Reading the Signs: Common Indicators That a Crypto Market Downtrend Is Coming
Crypto trading can be a very lucrative income source, especially for those who are able to follow market trends and make their trades at the perfect time. The value of a cryptocurrency depends on market forces and can be quite volatile compared to other financial assets.
In this article, we’ll go over some common indicators that investors should be aware of, as they can predict downtrends in the crypto market. None of these are a certain indicator of such trends on their own, but when combined, investors should take note.
Fear and Greed Index
The so-called fear and greed index is a sentiment analysis tool used to measure the public attitude towards crypto markets. They take into account the volatility of a currency, market volume, social media sentiments, surveys, Bitcoin dominance, and search engine trends.
These features are then presented using a scale from 1 to 100. Fear sentiment ranges from 0 to 50, and greed ranges from 51 to 100. Fear indicates that the market will crash, while greed is a sign to buy and hold.
Relative Strength Index
Relative Strength Index (RSI) is a popular indicator used to measure the speed and magnitude of price movements. By following the index for a cryptocurrency, investors can determine if it’s overbought or oversold. RSI compares the gains and losses of an asset on average over a set period.
If the RSI goes over the threshold of 70, it means that it’s overbought and that it may soon correct its price downwards. However, trends can sometimes persist longer than anyone anticipated, and therefore, RSI isn’t always a perfect indicator. Users need to take into account other metrics to get a more precise estimate of trends.
Follow the Founders
Founders and so-called whale investors have been known to move large amounts of crypto assets before the market gets through a downturn. Just a few weeks ago, this happened with Ethereum founders, and it had a huge effect on everyday users learning how to buy Ethereum and use the moment.
It’s important to note, however, that crypto founders also have other considerations when making their calls, and sudden movement of an asset isn’t always a sign that they are trying to dump it before it loses value. However, if a few important investors do it at the same time, small-time investors should follow along.
Network Activity
If a network activity for a certain currency is slowing down, chances are that its value will follow along. It shows that the general public has lost interest in it, and users tend to dump it afterward.
Network activity to look for includes a declining number of active addresses, declining transaction volumes, and lowered hash rates. The common way to go about this is to follow these metrics on a regular basis and, therefore, spot the trends as soon as they appear.
Trading Volume
High trading volume indicates that an asset is liquid or that it’s easy enough for the users to buy and sell large amounts at any given time. The volume is also used to confirm price trends in the midterm. If the price moves when there’s a high volume of trading, it indicates that the move isn’t just temporary.
Trading volume can also be used to determine momentum, meaning that all of the other indicators on our list mean more if they happen during a high volume of trading. What’s high volume, however, isn’t easy to determine, as it depends on which crypto token you’re following.
Interest Rates and Inflation
Even though cryptos are made to be independent of government action, they are still affected by larger macroeconomic trends. For instance, the increase in inflation leads investors to be more risk-averse and let go of some of the riskier altcoins. Small-time investors are also reluctant to get into crypto trading while the overall market is experiencing inflation.
Rising interest rates have the same effect, but they are easier to predict and prepare for. It’s a decision made by a central bank with a set date, while inflation usually takes a while to acknowledge and respond to.
Dollar Index
For many, cryptocurrencies are a hedge against the changes in US dollar value. However, a strong dollar does have a negative impact on the crypto market. It’s seen as a sign of a strong economy, and therefore, it leads to more investment in traditional financial assets than crypto coins.
Stablecoins, on the other hand, are directly tied to the value of the US dollar. Some investors don’t consider stablecoins to be true cryptocurrencies. Others, however, believe that they combine the best of both worlds and that they are a valuable part of a crypto portfolio. The value of stablecoins will rise and drop with the US dollar.
New Regulations
For a long time, crypto trading remained unregulated, as the existing laws didn’t recognize cryptos as a financial asset. Now, when the public attitude towards it has changed, so has the attitude of the regulatory agencies. Changes in regulatory approach could indicate downtrends as well.
This doesn’t, however, mean that every new regulatory rule leads to downturns in crypto value. Many investors feel that a stronger set of regulations makes the market more predictable and, therefore, easier to invest in when it comes to long-term trends.
Bitcoin Dominance
Bitcoin dominance refers to Bitcoin having the strongest position in the crypto market. Once investors move from different altcoins to Bitcoin, chances are that it will indicate a further shift in the market. Bitcoin is the biggest crypto out there, and it’s seen as the most stable one for long-term investors.
Since altcoins are riskier and more profitable, investors moving on to a safer asset that they can hold on to means they are dumping their holdings in altcoins. Such trends snowball, and for those with assets to spare, it’s the perfect time to buy altcoins and use the drop.
Black Swan Events
Black swan events are unforeseen events that suddenly change the crypto market. Such events that lead to a downturn in the market are most often security breaches, hacks, or technical problems a cryptocurrency can experience. Once those happen, the altcoins tend to drop fast, and it’s a good opportunity to buy if you’re willing to wait for the rebound.
Sometimes, the crypto markets are shaken by events that have nothing to do with crypto but affect markets in general. These include wars, pandemics, natural disasters, and similar events beyond the control of any investor or portfolio manager.
Conclusion
There are signs that investors can follow, which indicate that the crypto market will take a downturn. Those are confirmed by experience, but investors should also be aware that the crypto market is complicated and often affected by numerous factors at once. A downturn isn’t always the time to sell a crypto asset; instead, it is actually a chance to buy while the price is low.
The investors can make educated decisions by following network activity, trading volume, and overall macro-economy state, as well as keeping track of whale investors and decision markets. Even with all of these measures in place, diversifying crypto portfolios remains essential.