This content originally appeared on Level Up Coding - Medium and was authored by Dmytro Spilka
Cryptocurrency markets are famously volatile, so how difficult is it to identify and understand emerging trends in such a complex ecosystem?
Despite institutional investors and adoption rates growing throughout 2021, Bitcoin still suffered from significant collapses that saw the cryptocurrency’s price fall by as much as 50%. Whilst there was much optimism that the market would recover in the final months of the year, we saw record-breaking inflation rates lead to more investor sell-offs and further downturns.
(Image: ETF Trends)
As the chart above shows, we’ve seen Bitcoin exhibit lower levels of volatility compared to its formative years. This is a good sign for spotting trends, which are likely to be interrupted less by wild swings and heavy sell-offs.
So with this in mind, let’s take a deeper look into how easy it is to identify trends within crypto and what they’re capable of telling us:
Identifying Trends for Assets
Although the crypto ecosystem is controlled heavily by investor sentiment, Maxim Manturov, head of investment advice at Freedom Finance Europe, notes that the markets still share some universally recognised trends as other stocks and commodities.
“Given that any market has two main price trends for an asset: rising — ‘bullish’, falling — ‘bearish’, there is also a horizontal trend — ‘flat’. it is possible to analyze and correctly identify the price movement of cryptocurrencies,” Manturov said. “A steady upward price movement and a steady accumulation of buy order volumes indicate that a trend change has either already occurred or is on its way. Furthermore, a change in trend from downward to upward is also seen as the asset price fluctuates between highs and lows. This signifies a bullish trend. Such events can be seen in mid-January 2022 and in mid-March 2022.”
“In addition to technical analysis, the increasing activity in specialist social media communities, such as Twitter, Telegram and Reddit, should also be taken into account to determine the price trend of the crypto asset more fully,” Manturov added.
Significantly, social media may be the best place to identify trends in the world of cryptocurrency — more so than any other markets. This is because crypto is heavily based around investor sentiment, which can be monitored via social media.
In fact, social media sentiment is cherished so much by investors, we’ve seen the development of the Bitcoin Fear Index, which gauges how investors feel towards the cryptocurrency — helping to show whether optimism may pave the way for a price rally in future.
Deviating from Stock to Flow Models
Despite sentiment helping to pave the way for some level of trend analysis among investors, we saw one of Bitcoin’s most famous trend analysis models struggle in 2021: stock-to-flow.
(Image: PlanB (Twitter))
Bitcoin’s Stock-to-Flow Model (S2F) has been an extraordinarily accurate measure of where the cryptocurrency’s price should go following the asset’s pre-programmed halving events — in which the volume of BTC awarded to miners halves approximately every four years.
However, as the chart shows following Bitcoin’s most recent halving event in May 2020, BTC’s price rally was nowhere near the $100,000 predicted by the model, with the coin’s all-time high coming in at around $69,000.
The underperformance for Bitcoin’s S2F has come as a blow because the coin’s halving cycles had been seen as an opportunity to gain an unprecedented level of insight into the possible price path of the digital currency.
As we can see from the model’s price prediction, Bitcoin’s value would reach $1.1 million following its 2024 halving event — a cause of much optimism for investors. Losing the S2F model as an indicator of future price movements means that investors have far fewer assurances that their cryptocurrency holdings are heading higher over the coming years.
Due to Bitcoin’s market dominance, the coin’s future price rallies would impact the entire cryptocurrency ecosystem in dragging other assets upwards along the way.
Why it’s Harder to Predict Crypto Markets
Sadly, there are many reasons why cryptocurrency is harder to predict than more traditional investment options.
Because the landscape is fairly new, regulators around the world continually struggle to provide forward-thinking domestic rules on the buying and selling of crypto, which can cause severe price fluctuations.
Security concerns with decentralized digital currencies can also lead to widespread sell-offs — as well as frailties in coins’ technological frameworks.
Another major factor that hurts crypto trends is the market’s vulnerability to manipulation. Because cryptocurrencies are heavily sentiment oriented, it’s easy for whales — i.e. those holding a significant amount of BTC — to sell a major stake to prompt investor sell-offs before buying it back later on at a discount.
But fundamentally, the reason that cryptocurrencies like Bitcoin are so unpredictable is that they essentially have no tangible value. Because the asset isn’t pegged to real-world goods or currencies, its price is purely speculative.
This creates a situation where panic sales can be prompted by just about any factor that’s interpreted to have a negative market impact — even if it has no direct influence on the price of any cryptocurrency asset.
With this in mind, it’s best to stay vigilant when investing in crypto and always keep your ear to the ground. In a sentiment-driven ecosystem, trends can emerge in an entirely social manner.
Reading Cryptocurrency Markets: Is it Possible to Understand Trends Within Crypto? was originally published in Level Up Coding on Medium, where people are continuing the conversation by highlighting and responding to this story.
This content originally appeared on Level Up Coding - Medium and was authored by Dmytro Spilka
Dmytro Spilka | Sciencx (2022-04-27T13:00:46+00:00) Reading Cryptocurrency Markets: Is it Possible to Understand Trends Within Crypto?. Retrieved from https://www.scien.cx/2022/04/27/reading-cryptocurrency-markets-is-it-possible-to-understand-trends-within-crypto/
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