How to trade bitcoins with fundamental analysis

Trading bitcoins is similar to trading any other financial instrument, with the opportunity to buy and sell based on market sentiment, technical analysis and fundamentals.

This lesson will show you some of the factors that you can use for fundamental analysis, to get an idea of whether the price is likely to go up or down.

Determine the direction using fundamental analysis

Price volatility in the bitcoins market is driven by a number of key factors, including legitimacy as a tradeable currency, regulation and security

Momentum and volatility in the bitcoin market is predominantly driven by a number of key factors, such as legitimacy as a tradeable currency, regulation, security – all affecting speculation as to the demand of bitcoins.

For example, possible investigations from US and European government financial regulators, and the press surrounding the matter, can have a huge effect on the bitcoins market and drive volatility.

The bitcoins market is still inexperienced, hence its sensitivity to any large shifts in market sentiment. Some have compared bitcoins to the dutch 'tulipmania' in the 1600s. At that time, speculators drove prices of tulips to record levels, before the market crashed.

Fundamentally, price fluctuations of bitcoins are governed by a number of factors that influence the supply and demand, and hence the price. Below are some of the factors that you can take into consideration in order to determine whether the price is likely to up or down:

Volume of buyers and sellers

You can observe the buying and pressure of buyers and sellers at any one time that will enable you to gauge whether the price is likely to go up or down.

During any one trading session, there is an 'over the counter' volume calculation that shows the buying and selling pressure at any one time. Traders can see significant changes, whether it be on the buying or selling side, and so could enter the market to capitalise on the change in momentum.

Most brokers provide detailed daily volume statistics. So if you see the volume of buyers go up, then you can speculate that the price is more likely to rise. If the volume shows that the selling pressure has increased, then you can speculate that the price is more likely to go down.

Sensitivity to hacking

News of security surrounding the bitcoins market can determine the price of bitcoins. If traders lose confidence in the security of their investment, then this can lead to downward pressure in the bitcoins market.

Security is one of the most important fundamental factors that influence price movements. For example, if it is reported that client digital wallets have been hacked, then the price would weaken considerably as traders of bitcoins may lose confidence in the safety of their investment.

This could lead to unease and uncertainty within the market driving the price down.

Regulation

There is an on going debate on whether bitcoins should be regulated. Downward pressure on the price can occur when financial regulators investigate or put pressure on bitcoins providers.

Regulation of bitcoins providers is an ongoing topic. Breaking news on regulation can cause considerable volatility on the bitcoin price, with traders pushing it lower over concerns that the market may be closed or become more difficult to operate in.

The changing face of regulation is also an important factor to consider. For example, investigations or pressure from the FCA (UK) and NFA (US) financial regulators could potentially make things difficult for the bitcoin markets and its providers.

It is difficult to capitalise on such news, as it requires efficient order entry and in some cases the spread can widen considerably and it can be difficult to have your order filled. However, keeping an eye out for this type of news can help you to determine a possible weakening of the price.

Technical analysis

Technical Analysis has also played an important role in the analysis process. Traders have been able to use normal technical analysis tools, such as candlestick charts, support and resistance, momentum and charting patterns, to determine likely future price behavior.

To learn more on technical analysis, go to the following module:

Subject
From Japanese candlesticks to the Fibonacci indicator, technical analysis is the mathematical approach to trading.

Summary

So far you have learned that...

  • ... trading bitcoins is similar to trading other financial instruments, with the opportunity to both buy and sell.
  • ... there are a number of factors that influence the price of bitcoins, including legitimacy as a tradeable currency, regulation and security.
  • ... you can use the total volume on issue as a tool to determine the buying or selling pressure at any one time.
  • ... traders are sensitive to hacking and security, which can lead to a downward pressure on the price of bitcoins if news of such cases occur.
  • ... regulation of bitcoins is an ongoing topic and downward pressure on the price of bitcoins can happen if regulators investigate or put pressure on the service providers of bitcoins.
  • ... technical analysis can also play an important role in the analysis process.
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