A Guide to Crypto Technical Analysis

If you invested your life savings in Bitcoin in 2009 and did nothing but sit on a beach in the Maldives for a decade, drinking rum punch and making friends with the locals, you would have been one of the most successful investment managers in history.

You would have needed no knowledge of bond yields or inflation or how supply chain bottlenecks affected interest rates. You would have not needed to have spent your evenings learning about layer two blockchain technologies or scaling solutions or the wonders of zero-knowledge proofs. You would not have to have studied the intricacies of a price chart and used complex regression analyses to direct trading algorithms. You would be too rich to care.

These days, however, crypto is a far harder market to crack. More than any other market, the bedrock of this growing asset class is volatility, and knowledge (or blind luck) is vital to your success. There are so many scammers and swindlers and just flat-out bad investments that you have to be an expert to invest wisely.

Crypto investment experts these days have the cerebral horsepower of a small computer, and they outsource the rest of their brainstorming to armies of analysts and traders, and the rest to, well, actual computers. But how do these experts assess the worth of emerging cryptocurrencies? How can they set the lucrative wheat from the opportunistic chaff?

One popular answer: through technical analysis. Although historical performance does not necessarily imply future success, the business of technical analysis assumes that it can, if you’re sharp enough to work out how and when the market turns in your favor.

While sometimes dismissed as a dark art, technical analysts consider themselves market experts. They stare at price charts each day and try to predict the future price of coins. Some of these experts deploy advanced algorithms, through trading bots or high-frequency traders, to invest and divest money once certain patterns appear in the market. Their thinking is that history tends to repeat itself, and they try to turn a profit by picking up on patterns before anyone else. In this guide, we’ll share some of their methods for determining the value of coins.

Market caps and price momentums

The most straightforward way to assess the worth of a cryptocurrency project is to look at the market capitalization—the sum of a token’s supply multiplied by the most recent price of the token. By this metric, Bitcoin and Ethereum are top dogs, and any fast risers can be picked up by price charts. Some crypto analysts prefer a standardized metric called “realized market cap,” which excludes old or lost coins from the token’s overall supply.

Similar to penny stock traders in regular stock markets, some traders are devoted to trading so-called “small cap coins,” also known as altcoins (or, more colorfully, “shitcoins”), that rise quickly in value. But a market cap only tells you about the present. Analysts are concerned with predicting the future. This is easier said than done, and technical analysts employ many methods to work out the future price of a coin.

Ryan Selkis, founder of Messari, for instance, looks at a price signal called “market value to realized value,” which considers the ratio between recently-moved coins and “realized value,” a metric that calculates the market price of Bitcoin according to the time it last transferred hands. Selkis points out that whenever this metric, MVRV for short, hits 3, it’s a “good time to take gains,” and whenever it falls below 1, “Sell a kidney or a newborn” to buy a coin.

Other traders look at the volatility of a coin’s market cap. Some emerging coins rise in price very quickly and traders might seek to deploy funds to take advantage of such price movements. To do this they examine charts. Although charts only tell you the history of a price, some believe that crypto technical analysis indicators can provide hints about what is about to happen. One common metric on a chart is the candlestick, a green or red wick that rises or falls according to how much a coin has risen or fallen in a given time period. A large wick indicates that the coin’s price could be about to fluctuate.

Alongside these candlesticks, traders often consider whether a coin is likely to break out or crash—that is, they’re about to observe a huge increase or decrease in price once the market passes a “resistance” or “support.” A resistance or support level is a key price that, once surpassed or fallen below, will trigger a cascade of new purchases or liquidations. An analyst might say something like, “If Bitcoin rises above its resistance price of $50,000, it will likely rise far higher.” It’s difficult to identify resistance or support levels in advance, but considering how leveraged a coin is, or working out when a lot of traders are about to be liquidated, could provide information about a coin’s resistance or support level. Options and futures markets can provide hints about these levels.

To gauge the momentum of a coin’s price, some traders use statistical analysis to identify trends. One such tool is the Bollinger Band (named after analyst John Bollinger) to predict the future trend of the coin. These bands—really lines on a price chart—show what would happen if the price of a coin moved by two standard deviations away from the simple moving average of a coin. Traders believe that if a price is closer to the upper Bollinger Band, the coin is overbought (meaning that a dump could be incoming). If a coin’s price is closer to the lower band, the market could be oversold and investors might hope to snap it up soon, which could increase the price.

Other indicators that traders use to identify trends include average directional indices (ADX), which rates the strength of a price trend from one to a hundred, and relative strength indices (RSI), which quantify the magnitude of price movements. There are countless more methods to analyze charts. Elliott Wave analysis assumes that prices wax and wane in waves, while Fibonacci Levels aim to find resistance and support levels.

Traders have identified common patterns in price movements that they believe could help the discerning technical analyst work out what’s about to happen. “Hammers” indicate that a falling coin is about to reverse its fortunes, for instance, while a “hanging man” pattern indicates the opposite. A lot of this crypto analysis can be performed right on the price chart itself, whether that’s on a cryptocurrency exchange platform, on trading apps, or on a price chart website like Trading View.

Some traders like to factor in trading volumes when determining price momentums. High trading volume indicates that there is a significant interest in buying or selling the coin, which could indicate that a major price movement is about to occur. This isn’t watertight: certain traders might spring “bull traps”—where they pump up the volumes to make it look like there’s a lot of demand, encouraging people to invest and then drive up the price, before selling all their tokens and crashing the market.

There are plenty of indicators to choosefrom, and experts have spent decades applying statistical analysis to stocks. If you’re still confused, consider reading the research notes published by cryptocurrency experts. Top crypto technical experts often share advice on how they think the market will perform, but be mindful that, if they are heavily invested in a certain coin, they might bias their cryptocurrency market analysis to encourage people to invest in the coin and drive up the price. The industry is still too new to have certified cryptocurrency experts—reputation is key. The best crypto technical analysis, however, is worth its weight in digital gold.

Arbitrage opportunties

Price action isn’t the only way to profit from the prediction of cryptocurrencies. Smaller cryptocurrencies are often vulnerable to arbitrage trades—when a trader buys a cryptocurrency at a lower price in one trading venue, then resells it for a higher price moments later on another venue. While large cryptocurrency markets are likely highly efficient, meaning that arbitrageurs trade on these price differences so quickly that you don’t have time to make any money, smaller coins may present greater opportunities for arbitrageurs.

Yields

One of the main criticisms of cryptocurrencies used to be that they were not yield-generating assets. Unlike stocks, they didn’t pay dividends, and unlike bonds, they didn’t generate yields. That has changed in the era of decentralized finance and proof-of-stake coins. One of the most profitable trades is to take advantage of the variable yields offered by lending protocols, decentralized exchanges and proof-of-stake validation protocols. Some yields are so high that you could still profit if the coin’s value were cut in half.

Calculating yields is a complex task given that these DeFi protocols change yields according to rising and falling demand, and the tokens that you earn from staking—the process of pledging a token to a smart contract—are also volatile. Some traders give up on the process of calculating this stuff manually and rely on yield farms like Yearn Finance, or defer to lending products offered by companies such as BlockFi and Celsius. Calculating yields on one’s own requires you to accurately predict the yield of a product (or set of DeFi protocols) as well as the price, and shift money around so efficiently that you do not suffer from collapsing yields or prices.

Fundamental analysis

It’s important to consider some of the more important fundamental aspects of emergent coins that can influence price. Smaller coins have yet to prove themselves and a prudent investor would be wise to thoroughly research a project before investing. Dodgy fundamentals, like a spurious or badly written whitepaper, an anonymous team, or a lack of a smart contract audit could cast doubts on the viability of the project. Crypto is rife with scams, and failing to do your due diligence on a project could scupper your technical analysis—if the developers abscond with, say, all the money in a DeFi project’s liquidity pool, your trend lines could quickly become vertical.