In the last year or so since crypto winter engulfed the world of Bitcoin, traders appear to have become more thoughtful. The sharp ups and downs in Bitcoin price seen in 2021 and even going back to late 2017 gave way to more moderate price shifts followed by Bitcoin price plateaus. This happened as Bitcoin prices fell and is continuing as prices rise. How can you predict the next Bitcoin price plateau? The myth that Bitcoin and the rest of the crypto world were somehow divorced from the realities of the wider financial world has been shattered. What cues do you look for today in order to profit from swings in Bitcoin prices?
Fundamental Versus Technical Analysis of Bitcoin
The assumption that Bitcoin and other crypto tokens would go up in price forever was a fallacy that resulted in the collapse of many crypto exchanges, the bankruptcy of folks like Voyager Digital, and even charges of fraud as crypto businesses scrambled to maintain solvency in the face of lower and lower crypto price plateaus throughout 2022. Those who successfully traded Bitcoin relied on two things, fundamental analysis of what drives Bitcoin prices and technical indicators that can predict market price swings based on evolving price patterns. Both approaches have their pros and cons when trading Bitcoin.
What Fundamentals Drive Bitcoin Prices?
When Bitcoin was invented, its internal coding limited the eventual, final number of Bitcoins that will ever be able to exist. This makes Bitcoin distinct from fiat currencies like the US dollar, yen, euro, or British Pound. There will be no central bank or government turning on the printing presses and cranking out billions or trillions of Bitcoin to balance a budget or buy votes. This is Bitcoin’s strongest fundamental value. Other “fundamentals” were assumed to be that Bitcoin would be a hedge against inflation and a store of value when the financial world fell apart (like last year). That did not happen. What Bitcoin did was mimic the Nasdaq stock market in its movements up and down in response to Fed rate hikes, the war in Ukraine, and speculation about the rate at which inflation would be reduced.
Banking Crisis Was a Winner for Bitcoin
The banking crisis was good news for Bitcoin as it gave the impression that Bitcoin and the crypto world were safe from this part of the financial system even though at least one medium sized bank went under because of its mishandling of crypto investments. The markets assumed at the end of 2022 that the Fed was done raising interest rates. Stocks went up and do did crypto. The glitch in the banking system was frosting on the cake for Bitcoin and brought it to a new price plateau.
How Reliable Is Technical Analysis for Trading Bitcoin?
Prices in markets are eventually determined by the fundamentals of supply and demand. How valuable is something? How much are folks willing to pay for it? However, getting from point A to point B in time involves speculation, guessing. Is the price of Bitcoin (for the Nasdaq, S&P 500, gold bullion, Microsoft stock) going up or down and by how much? As traders buy as sell based on their predictions of where prices will go the sum total of their actions leave useful cues. How many options traders are betting on the market going up versus going down (calls versus puts). This is the VIX or “fear” index. How volatile (uncertain) is the market? What is the trading volume (level of interest) for a stock or crypto token like Bitcoin. When trading volume goes up it tells us that people are either buying a stock or crypto token because they think it will go up in price or selling because they think it will go down. When the price of Bitcoin is going up and trading volume is high traders think that this is a market rally and they jump in and buy. Unfortunately, in the case of Bitcoin, they are all-too-often being fooled by Bitcoin wash trading. In this case, big traders are buying and selling simultaneously to create the illusion that there is far more interest in the Bitcoin market than there really is at a given point in time. A better technical indicator for Bitcoin is probably the moving average which smooths out daily fluctuations and more clearly shows when Bitcoin is moving from one plateau to the next.
Predict the Next Bitcoin Price Plateau – SlideShare Version