Learn all the specifics in How To Analyse Cryptocurrencies with the Defensive Trading course in Advanced Analysis of Cryptocurrencies
Your capital is at risk. Other fees apply.
How To Analyse Cryptocurrencies
How To Analyse Cryptocurrencies
The below section forms part 2 of the Defensive Trading course in how to Trade and Invest in Cryptocurrencies and Cryptoassets. We will begin by looking at the various forms of analysis and then delve into the specifics of Fundamental and Technical Analysis.
Forms of Analysis
As with all forms of assets, there are two forms of analysing the price movements in the market. These are known as Fundamental and Technical Analysis. This will form the basis of this section of the course in Cryptocurrencies How To Analyse Cryptocurrencies.
This is the analysis of the market based on ‘real word’ factors that are affecting the Cyptoasset class, or a specific Cryptocurrency.Fundamental analysis takes real events and interprets them in such as way that you can determine the immediate, or future, likely effects on the price of that asset.
It can thus be traded in accordance with this interpretation of price movement.If there is a piece of information that is announced to be released, and the market has a fair idea of what the release is going to say, the information will tend to be ‘priced in’ in advance.
In Fundamental Analysis, context it everything. It is the basis of forming market ‘Sentiment’ (see below).In order to keep track of all data releases, and therefore to understand the fundamentals, you will use a Crypto calendar.
Technical analysis is very visual and relies on charts as in the above image.
It is the analysis the historical price movements of a particular asset, in an attempt to be able to determine what the likely future movements of that asset will be.It is based on behaviour. In the same way that people all have their idiosyncratic tendencies, so to do financial assets with certain price levels.Technical analysists base their decisions on probabilities due to the known behavioural patterns of an asset.
Ironically, due to Technical Analysis being based on past behaviour, the predicted future behaviours tend to be self-fulfilling. This is because the Technical information that can be derived by analysing a chat will encourage traders to have their trades set up in similar ways, so that the demand of that asset at that price will push in the direction that trades had predicted it would move in.
One of the biggest questions in the Cryptocurrency world is how to find Coins. It is the dream of all di- hard Crypto traders and newbies alike, to find that ultimate coin that is going to go to the moon and make them millions overnight. That is of course not realistic but there is still a raft of ways to look at coins and use the information to determine what the likely future is.
Coin MarketCap https://coinmarketcap.com/
This is a similar idea to Market Cap in the Stocks which consists of multiplying the amount of outstanding stock shares by the current stock price. For Cryptocurrency assets, Market Cap is determined by taking the circulating supply of tokens and multiply it by the current price. For example, if a coin has 100 tokens outstanding and is trading for $10 a coin, it has a market cap of $1000.
As you can tell, this figure is highly variable.The goal when using this resource is to try to find coins that have a low Market Cap. Again, with time, this has evolved to mean different things. Once upon a time a Currency with a Market Cap below $250K was considered low, however, now days anything below $1M is considered low.
The next thing that is required is to find the coins within that Market Cap range that have a moderate level of trading volume. It is important to note that very little to no trading volume is not desirable, as in this instance, there is a risk that the coin is actually a ‘dead coin’ and is a project that has been dumped.
The last thing that is important to check is the circulating supply to total supply ratio. If there is already a significant difference between the two, this could be due to a ‘premine’ which is a possible red flag of a scam project.In addition, you can search by recently added coins. This is not necessarily the fastest way to find new coins, but if you are checking it regularly, you will still be able to find coins to check out much more quickly than the majority.
Despite the naysayers, one of the best places to pick up on chatter about emerging Cryptocurrencies is on Social Media. When you stop to consider that the generation that brought us and proliferated Cryptocurrencies are the social media generation, it makes more sense. If this is a methodology that you are able to apply yourself to, then start by the following platforms:
The trick here is to follow accounts of people who know what they are talking about, but not such a big following that the coins that they are talking about have already attracted large investor interest. One of the key things about this approach to finding coins is that you need to take a methodical approach to the content on the platform and not let it remain pure entertainment and interest as it is for the vast majority of users.
BitCoin Talk https://bitcointalk.org/
This is one of the original and the best forums to follow the chatter on the latest info and releases regarding Cryptocurrencies. Often Currencies that are seeking to gain traction will self-promote on forums to find investors.
Telegram is described as Telegram …a cloud-based mobile and desktop messaging app with a focus on security and speed and is used widely by the crypto community due to its encrypted messages and followable ‘profiles’ as with other social platforms.
There are many Exchanges to choose from but the most prominent are:
Binance Bittrex KuCoin
The benefit of finding coins on a major exchange is that they have gone through a lot of the checks and balances that are involved with progressing through the smaller exchanges to make it to the larger ones.
Conversely, if you are looking for virtually unknown Cryptocurrencies to invest in, then you are probably better looking for Cryptocurrencies that are listed on the smaller exchanges as they would provide greater opportunity for price increase, however, the risks would be also be greater.
Coinmarketcal.com (https://coinmarketcal.com/en/) and Coin Telegraph (https://cointelegraph.com/)
Coinmarketcal is a site that offers a Crypto events calendar which works much in the same way as an Economic Calendar or a calendar of Earnings Releases during Earning Season in the stock market. It is a good way of keeping up with the upcoming sources of potential market moving events or releases that are likely to move a Cryptocurrency. You can also follow Coin Telegraph.
Is a reliable source for Crypto news and includes an invaluable ICO calendar. (see Strategy) They can be used for the following:
This would usually be any additional capabilities being announced to an existing Coin or a new coin release altogether.Token burn: A ‘token burn’ is performed by a Cryptocurrency when they purposefully seek to reduce the supply of that currency in the market by destroying of a certain amount of their tokens (or coins) in order to reduce their number in circulation and therefore increase the value of those remaining.
In Cryptocurrencies, a white paper release is a kind of press release and is done in order to explain the purpose of the project and the technology behind it. A white paper is written by the founders and/or developers of a Cryptocurrency in order to publicise and potentially to sell the currency. They are predominantly comprised of factual information along with diagrams, statistics, and quotes that help support the mission of the project.
As with analysing a stock in the stock market, there are several key areas that you need to look at in detail before you should consider investing in or trading a Cryptocurrency. These are the following areas:
In Cryptocurrencies, the team correlates to the Management of a company. After all, people are the backbone of the project, such that, if the team is right, it can overcome many other shortcomings that the project might be facing. The reverse it also true, if the concept of the Coin is amazing and the product seems to be working perfectly this can all go awry if the team are too inexperienced to manage the Cryptocurrency as it grows.
A fabulous example of a well put together team comes from the Facebook Currency launch Libra. The idea was actually born by Facebook exec. David Marcus whose previous job was as the president of PayPal. In addition, the vice president of product is Kevin Weil who is the former product chief of both Twitter and Instagram. Not bad.
With the team overall, the positions that you need to look at most closely are the ones that are in leadership roles, (CEO, CFO etc.) and assess how much transferrable or industry specific experience they have and the duration of that experience.
The second thing that should stand out to you in the team should be the people on the technical build side. If the project doesn’t have a in house development team who are capable of creating the project from scratch, then they are in for a hiccup in the future.
Running alongside the Team behind a project has to be the actual project concept itself. One of the key areas that you need to look for is the use of the blockchain technology within the project. Understandably, the hype around the Crypto-sphere coupled with a broad lack of understanding of the underlying technology, many projects can simply add the idea of using blockchain to their design idea in order to promote it in the market place, when in reality there is no necessity for blockchain to be used for the project at all.
An example of this is that the incorporation of the word ‘blockchain’ into company names has been seen to make the share price of those companies jump, with one British company On-Line Plc seeing their share price shoot up 394% in one day after they added the word to their name making it, On-Line Blockchain Plc, though there was literally no material change to the business or its financials.
Further to this, you need to think about what the technology is trying to achieve, what the possible future uses are of this project, and importantly how much competition there already is in that space of Crypto.
Believe it or not, many Cryptocurrencies that have ICO’d and generated significant amounts of cash actually don’t do anything. It seems self-explanatory, however, one of the key areas that should be looked at most closely is the progress that has been made in the development side of the project. Having a track record if growth and development is a key way of being able to split the projects with real growth prospects apart from the ones that are foundered in marketing and hype.
In this respect, in order to make sure that you are watching the development you can look closely at areas like the code that has been released on GitHub (https://github.com/) and the prototype, alpha or beta versions of the project that were released. It is through the assessment of the work done in these areas that you can confirm that there is actually a team behind the brand and that they are actively seeking to develop and implement the Cryptocurrency.
In Cryptocurrency as in the stock market, when approaching an asset to invest in it is important to look at more than simply the price. You need to become familiar breaking down what goes into making the price and decide if the market has got it right. It is true across all asset classes ranging from forex to the art industry that if the price is, in your opinion, not inline with the fundamentals, you have identified an opportunity to make some money.
Luckily, in finance, this can also mean trading against an asset by shorting something that you believe is unjustifiably high or overpriced. When looking at a Cryptocurrency, in addition to the above factors, you must pay close attention to the price, the market cap and the supply. These three together will provide a picture.
Because Market Cap is derived by circulating supply x price we can understand that this figure can be altered by changes in either of those two areas. Price is obvious, however, supply can also be a player. As with stocks, from time to time a company will issue more shares in an attempt to generate more capital.
The same can be said of Cryptocurrencies. From time to time, a currency might release previously unreleased coins to the market which will them reduce the overall market cap at that price. In a crude sense, a lower market cap roughly equates to higher returns on investment, but it also comes along with higher risks as well. As we detailed previously, smaller projects are more susceptible to manipulation or failure.Price: Based the above, looking solely at price is only looking at part of the picture.
The important thing that you need to look at is the correlation between price and market cap. If you consider that a $0.01 coin with 10,000,000,000 supply would have a $100,000,000 market cap, vs a coin with a $1.00 coin with only 1000 supply which would have a $1000.00 market cap. In this instance, the coin with the higher price is actually a better value coin.Supply: Supply in Cryptocurrency can actually be further broken down into Circulating Supply and Total Supply.
It is Circulating Supply that is used to calculate Market Cap, and it is a representation of the current amount of coins in the tradable space. Conversely, the Total Supply is the total amount of coins that are ever able to exist for that Cryptocurrency. For example, Bitcoin currency has a Circulating supply of 17,812,912 BTC vs a maximum Total Supply of 21,000,000 BTC.
Building on the points raised by the section on psychology discussed previously, it is always important to consider the context of where a Cryptocurrency is sitting within a broader view of the industry overall. As many may recall, there have already been short term bull and bear markets within Cryptocurrencies, most notably within Bitcoin. Recalling the comparison charts shown previously highlighting the similarities between both Gold and the NASDAQ we can already see that there have been cycles within the fledgling Cryptocurrency market.
Incorporating this top-down approach to fundamental analysis is very important as if the overall market is bearish on an asset class, it is not well advised to try to go against the tide. You may still hold bullish fundamental views on specific assets in the industry, but the timing may not be right to buy until you start to see material evidence of a change in sentiment overall, at which time you will be well positioned to get in early and ride the recovery.
Price Action, also known as ‘Naked Trading’ depends only on the price movements of an asset as seen on the chart.
It focuses on the historical data and does away with fundamental analysis and technical indicators, however, it is a form of technical analysis. They focus on things like trend lines, price bands, high and low swings, technical levels of support, resistance and consolidation.
They will use things like simple price bars, price bands, break-outs, trend-lines, or complex combinations involving candlesticks, volatility, channels.Because of the interpretive nature of naked trading, no two traders will trade price action in the same way.Let’s take a more detailed look into this style of trading:
Support and Resistance Zones
Support and resistance zones are the naked traders most valued form of analysis.Zones are slightly different to support and resistance lines because they are not a particular price point, but an area, and therefore shouldn’t need to be adjusted.
They are significant because they have been tested and tested over time and have a historical tendency to cause a reversal of the trend and thus become better with time.These zones can seem to be a little bit tricky for people to find who are new to trading, so there are a few tips to help with that:
Use a high timeframe, do weekly, daily charts.Using a line chart, instead of a candlestick chart as a line chart will show the closing price.Don’t focus on minor areas.
Trendlines are essentially the same as support and resistance levels, however, they are continuous and on a diagonal trajectory.It is generally accepted that three touches on a line are required to confirm the trend, however, two touches is the minimum to establish the trend.The more times the trend line is tested, the stronger the trend becomes.
- Uptrend – when the price is consistently displaying higher highs and higher lows.
- Downtrend – when the price is consistently displaying lower highs and lower lows.Consolidation – when the market is moving in a set range, neither making higher highs nor higher lows.
Channels area very similar to trend lines, however, they are a set of two lines which run exactly parallel to each other offering support and resistance to a trending asset.
As with trend lines, there are three kinds of channels:
- Ascending Channel – when the price is consistently displaying higher highs and higher lows in a parallel range.
- Descending Channel – when the price is consistently displaying lower highs and lower lows in a parallel range.
- Horizontal Channel when the market is moving in a set range, neither making higher highs nor higher lows in a parallel range.
Candlestick and Chart Patterns
Chart patterns can be broken down into a few categories. There are candlestick patterns, which focuses on the intentions of the market based on one or tree candle sticks.
There are also more comprehensive Chart Patterns which look a much larger periods of time of an asset.Both pattern types are interpreted as being potential signals of one of three future movements of an asset; reversal, continuation or bilateral.
|Spinning top||Indecision, possible reversal.|
|Marubozu||Either very bullish or very bearish depending on direction.|
|Doji||Sign of indecision, (only really significant when by a Marubozu as it indication that the buyers/ sellers are becoming exhausted).|
|Hammer||Bullish, potential reversal.|
|Hanging Man||Bearish, potential reversal.|
|Inverted Hammer||Bullish, possible reversal.|
|Shooting Star||Bearish, possible reversal.|
|Engulfing Candle||Either bullish or bearish depending on the direction. It is actually a two candle stick pattern as it depends on the previous candle being completely engulfed by the ensuing one, however, in the opposite direction, signifying a potential change in direction.|
|Tweezer bottoms / tops||This is another combination pattern that is made up of two candlesticks. It is actually a hammer and hanging man combination, or, an inverted hammer and shooting star combination. It is seen as being an indication that a reversal may soon occur.|
|Evening and Morning Stars||These are triple candlestick patterns that can indicate the end of a trend and a potential reversal.|
|Three White Soldiers and Black Crows||Three candlestick pattern, reversal confirming.|
|Three Inside and Down||This is also a three candlestick pattern, end of a trend and reversal confirmation pattern.|
|Three Inside and Up||This is also a three candlestick pattern, end of a trend and reversal confirmation pattern.|
|Double Top||Bearish. Indication of reversal. Comprised of two touches at a resistance point that cannot be broken by the buying power. Generally appears after a strong upward move or trend.|
|Double Bottom||Bullish. Indication of a reversal. As with the double top, it comprised of two touches but this time at a support level. The sellers cannot break below. Generally appears after a downtrend or strong downward move.|
|Head and Shoulders||Bearish reversal pattern. Comes after a uptrend. Made up of three peaks, with the central peak being higher than the other two. Most reliable when the angle of the neckline is sloping downwards, meaning that the last low is lower than the first and second lows.|
|Inverse Head and Shoulders||Bullish reversal pattern. The opposite of the above head and shoulders pattern. The central trough is lower than the outer two. Comes after a downtrend.|
|Rising Wedge||Bearish. It can be an indication of a reversal or continuation of a trend depending on the preceding trend. The key with a wedge is that it is a form of consolidation. It is different from a channel because the trajectories that the lines are tracking are not parallel, but converging.|
|Falling Wedge||The same but opposite to a rising wedge. Bullish. It can be an indication of a reversal or continuation depending on the preceding trend.|
|Rectangles||Can be bearish or bullish. A ranging market. A period of consolidation before a continuation. Essentially a horizonal channel where the asset is caged in by certain support and resistance points.|
|Pennants||Trend continuation indication. Can be bullish or bearish depending on the preceding trend direction. It is a short period of consolidation before a continuation.|
|Symmetrical Triangles||Bilateral chart formation. It is a period of consolidation and is characterised by lower highs and higher lows. It is an indication that the price is preparing to make a break.|
|Ascending Triangle||As above, is a period of consolidation and will have either horizontal support or resistance. It is an indication that the price is preparing to make a break, however, that could be in either direction.|
|Descending Triangle||As above, comes after a period of consolidation and will have either horizontal support or resistance. It is an indication that the price is preparing to make a break, however, that could be in either direction.|
Two kinds of indicators, leading and lagging. As the names would indicate a leading indicator gives a signal before the new trend occurs, and conversely, the lagging indicator provides a later signal after the trend has started. Each has positives and negatives, one is delayed (lagging) but the other will give ‘fake’ indications (leading).
Generally speaking, leading indicators are oscillators and lagging indicators are trend following or momentum indicators.
|Simple Moving average||Trend indicator as a line chart.||Moving averages are a way of using a line chart to view the average of the closing price for a set period, on a continuous basis. The larger the period included, the less responsive the indicator becomes. They can also offer dynamic support and resistance lines.||They smooth out the price so that you can see a clear indication of direction.||As they as based past data and therefore their response is delayed.|
|Exponential Moving Average||Trend indicator as a line chart.||Unlike SMAs, EPAs smooth out any one-time spikes caused by a price surge from a news release or similar event. This is because they weight the most recent periods where SMAs will give each time period equal weight.||EMAs can cause ‘fake’ indications as they can be too responsive.|
|Bollinger Bands||Volatility measure. Appears as line charts.||Calculated price and volatility over a set period of time inclusive of standard deviations. They represent a maximum and minimum moving average. The more volatility the wider the bands are apart (said to be loud or quiet). Can be used to trade the ‘Bollinger Bounce’.||They are simple, reliable and don’t dazzle the eye too much to detract from the underlying charts movements.||Only a small piece of the puzzle, while knowing and understanding volumes is very helpful, you cannot rely on it alone.|
|Moving Average Convergence Divergence (MACD)||Momentum indicator in a trend. Line chart and histogram.||Made up of 3 measures, a fast moving average, a slower moving average and the difference between the two displayed as a histogram. Normally, 12, 26 and 9,||Only gives signal once the trend has been established.||Can be delayed. Not standard issue on Trade, please see accompanying download for this chapter.|
|Parabolic SAR (stop and reversal)||Oscillator signals the end of a trend or a reversal.||They indicate an exit point for a currently running trade.||Very easy to understand and use.||As with many other indicators, it us best used in a trending market otherwise it can just give ‘fake’ indications.|
|Stochastic||Oscillator indicator used to signal the end of a trend. It is a line chart||Measures if an asset is overbought or oversold. Made up of a faster and slower measure. Gives a reading in the range between 0 to 100, with over 80 being considered overbought territory, and under 20 being considered oversold territory.||Creates a condition called divergence, which is a trade set up.||Markets can linger in overbought or oversold territory for extended periods, during which time the price can continue to extend further in that direction.|
|Relative Strength Index (RSI)||Oscillator to signal the end of a trend. Displayed as a line chart.||Similar to a stochastic, identifies overbought and oversold territory of an asset. However, while it also ranges from 0 to 100, distinctly, it uses levels of 70 and 30 to indicate overbought or oversold territory.||As above||As above|
|Ichimoku Kinko Hyo||Estimates future price momentum and approximates future support and resistance areas.||Made up of 4 key measures. Kijun Sen; Represented by the blue line, highest high and lowest low for 26 periods. Tenkan Sen: represented by the red line, highest high and lowest low for 9 periods. Chikou Span: represented by the green line, closing price 26 periods behind. Senkou Span: Orange clouds, are the forecast elements that are calculated by averaging the first and second elements and the highest high and lowest low for 52 periods, forecasted 26 periods in advance.||As with other moving average indicators, the points of crossing are trading opportunities as well as providing dynamic support and resistance lines.||Due to the complexity and volume of information displayed over one single chart, it can appear confusing and then be excessive and off-putting.|
At this stage, the most likely combination of indicators to use when trading Cryptocurrencies are:
- Moving Averages (MA)
- Moving Average Convergence Divergence (MACD), and
- Relative Strength Index (RSI)
This is because the volatile nature of the assets, these indicators are most likely to respond to the market movements quickly, which will allow the trader to be able to take advantage of the rapid and often extreme price movements in this class.
Your capital is at risk. Other fees apply.