What Bitcoin Traders Should Know About FA & TA

Initial reaction to daily volatility of #Bitcoin prices seems unfathomable.

Let us take at a closer look through the eyes of doing Fundamental Analysis (FA) and Technical Analysis (TA) of Bitcoin.

Fundamental analysis is the evaluation of economic, financial and other key variables, known as fundamentals, to determine a security’s true value.

Bitcoin has managed to gain significant traction as a medium of exchange. Hundreds of companies – including eBay and PayPal – have agreed to accept the digital currency since its inception in 2009.

While investors use fundamental analysis to evaluate different asset classes, such as equities and fiat currencies, several analysts assert that using this approach to evaluate bitcoin is more complex.

While demand for bitcoin can be a complex study, supply is a bit more straightforward. The bitcoin protocol limits the total number of units at 21 million, and 16.3m bitcoins were in circulation at the time of reporting.

Three factors that affect FA as a reliable predictive method of a “Buy or Sell” signal.

1. Too many variables could affect bitcoin demand, including user adoption, transaction activity and trading. The weightage of study is difficult to determine for each variable (even you could capture them all).

2. Your emotion is getting in your way. Human sentiments and emotions could lead to Bitcoin market  prices volatility.  They could not be prescribed in terms of quantifiable units for analysis and provides a means to making a “buy or sell” decision easily.

3. Past performances of Bitcoin using the fundamental analysis of key variables, could not reliably, be characteristically appeared the same way and the same form in future event (due to  the variables’ complexity as stated in item 1 above).

Technical analysis is more interested in looking at a security’s price movements to make a better-informed decision.

Technicians (sometimes called ‘chartists’) take a practical approach, looking at a security’s history (using price charts) and applying various analytical tools to get a better sense of how the market feels about that particular security. Dow theory is the foundation for this practical method for evaluating securities.

By leveraging technical analysis, bitcoin traders can gauge market sentiment, identify trends and potentially make better-informed investment decisions.

Three factors that affect TA “put to use” as a useful “Buy or Sell” signal tool.

1. Too many chart data collected, may lead you to analysis paralysis and resulting in trader not able to “work the plan” of his/her trading strategy.

2. Your emotion is getting in your way. Human sentiments and emotions could lead to Bitcoin market  prices volatility. They could affect its future chart pattern and direction in many ways i.e “chart pattern not in his book’ to speak, affecting its usefulness as a future price predictor.

3. Past performances of chart patterns could not appear in the same exact way, resulting in taking too long to form a pattern decision. This has a major impact of taking the desired action too late, resulting in reduced profits or greater loss than it should be (by not taking timely action to carry out the trade.)

An astute trader usually has a To-Do Item Checklist prior to carry out any trade.

1. What To Buy – FA may help in this area

2. When To Buy – TA may help in this area

3. When To Sell – Both FA and TA applicable in this area

4. Risk Management – Both FA and TA applicable to ensure that the selected way of risk management (of capital) is “in place” prior to actual trading of Bitcoin.

5. Overcome one’s emotion – Systemize the execution of trades using “smart logics” computer to do the “rational thinking” work of items 1, 2 & 3. You just need to follow the computer “Buy or Sell” signal mechanically, without exception (the human emotion element is not in the equation).

Flash News (31-Oct-17):  CME Group Inc. is planning to have Bitcoin Future Contracts listed in its exchange before end of this year – The implication is volatility of  Bitcoin currency can be hedged! It addresses a major concern of Bitcoin’s usefulness as a stable stored currency.

CME Group Inc. (Chicago Mercantile Exchange & Chicago Board of Trade) is an American financial market company operating the world’s largest options and futures exchange.

If you would like to know whether you are ready for it,  please read my recent post on “5 Tips To Trade Bitcoin Or Volatile Cryptocurrency”

For cryptocurrency starter, you may like to consider opening an account with Coinbase, a secure online platform for buying, selling, transferring, and storing digital currency.

Note:- If  you buys or sells US$100 of digital currency or more through Coinbase using this link, you and your referral will both get US$10 worth of free bitcoin.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.

If you’ve any comments, please drop me a line.

Reuben Ong