Simplified Guide to Cryptocurrency Market Analysis & Tools

As a cryptocurrency trader or investor, you need to understand the market of any coin before you buy or invest in it. There are factors that affect the prices of all crypto coins generally. Also there are internal factors that affect individual cryptocurrencies. That is why it is always advisable to research, study and analyze the market of any coin before you invest in it, especially as a beginner.

Cryptocurrency Market Analysis (FA and TA) Guide

A proper market analysis will help you know the best time to buy the coin and the best time to sell it off. Although there is no way to predict with 100% accuracy, the price of any cryptocurrency, but proper market analysis will help you know the signs that indicate the approaching of loss or profit.

There are two main types of market analysis in stock market:

Fundamental Analysis (FA)
Technical Analysis (TA)

The knowledge of both types of analysis will help you predict with a higher level of accuracy, the market condition or price of a particular coin at a particular time.

FA and TA are summarized in the image below.

types of crypto market research analysis - fundamental analysis and technical analysis — Two types of crypto market research analysis – Source: masterthecrypto.com

Cryptocurrency Fundamental Analysis (FA)

Fundamental Analysis (FA) is a market analysis approach used by investors to estimate the intrinsic value of an asset. By looking at a number of internal and external factors, their main goal is to determine whether the said asset is overvalued or undervalued. This will help them whether it is worth investing in the asset. It is good to note that FA alone cannot help you to properly analyze any asset. It will only help you know the value of the asset and probably the growth rate if some factors act favorably, which might not always be the case. Once you have discovered a good asset with the help of FA, you also need to carry out Technical Analysis (TA) to know the best price to buy the asset and the best price to sell off the asset in order to maximize your profit.

The first step in FA is to discover the strong metrics that will help you estimate the true worth of the coin. Also note that there are many FA metrics, but most of them can be easily manipulated by the team behind the project. For example, numbers of Twitter followers or Telegram/Reddit users are probably not good FA metrics because it is easy to create fake accounts or buy engagement on social media.

We will classify these strong metrics into 3 categories: on-chain metrics, project metrics, and financial metrics.

1. On-Chain Metrics

On-chain metrics are those that can be observed by looking at data provided by the blockchain. The simplest way to study these metrics is to pull the information from websites or APIs specifically designed for the purpose of informing investment decisions. For example, websites like ConMarketCap and CoinMetrics have on-chain analysis for most of the popular coins like Bitcoin, Ethereum, etc.

Below are some of the key indicators under this category.

Transaction count: The number of transactions within a period of time. This is a good measure of activity taking place on a network.
Transaction value: Tells you the amount that has been transacted within a period of time.
Active addresses: The blockchain addresses that are active in a given period.
Fees paid: This can tell you about the demand for block space. If the fee increase with time, it means that users are competing with each other to have their transactions confirmed faster.
Hash rate and the Amount staked: In Proof of Work cryptocurrencies, hash rate is often used as a measure of network health. An increase in hash rate over time can also implies that there is a growing interest in mining. More miners are online to secure the network.
Also, if the amount staked is increasing with time, it implies that more investors are interested in the cryptocurrency project.

2. Project Metrics

Project metrics involve a qualitative approach which involves studying and evaluating the quality of the essential aspects of the project. This will help you know if the project has a promising future or not.

Some of the key indicators in this category include:

The whitepaper of the project: Whitepaper is a technical document that gives us an overview of the cryptocurrency project. A good whitepaper should reveal the code technology used, use cases it aims to cater to, roadmap for upgrades and new features, supply and distribution scheme for the cryptocurrency.
The project team: You also need to check it there is any team behind the project. Has the team previously handled any successful cryptocurrency project? If there is not team, check to make sure the develpopers are working consistently to improve the project. If the project has a public GitHub, check to see how many contributors it has, and how many future activities they have.
The main competitors of the project: Check their whitepaper to see if they revealed their main competitors. If they did, research about these competitors to know what they are up to. If the competitors have stronger teams, then there are possibilities that they may overshadow the cryptocurrency projects that have weak teams.
Tokenomics and initial distribution: If the project will create a token, check to know if the token has real utility. Will the wider market will recognize and value the token?
Also, focusing on the distribution might give you an idea of any existing risks. For instance, if the vast majority of the supply was owned by only a few parties, then you might conclude that it is a risky investment, because those parties could eventually manipulate the market.

3. Financial Metrics

Finance is the key aspect of any project. Here, you analyze the various metrics that directly or indirectly determines the financial state of the project at any given time. These metrics will help you know whether the rate at which your investment in the asset will add value. Other interesting metrics that might fall under this category are those that concern the economics and incentives of the crypto asset’s protocol.

Below are some of the key indicators under this category.

Market capitalization (network value): This reveals the hypothetical cost of buying every single available unit of the crypto asset (assuming no slippage). It is the product of the circulating supply of the crypto coin and the price at any point in time. Market capitalization can be misleading because it’s impossible to truly determine how many units are in circulation for a given cryptocurrency. Coins can be burned, keys can be lost, and funds can simply be forgotten about. What we see instead are approximations that attempt to filter out coins that are no longer in circulation.
Market capitalization is used extensively to estimate the growth potential of cryptocurrency networks. Some crypto investors say that small-cap coins have more growth potentials than “large-cap” coins. Others say that large-cap coins have stronger network effects. Therefore, they have greater growth potentials than unestablished small-cap coins.
Liquidity and Trading Volume: A liquid market is a competitive market flooded with asks and bids, leading to a tighter bid-ask spread. Liquidity is a measure of how easily an asset can be bought or sold. Being familiar with liquidity can help you carry out effective fundamental analysis, because it acts as an indicator of the market’s interest in a prospective investment.
Trading volume is an indicator that can help us determine liquidity. It is usually displayed in the exchange chart of any cryptocurrency.
Supply mechanisms: Maximum supply, circulating supply, and rate of inflation can affect the investment decisions of some investors. Some cryptocurrency project teams reduce the number of new units they produce over time, making them attractive to investors that believe the demand for new units will outstrip their availability.
Some investors see a rigidly-enforced cap as damaging in the long run. Their reason is that it disproportionately rewards early investors, whereas a steady inflationary policy would be fairer for newcomers.

Also know that some of these indicators mentioned above can be manipulated. For example, in the case of market cap of a coin. That is why you should not only use FA to analyze the market value of a coin.

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Real Life Application of Cryptocurrency Fundamental Analysis

The metrics to be considered in carrying out fundamental analysis of any coin have been discussed. Now, you also need to know how FA can be applied in real life.

Assuming you join a group where trade signals are released at random, in order to make sure that the coin you chose to trade has a high growth potential, you carry out FA. You can choose two to three coins and carry out FA on them individually, then compare their results to know the one that has the best real value and promising future.

In summary, FA can provide invaluable insights into cryptocurrencies in a way that technical analysis cannot. Being able to separate the market price from the “true” value of a network is an excellent skill to have when trading. Of course, there are things that TA can tell us, which you can’t predict with FA. That’s why many traders use a combination of both FA and TA these days. You can learn more about Crypto Fundamental analysis with this guide at Binance Academy.

Cryptocurrency Technical Analysis (TA)

Technical analysis is the study of statistical trends, collected from historical price and volume data, to identify opportunities for trade. Technical analysts observe patterns of price movements, trading signal and other analytical tools to evaluate the strength and weakness of an asset. Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends to determine future price movements.

Traders use technical indicators to gain additional insight into the price action of an asset. These indicators make it easier to identify patterns and spot buy or sell signals in the current market environment. There are many different types of indicators, and they are widely used by day traders, swing traders, and sometimes even longer-term investors.

Important Technical Analysis Terms

When carrying out technical analysis, there are some inevitable terms. You need to understand these terms.

Market Trends

Market trends are the major market movement of an asset that determines its price and trading volume at any time. It is simply the perceived direction of price movements over a particular period. Market trends apply to all assets and all markets where there’s movement on prices or volumes bought and sold. Market trends are analyzed by comparing historical price movements against a current price.

The key tool in technical analysis for trend identification and confirmation is a trend line. A trend line is simply a straight line connecting two or more price points and extending into the future. There are two major types of trend lines: Uptrend lines and Downtrend lines.

An uptrend line has a positive slope and is formed by connecting two or more low points. At least three points must be connected before the line is considered a valid trend line. In order for a trend line to have a positive slope, the second point must be higher than the first. Uptrend lines indicate that net demand is increasing even as the price rises. A rising price combined with increasing demand is very bullish, and shows strong determination on the part of buyers.

technical analysis - uptrend line — Technical Analysis: Uptrend line

A downtrend line has a negative slope and is formed by connecting two or more high points. At least three points must be connected before the line is considered a valid trend line. In order for a trend line to have a negative slope, the second point must be lower than the first. Downtrend lines indicate that net supply is increasing even as the price falls. A declining price combined with increasing supply is very bearish, and shows the strong resolve of sellers.

technical analysis - downtrend line — Technical analysis: Downtrend line

According to the second tenets of Dow Theory, there are three phases of market trends:

Accumulation Phase: This is the period when ‘intelligent’ investors start buying or selling the asset against the general market opinion. During this phase of the market, the price of the asset doesn’t change much because these knowledgeable investors are in the minority.
Absorption (Public Participation) Phase: After some time, the market catches on to these ‘intelligent’ investors. And a result, they will no longer be in minority. A rapid price change takes place when trend followers and other technically oriented investors follow the trend. This continues until rampant speculation begins.
Distribution Phase: After huge speculation, because of the limited supply of the asset, the price begins to retrace as these ‘intelligent’ investors begin to distribute their holdings to the market. As a result of the bag dump, the price of the asset starts falling, alongside the volume. This is the final phase of Dow Theory.

Resistance and Support

Assets’ price movements are not linear; the price will face resistance as it goes up or support as it goes down. In technical analysis, support and resistance are predetermined levels of the price of an asset at which it tends to reverse its trend. These levels are denoted by multiple touches of price without a breakthrough of the level. Traders often buy at support and sell at resistance.

Resistance is a level where an uptrend can be expected to pause or rebound that indicates a concentration of sellers. When the resistance level is broken, it most time becomes a support level.

To illustrate how resistance works, let’s assume that buyers kept buying a crypto coin at a particular price range until the price of the coin goes above that price range. However, once it reaches, say $4,250, the sellers started dumping their bags. However, if the buyers have enough momentum to increase the price of the coin above $4,250, then the price will continue to rise until it reaches another resistance level. Upon the breach, the $4,250 resistance level now becomes support.

Support is a level where a downtrend can be expected to pause or rebound due to a concentration of buyers. When the support level is broken, it most time becomes a resistance level.

To illustrate how support works, the sellers (bears) started selling off their bags of a particular coin. As a result of the bag dump, the price of the coin went down. The moment the price comes down to a certain level, say $3,800 and buyers (bulls) start buying back the coin. This will of course bounce up the price of the off this level. If the sellers are carrying enough momentum and actually manage to drop the price of the coin below $3,800, the price will continue falling until it reaches another support level.

NOTE: In technical analysis, support is often used as an entry point and resistance as an exit point. In the case of strong trends, the price can go through support/resistance without stopping.

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Essential Technical Analysis Tools/Indicators

Indicators are the tools of choice for battle-tested technical analysts. Each technical analyst will choose tools that best fit their unique play style, to help them make realistic price predictions. Some like to look at market momentum, while others want to filter out market noise or measure volatility. It will be difficult to say that a particular indicator is the most important because what one analyst will swear to be the ultimate indicator another will dismiss completely. We will explain some of the popular and effective tools for TA.

These tools include:

Japanese Candlestick Charts
Moving Average Convergence Divergence (MACD)
Bollinger Bands (BB)

Japanese Candlestick Charts

Candlestick charting is based on a technique developed in Japan in the 1700s for tracking the price of rice. It has now become a suitable technique for trading any liquid financial asset, including cryptocurrencies. Candlestick can be studied individually (simple patterns) but more often used in groups (complex patterns). The purpose of Candlestick charting is to determine the market trend.

If you have even visited an exchange’s website, then there is a possibility that you have seen these charts.

The first thing you will notice is the red and green candlesticks lying one after another. Each candle shows you the price movement of the asset during a specific time interval. Along with the closing price, each candle shows the opening price, the lowest, and highest price of the given time-period as well as the closing price.

There are two types of candlesticks:

Green (or White) Candle: It is also called the Bullish candle. The close is above the opening.
Red (or Black) Candle: It is also called the Bearish candle. The close is below the opening.

Japanese candlesticks description — Japanese candlesticks

Every candle has a body and a couple of shadows that are sticking out of it. The body shows you the difference between the opening and closing price. The shadows show you how high or how low these opening and closing prices have gone respectively.

In a green candle, the upper shadow is the close price, while the lower shadow in the open price and vice-versa for red candlesticks.

These candlesticks clearly show you exactly where the market turned and help you identify different patterns which may help you predict how the market will act.

There are two reversal patterns on candlestick graphs:

Bullish Reversal Patterns: Here, the buyers or bulls close the market. This means that a green candle closes the market.
Bearish Reversal Patterns: Here, the sellers or bears close the market. This means that a red candle closes the market.

NOTE

When a technical analyst examines the price chart, along with the technical tools, they also need to be mindful of the time frames that they are considering. Popular time frames that traders most frequently study include: 15-minute chart, Hourly chart, 4-hour chart, daily chart (1-Day), etc.

The time-frame that a trader chooses is directly dependent on their personal trading-style. Short term traders study the hourly or the 15-minutes chart. While long term traders study the 4-hour, daily, or even weekly charts.

You can study more about how to read crypto charts with this guide at Binance Academy.

Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence (MACD) is a trend following indicator. The MACD is used to determine the momentum of an asset by showing the relationship between two moving averages. It is made up of two lines: the MACD line and the signal line.

The MACD lines displayed below can be interpreted as follows:

If the blue or purple line (MACD line) is above the orange or red line (Signal line), the momentum is bullish.
On the contrary, if the blue line is below the orange line, the momentum is bearish.
When the lines diverge, it denotes a strengthening of the current trend while a convergence shows a trend reversal.
When the lines cross, it is likely that the change in momentum is confirmed.

MACD - technical analysis indicator — MACD: TA indicator

By looking for divergences between the MACD and the price action, you might gain insight into the strength of the current trend. For example, if the price is making a higher high, while the MACD is making a lower high, the market may be reversing soon. What does this mean? It means that price is increasing while momentum is decreasing, so there is a higher probability of a pullback or reversal occurring.

Bollinger Bands (BB or BOLL)

Bollinger Bands display a graphical band (the envelope) with a simple moving average in the middle. The width of the envelope expresses the volatility.

Volatility refers to the rate at which the price of an asset can increase or decrease. As volatility increases and decreases, the distance between the bands increases and decreases as well.

Another important concept of Bollinger Bands is Squeeze, which refers to a period of low volatility, where all bands come very close to each other. This may be used as an indication of potential future volatility. On the other hand, if the bands are very far from each other, a period of decreased volatility may follow.

Bollinger Bands indicator — Bollinger Bands: TA indicator

There are other important TA indicators such as Relative Strength Index (RSI), Moving Average (MA), Stochastic RSI (StochRSI), etc. You can read more about these essential TA indicators with this guide at Binance Academy. Also check out this free complete technical analysis guide.

Best Free Websites/Tools for Crypto Market Research and News

If you must succeed in the cryptosphere, then you must stay updated and also carry out researches. To do these, you need to know the recommended cryptocurrency websites and tools that will help you in market research and analysis. You also need to know good crypto news sites to stay updated.

Some of the recommended Sites/Tools for Crypto Market Analysis include:

Some of the recommended Crypto News Sites include:

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Conclusion

You have learnt how to analyze any cryptocurrency using fundamental analysis (FA) and technical analysis (TA) before investing in it. You also learnt the various FA metrics and the real life applications of FA. We went further to explain the various TA indicators or tools and how to use them. Finally, we revealed the best recommended websites for crypto market analysis and news. Feel free to apply the tips revealed in this article in your crypto trading or investment journey.

If you have any contribution or question about crypto market analysis, kindly drop it in the comment section below. Enjoy!