Markets can shake either due to some controversy, like remember how Bitcoin took a deep plunge because Tesla stopped considering it in their payments anymore? That’s something not determined by fixed factors. Such a turn of events can not be predicted by technical analysis. However, such incidents are rare. There are cryptos that often don’t have much controversy around them. For those, technical analysis helps traders understand when to buy or sell. It is important, but they also maintain that it shouldn’t be solely relied upon for making decisions. This is because of the following reasons:
There are theoretical models
These predictions are completely based on mathematically derived functions that are continuous. The predictions made would always have some degree of probability. Many analysts themselves have said that the mathematical basis of the model itself says that a reliable prediction cannot be made. Hence, it is not wise to completely be reliant on technical analysis.
Controversies and issues cannot be quantized
Now, when a controversy arises about a particular cryptocurrency, this cannot be analyzed accurately. No one can predict when the prices will return to normal or when the plunge will stop. The Bitcoin issue completely was out of people’s hands and despite the prices coming back up, the losses incurred were huge. This falls out of the technical analysis domain.
What should be done?
Traders often recommend combining technical analysis with other methods. Current events, the performance of major cryptocurrency holders, legislations of the countries it is being traded in large volumes in, etc. matter a lot. Being updated with all those factors also matters. This would give you a better prediction of cryptocurrency performance. Combining this with technical analysis can make you effectively predict the cryptocurrency’s value in the future.
Cryptocurrency can seem tricky, and finding out technical analysis is not 100% reliable may freak you out. However, cryptocurrency is not as volatile as stocks, so even if you see a plunge, there are factors that may help it to regain old prices. The past performance analysis of a crypto’s performance can give insights into its future performance. Technical analysis will help you in deciding when to sell or buy as near-perfect computer algorithms are at work here. So, while it is not 100% accurate, it is very important to see the trends and predictions to get an approximation of how your cryptocurrency will perform in the markets.