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Predicting the future price of a financial asset or commodity has been the goal of investors for as long as modern markets have been around. Many different strategies have been developed and endless debate has arisen as to which strategy produces the greatest results.
Generally speaking, there are two main camps; fundamental analysis and technical analysis. The former is interested in studying balance sheets, management history, market sentiment, and a great number of other factors to derive an intrinsic value of an asset or commodity. If the value is less than the market is currently valuing the asset at the expectation is that it will rise in value in the future once the market property appraises it.
The latter is more concerned with price action and technical indicators, such as moving averages, relative strength index, Bollinger bands, and many others, to determine future price points.
Because of the high volatility and large price movements in the Cryptocurrency market, many investors have tried to develop ways of predicting the price movements in hopes of profiting off the large price swings. Here we will look at some of the myths and realities when it comes to predicting cryptocurrency prices.
Myths
A single property can predict future prices
Markets are much too complicated to be predicted by a single attribute or factor. Sentiment is not always rational, and news cycles can have dramatic effects on the prices. All successful traders use a combination of different indicators and attributes in their price-prediction models.
Crypto market behave like traditional markets
A major difference between the cryptocurrency market and traditional financial asset/commodity markets is that cryptocurrency is not regulated in any formal way. All trading regulation is left up the exchanges themselves. This lack of regulation can, and has, led to troublesome events for investors. For example, in 2017 Bitcoin Gold suffered a 51% attack which weakened the coins price.
This lack of regulation creates an environment in which price manipulations, such as pump and dump schemes, can be organized without any fear of consequence. This is particularly true for small-cap, low volume, coins and tokens.
Sentiment-Market impact fallacy
This fallacy describes the belief that public sentiment, or consensus judgment about the future of an asset, can be used to make reliable price predictions. In December of 2017, the price of bitcoin had reached nearly $20,000 per coin. Many analysts and pundits, along with the public at large, were expecting the price per coin to continue to rise. Of course, it didn't andit fell to a low of just over $3,000. While at these lows the general sentiment was that the price would drop even lower, perhaps bottoming around $1,000/coin. This did not happen. Instead, the price rebounded to a high of $11,300; something no one was expecting.
Realities
Order books are often the best source of predictive data
This is particularly true for high volume coins and tokens. Viewing the order book can give an investor or trader insight into a coin's momentum or buy/sell imbalances. This is best used with a short term trading strategy.
Some coins and token have real-world applications
Some traders are so preoccupied with the volatility in the cryptocurrency markets and the opportunities it produces that it can be easy to forget that some cryptocurrencies offer viable solutions to real-world problems. Stellar Lumens, for example, is a coin that allows for fast, and easy transfer of fiat currency across borders. Using standard fundamental analysis on projects that one deems to be of real-world use can reveal underpriced coins and tokens whose price is likely to rise in the future.
Moving averages show overbought and oversold conditions
While we said above that no one attribute or factor can reliably predict a future price point moving averages can give us a good indication of when a certain coin or token is overbought or oversold. The basic premise here is that the price of an asset, commodity, coin, or token will always tend back towards the moving average. If a certain price is well below the current moving average, it can be reasonably assumed that the price will move back up in the future to normalize itself with the moving average. The same can be said if the price is well above the moving average.
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About the author
Beatrice is a professional copywriter at Phdkingdom.com. Over the years she has written on a wide variety of topics for many projects. She is always willing to share her experience and advice with new copywriters helping them to write engaging content that sells.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.