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Basics Of Bitcoin Market Analysis

Many investors who are new to Bitcoin don't know much about analysing individual digital currencies, so they can benefit significantly from learning some quick tips on the matter. This article provides some straightforward methods investors can use in order to make better-informed decisions about whether to buy Bitcoin.

Basic Types Of Analysis

Investors who are considering Bitcoin should keep in mind that there are three basic types of market analysis: fundamental, analysis and sentiment.[1]

    • Fundamental analysis looks at key variables that affect the supply and demand surrounding a digital currency. This is a perfectly reasonable approach, as an asset's price is a function of supply and demand.
    • Technical analysis involves looking at market data—for example, price and trading volume) in order to get a better sense of conditions.[1] By reviewing this information, technical analysts hope to get a better idea of what the market will do going forward.
    • Sentiment analysis involves getting a better sense of the mindset of traders.[1] The market consists of investors who collectively cause prices to move. If an investor can get some sound insight into what they are thinking, they may be able to make better-informed decisions. One practical way to get a better sense of the sentiment surrounding a digital currency like Bitcoin is to look at the long and short data that is available.[2] Bitfinex, for example, has provided much of this information to the public through its API. Another potential source of information is Google Trends data, which can provide insight into search interest for key terms like "Bitcoin."

Learn The Economics Of Bitcoin

If an investor wants to be ready to make well-informed decisions regarding Bitcoin, they can benefit greatly from learning about the economics surrounding the digital currency. While some may think that Bitcoin is merely a technology, that is a very superficial assessment, as it's an economic system made possible by the existence of digital currency.[3]

Learning about the economics surrounding Bitcoin can compel an investor to explore many questions, for example "What is money?" and "What makes money valuable?"[3] While these questions may seem a bit more theoretical, investors who are considering Bitcoin need to learn more about practical figures, such as the digital currency's supply.[4] Bitcoin's total supply is fixed at 21 million, while roughly 17.4 million units of this digital currency had been mined at the time of this writing (December 2018).[5] Another key metric is market capitalisation (market cap), which is a measure of an asset's total value. This metric can help an investor get a quick glimpse of Bitcoin's total value.

Investors should also keep in mind that many units of Bitcoin have been lost. There are plenty of anecdotes about this sort of thing, such as a person throwing away (or simply misplacing) their private keys, which would prevent them from being able to access their bitcoins.

According to an estimate provided by blockchain research firm Chainalysis, between 2.78 and 3.79 million units have been lost forever.[6] Chainalysis arrived at these figures after performing some thorough empirical analysis on the blockchain, the distributed ledger that records all of Bitcoin's transactions.

Don't Fall Victim To Hype

Investors who are thinking about getting involved with Bitcoin should remember that the entire digital currency market has historically experienced some very sharp volatility. The total value of this market climbed significantly in 2017, for instance, from roughly US$17.7 billion at the start of the year to roughly US$600 billion at the end.[7] This represented a gain of more than 3,000%.

While this bull market was certainly impressive, the cryptocurrency market dropped significantly the following year, trading close to US$135 billion in November 2018.[7] This figure represents a decline of more than 75% from the start of 2018.

Summary

When evaluating Bitcoin, potential investors can benefit from harnessing fundamental, technical and sentiment analysis while also learning more about the economics of Bitcoin, namely the various factors that affect supply and demand. These variables are crucial, since price is a function of supply and demand. Also, investors should remember that hype plays a big role in the digital currency markets, and they must be wary of how it can affect the market's movements.