Market analysis is an evaluation of a specific financial instrument, stock or in our case, the crypto markets. It can be applied to a specific cryptocurrency, some initial token offerings (ICOs), or even the whole crypto market in aggregated form.
There are two types of analysis that are based on financial markets, which are fundamental and technical analysis. They both serve as tools so that investors and traders can make purchasing and selling decisions of some cryptocurrency. By analyzing and evaluating historical data, financial flows, and price movements, investors try to gain market advantage and ultimately profit from the acquired knowledge.
The fundamental analysis focuses on the analysis of data obtained from various company financial reports, market reports, users, technology, business, etc. When we enter the crypto market somewhat, the situation with fundamental analysis is a bit different, especially with the new ICO companies. Since many companies in the crypto market have just been established, and there are only a few of them with a history of business for some years, some classic reports such as profit, balances, liquidity and solvency are not available because they are not even there or the time period is so small that they are not relevant. For this reason, a fundamental analysis refers to some other features of projects and companies in the crypto market, which can be good indicators for making investment decisions in the same (or wide margin).
1) Analysis of Team and Key People
In most projects and upcoming ICOs, the main team of people behind the company and products will be highlighted on the website. This is also one of the most important indicators that carry the highest weight of investment decisions in the project. The questions and analysis you can ask when you study a team is the following:
- What is the relevant experience of leading people in the team? Does their business history confirm that experience?
- A good practice is that people in the team have accounts on business networks like LinkedIn and are active on Twitter where you can see their engagement in the community and technology.
- What is the distribution of the team? Are there any persons in charge of business development, marketing and development?
- What is the relationship between the team and whether they have already worked on some of the previous projects?
- Depending on the nature and type of product, do you consider having enough people in specific positions? If the product and idea are technologically complex, is there a variety of people developing it, such as CTO, Software Architect, Software Engineer, Software Tester, etc.
2) Whitepaper and business plan
Whitepaper has literally become the “backbone” of every new ICO or a crypto project that develops something on blockchain technology. A parallel can be drawn from the original white paper of Satoshi Nakamoto with which Bitcoin was introduced to the world. The goal of the white paper is to describe the project/product or platform developed by the team. If you are considering investing in an ICO that you feel you have a good idea and they are solving some actual problem, then the whitepaper should be the next station after team analysis. What you want to find in the whitepaper is a detailed breakdown of technology and products that are being developed and how it is to be achieved. Whitepaper generally consists of presenting problems, analyzing the market and the users that this product should address and how the problem or challenge is solved.
Also, the whitepaper should contain the entire economic calculation of the project and the token issued by it. Attention should be paid to the number of tokens planned to be minted, the initial price of tokens and token distribution to various interest parties. (eg how much percentage the founders get, how much they will be offered on the market etc ..). Throughout the section, it is also necessary to analyze how these assets raised by the investor will be utilized and to which things. Whether it’s development, marketing, legal issues, etc ..
Most of the tokens they represent can be classified into two categories:
Asset / Security Token – these are tokens that essentially do not have any use other than reflecting the business of the company itself and startup. Their main function is to trade (transactions) and reflect business performance on the markets. Most projects can make various distributions of dividends or some benefits to investors where we could pull parallels with classical shareholders and shareholders who have a percentage stake in the total capitalization of that token or cryptocurrency.
Utility Token – utilization tokens are mostly oriented to a specific purpose and utilization in the product itself and without the same main function could not be practicable. Ethereum is a great example of utilization token because it is necessary to perform all smart contracts on the network and serves as fuel (Gas), in other words, it is necessary to create new ERC20 Tokens and transact them within the Ethereum network, which are precisely the products and most ICOs we analyze when deciding on an investment.
Tokens can certainly be combined with utility and asset class and are not exclusive. When you have finalized your analysis of the idea, team, and product, switch to the next step.
3) “Product-Market Fit”
After you’ve been researching the team and a whitepaper from a project and it made sense for you, it’s important to look at the real sector and whether a specific product or problem that is solved by this innovative blockchain startup is really something that is needed on the market, in other words are there customers who would benefit from it and ultimately buy it? This section is particularly important in order to estimate the amount of demand for such a product and whether the market is ready for that product. You may be interested in a product that will achieve some business results more quickly or you might be looking for a product that will only mature over the next 5+ years. Perhaps there are already a few products that address this same problem and you believe that the competition of the product you are analyzing will still be faster and more effective in the “foray” for potential consumers and customers.
4) Roadmap or product development plan
The Roadmap or Product Development Plan can give you an insight into when and in what period certain parts of the product or platform should be delivered and usable in the market.
- Do they have a development plan that is too short or too long for what they are trying to develop and push to the market?
- If the product is already on the market and token is traded on some exchanges, the roadmap can be a great indicator of how the development team behaves.
- Have they met all the “milestones” or points where they needed to issue an upgrade, patch or new module?
- Have the dates and quarters been hit or did delays occur? What is the intensity of development efforts or making new business partnerships?
- Are there any indications that the next “milestone” in the development plan of the whole project is achievable and will it be delivered on time?
These questions will help you better understand the so-called “velocity” or the momentum of the team that is developing, marketing and achieving results.
The ultimate “feature” of a team or company behind some blockchain project is certainly the way they communicate to their potential investors and customers. It is common practice that all projects in the crypto domain are extensively present on various social networks and channels such as Slack, Telegram, and Discord. In these channels, investors, users, and fans/haters can communicate directly with people from the team. According to the communication that goes there, one can notice the good features of the project and the team itself that leads it.
- Is the response time form the team relatively fast?
- Are the answers to the questions clear and transparent?
- What is the impression of other users on social networks and forums? Experiences, comments, and ratings that occur on these networks. Twitter is a very interesting platform to track here.
- What are the official PRs of a team and products? Do they meet some standards, can information be verified in other sources?
There are still many segments that you can further explore and make sure that the money you invest is right for you and for the right purpose but through these 5 points, you should get a solid understanding of a project, ICO or already existing cryptocurrency you are interested in. Fundamental analysis is a very good foundation for finding the projects that you really believe can bring value to people or the market they aim to penetrate via their technology or product. This analysis is mostly done by “Long Term” and “Value” investors, ie those investors who are not interested in price trends on a daily or even monthly basis are already deciding to invest in periods longer than one year because they consider that return on investment (ROI ) to be much larger after a long period of time.
Technical analysis focuses on observation and study of historical price movements in order to predict future trends. Traders relying more on technical analysis are primarily concerned with the price and volume that is happening over some cryptocurrency. Graphs are the main “tools” that show trends in price trends and supply and demand for some cryptocurrency in a given period of time. There are many indicators and samples that can be mapped and illustrated on price movements and then the so-called “entry” and “exit” positions for which they are purchased or sold are obtained. To be able to read basic patterns of the movement of some cryptocurrency (or any investment) you do not have to be a professional trader. Here is a review of a few patterns and concepts that appear in all equity and stock markets and can serve you for more reliable investment decisions.
1) Candlestick graphs
In order to give you a concrete insight into the understanding and reading of the graphs, it is necessary to understand the basic elements. “Candlestick Graph” is the holy grail of technical analysis and are the most common graph you will encounter.
The green “candle” is an example of “Bullish” ie purchasing price movements. It is read so that the “Open” part of the graph is associated with the first price in a time interval we are watching. Price movements can be observed at specific time intervals, e.g. 1 minute, 10 minutes, 1 hr, 1 day… In our example price moves at intervals of 1 min. At the start of each new cycle of 1 minute, there is a starting price of X. In that interval, buyers and sellers can push the price in different directions. If this interval is bullish, the candle will grow larger until it reaches the highest price eg X + 10. After that, the price will fall slightly (but will still be higher than the opening price X) and will close at X + 5. At this point, we get “shadows” that associate the largest and lowest price in that interval and the price of opening and closing in that interval.
The reverse situation is for bearish movements, ie when sellers have more pressure on the price and after the opening price, they push the price below X.
2) Support & Resistance
One of the basic but complex technical concepts in technical analysis and forecasting of price movements is the so-called Support and Resistance Levels. This concept is very important for you to understand specific trading patterns like “Head & Shoulders” or “Double or Tripple Bottom” which we will touch upon. It is complex because there are many factors that influence the formation of these levels and vary from situation to situation. Let’s start with the definition of support and resistance.
Support or Sometimes Floor – These are specific levels in the price of a cryptocurrency where the trader can notice that the price does not fall below this level. There are many reasons why this is happening. There may be some psychological limit in price such as round and full numbers, 1, 10, 100, 1000 … At such levels, there are buyers who place their purchase orders and are ready to enter their “entry” position.
It is possible that this is a price that is interesting to a particular set of traders, and this is called accumulation at that specific price of X. Support is actually quite a complex factor to estimate but can be noticed when looking at the historical review of the price movement of some cryptocurrency.
We took an example of bitcoin in the given period:
This is a very “rough” review of bitcoin support that was formed at around $ 12,000. We can see that at one point there was a little more “spike” sales that wanted to drop the price below but still dumped over 12,000. The reason for that is very likely to be much. First, that is some psychological limit and round number.Second, most of the major purchase orders were set at this price level during that period. So, there were a lot of investors and traders who were waiting for this downsize and prices around $ 12,000 were their “entry” positions. Likewise, we can see support at the level of $ 13,000, which indicates that there were a lot of interested buyers in this price range, and therefore strong support formed at this levels.
Resistance or Sometimes Ceiling (Ceiling)
The opposite thing to support is resistance. It appears when the price is trying to grow but the pressure from sellers is too much to sustain.
We took an example of bitcoin in the given period:
It is obvious that at $ 15500 price level, very strong resistance has formed that blocks the price of bitcoin to pass above that level. This gives the traders an indication that the price could move when the price again starts to attack those levels. If it is rejected every time, it means that the pressure from sellers is very high and that there are plenty of “short” positions betting on downwards price movements. Depending on how the price acts on the resistance level, positions for entry and buy-in can be planned.
The concept of support and resistance is important to understand specific patterns of price movements like “Head & Shoulders” or “Double or Tripple Bottom” that we will touch on concrete examples with some graphs and patterns.
There is a saying in the technical analysis: “The trend is your friend”. Trends are general price directions in a market and may vary from short, medium to long trends. Generally, common knowledge says that it is best to trade in the direction of the trend, or if the market has an upward trend, traders need to be very careful if they enter positions that require a change of the trend.
4) Most famous samples (patterns) of price movements
Among the more popular samples of technical analysis are certainly triangles. The three most popular types of triangles are symmetrical, growing and falling. Symmetric triangles show two trend lines connecting and signaling a jump or a fall in prices.
B) PENNANT (FLAGS)
Similar formation as triangles but the only thing that Pennants appear after a sharp rise or fall in price and thus signal the direction in which the price of a particular cryptocurrency will continue to go. Likewise, the pennant is in principle a feature of very short trends.
And after the triangle breakout:
C) HEAD & SHOULDERS
The Head & Shoulder pattern signals the reversal of the current trend and the possibility that the price will go in the opposite direction to the previous one. This is very noticeable on the next graph but in a shorter daily trading interval.
The formation we can notice in this green sketched area is the sample head and shoulders. It is obvious that there is a left shoulder followed by a slightly stronger price-buying trend (head) which then returns to the level of the first shoulder, and then again to the right shoulder with a return back to the level of the initial support. This is mainly a pattern that indicates a “reverse” trend and the price goes in the opposite direction.
D) DOUBLE I TRIPLE BOTTOM / TOP (DOUBLE AND TRIPLE POD / STROP)
This pattern is quite easy to spot and is one of the most reliable patterns for further pricing. The pattern appears when the price tests the same resistance or support level two or three times without breaking that level (in any direction).
We will take an example of the previous graph because it fits perfectly into the flow of thoughts. After the fall in prices, we can see that the trend hit the $ 14400 level of support at every turn back, which means that the buyers were strong and “swallowed” everything that the sellers wanted to sell.
After that, the price formed a fast-rising trend, which at the moment (at the time of writing) wants to break the level of $ 16,000, but it seems that at this point it is also forming a double or triple resistance. Depending on the breakout or rejection, a new trend will be indicated.
Summary and Conclusion
This is only a very small glimpse of the whole technical analysis domain where we wanted to give some starting position to all new investors and traders entering the cryptocurrency area so they can make better and more sound decisions with their investments.
An overview of basic knowledge and concepts regarding technical analysis is presented here, but the domain itself covers a lot of things that are not covered at this point. Various indicators, oscillators, volumes, and much more advanced graphs and analysis are also part of the entire “toolbox” with which traders and investors are involved.
It is important to note that technical analysis does not have to guarantee that the price will behave as expected. There is a saying in the investment world that markets can stay irrational a lot longer than an investor can remain solvent.
What to do after you grasp the concepts?
Cryptocurrencies, and especially blockchain technology, is certainly something that can potentially change our current economic systems in the digital in the sense how we perceive money, ownership, and trust we between different parties when conducting economic transactions. But on the other hand, there is a lot of disinformation, dealing with dubious facts, and mostly “mania” and greed. All markets go through these so called Gartner Hype cycles and this is not something that is unknown to macro and microeconomics. However crypto markets and blockchains have done something completely new and not known in financial markets. They have enabled masses of people to take a credit card and move into this market and start trading or investing. Barriers to entry for becoming a part of the crypto market are minimal and there is a large number of people and capital pouring in. The whole ecosystem has very little and in fact no regulation in relation to “traditional” capital markets. This is why various manipulations, scams and commonly known “Pumps & Dumps” occur. It’s easy to profit in this market but also, it’s easy to end up with a loss.
That’s why this content could help you become a better investor or trader and at least give you the ability to make more relevant and calculated decisions. One rule applies in all this. Do not risk what you are not willing to lose.