Bitcoin, or better yet, the entire cryptocurrency market is the perfect example of a “free market” driven by supply and demand. Market access is easy and information is widely available. As a result, human emotions such as “fear and greed” are unconstrained. In general, this combination of factors makes cryptocurrencies well suited for the use of technical analysis.
Fundamental analysis looks at the external factors that can affect price. Stock market analysts look at revenue (growth), sales prices, cost of goods etc. And based on all that information, they come up with a “fair value” for the company. If a company’s stock is trading for less than the fair value that the fundamental analyst believes is fair value, it would be interesting to buy that stock.
If the stock price is above that fair value then it is obviously better to sell.
In the cryptocurrency market, factors such as the number of new coins being mined, the amount of coins being freely traded, the background of a particular cryptocurrency related project etc. are used by fundamental analysts to determine the intrinsic value of the coin and decide whether to buy or sell.
Technical analysis takes a different approach. The technical analyst only looks at the price. At the end of the day, the price, at which the investor buys and sells, determines the profit and loss. Prices are determined according to the buying and selling activity of investors in the market.
Fear and greed drive herd behaviour
It is clear that investors are influenced by many (external) factors, the news being the most important. Every time some news about a market or a security is published, investors review the price of the related or related security.
Over the years, cryptocurrencies have been in the news multiple times. Sometimes it was incredibly positive, driving up prices exponentially and creating a collective feeling known as FOMO. Fear of getting lost – “Everyone makes money with cryptocurrency, and I’m not, I need to participate.” On the other hand, there have also been stories about regulation, or about countries banning mining and trading in cryptocurrency. This negatively affected prices.
Obviously, these events create a lot of emotion, and they drive investors to make buying and selling decisions.
Since herd behavior is not alien to human nature, all this buying and selling will create “trends” that can be spotted on the charts. This is where technical analysis comes in.
Bitcoin Price Prediction: Technical Analysis and Charts
Technical analysts use charts to find price trends and try to gauge whether that trend is likely to continue or reverse. Our toolbox at Stockcharts.com is filled with a variety of price-derived metrics. But we also use more subjective interpretations of specific trends and patterns as they form on the charts. This is based on extensive historical studies that show that markets tend to respond in a similar fashion in specific situations.
Charts help show supply and demand trends
In analyzing price trends, the highs and lows visible on the chart contain important information. They tend to act as “support” or “resistance” levels after they form, and the markets revert to these old levels.
Translate “support” with “demand” and “resistance” with “supply” and suddenly reading the chart will become much easier and make more sense. In the BTC chart above, I have highlighted a large uptrend that starts at the end of 2015 and ends at the end of 2017. And one downtrend that starts at the end of 2017 and ends at the end of 2018.
Technicians define an uptrend as a series of “higher highs” and “higher lows”. A downtrend is the opposite, which is a series of lower highs and lower lows. The two distinct examples are good examples of each.
To the right of the chart, we find some good examples of old tops and bottoms that act as support (always below the current market price) or resistance (always above the current market price). It never ceases to amaze me how these ancient tops and bottoms seem to act like magnets.
Bitcoin Price Prediction
From March to April 2021, the price of Bitcoin reached its highest level in the region of 65K before dropping just below $30K. The rally from the July 21 low made BTC bounce back and hit the 65K region again towards the end of the year (see red arrows).
At around $65K, the market was dominated by sellers (= supply) and demand wasn’t strong enough to push BTC beyond $65K. This additional supply in the $65,000 area created a lot of resistance and caused a new high at the same level. The sellers started pushing BTC lower again until it reached its previous low, just under $30K.
A slight hesitation is emerging as this old dip is starting to act as a support to attract buyers. But that was short-lived as BTC broke below the $30,000 support level in June of this year.
Bitcoin Price Prediction: Putting on the brakes
Breaking the support level, more often, in this case too, accelerates the movement. Within 3-4 weeks, BTC fell back to the peak level of late 2017 at around $20K and a new bottom was formed at that level.
When the buyers are not strong enough to keep the price at or above the support level, this is a sign of weakness. It indicates that sellers (supply) are still in control. After a brief rally, BTC is now, once again, in the area around $20K and hovering around that level.
Price behavior in the coming weeks will be crucial to Bitcoin’s near-term development. The prevailing trend is bearish. A clear rhythm of lower highs and lower lows can be seen from top to bottom on November 21. This means that the upside potential for BTC is now limited as each previous peak will attract new selling activity making it difficult for BTC to push higher..
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