Predicting cryptocurrency prices is not an easy feat and requires you to use various tricks and techniques. But what if we told you there are certain ways in which you can identify a crypto token’s performance to make informed investment decisions and find market opportunities ahead of time?
This article is a guide on how to effectively predict the price of cryptocurrencies. Here you will learn the key factors determining a token’s price to help you make your forecasts about the best coin to invest in and not have to miss out on fresh opportunities that emerge in the highly competitive and growing market.
So, without further ado, let’s get started.
Key Factors that Affect the Price of Cryptocurrencies
It is important to understand how external factors and market forces affect cryptocurrency prices before making accurate value forecasts. Here are some key factors that can determine the price of crypto tokens:
1. Tokenomics
Tokenomics is the study of the supply and demand of a particular cryptocurrency and how it affects the asset’s valuation. Each crypto asset has designed its tokenomics to best suit its value proposition.
For example, Bitcoin (BTC) has capped its supply to 21 million tokens that have a decreasing inflation rate. This helps attract demand from those who seek a store of value and an asset that is a hedge against inflation.
Meanwhile, Ethereum has designed its tokenomics in such a way that Ether (ETH) tokens are utilized for network fee payments, staking, loan collaterals, and other decentralized finance (DeFi) use cases. These actions support the cryptocurrency’s demand, attracting capital.
2. Value Proposition
Value proposition refers to the benefits that a cryptocurrency offers to investors. In Bitcoin’s case, its value proposition lies in its property as an inflationary hedge, the blockchain’s decentralized nature, security measures, and its peer-to-peer payment network.
At the same time, Ethereum’s value proposition lies in providing users with the world’s largest smart contract-powered platform that opens the door to implementing decentralized applications (DApps).
Other cryptocurrencies have their type of value proposition, such as solving issues related to high gas fees, or low transaction throughput.
3. Token Vesting and Unlock Timelines
Investors need to be aware of a particular token’s vesting and unlock timelines. When a cryptocurrency project is initiated, certain participants, such as the core development team, early investors, and founders typically get a significant share of the newly issued coins as a token of appreciation for their support and contributions to the project.
These allocated tokens are placed in a vesting smart contract that is programmed to be released at timely intervals automatically. This process is carried out for various reasons, such as limiting the token’s circulating supply, decreasing its selling pressure, and giving it support to increase its value.
When vested tokens are unlocked they add a significant amount to the circulating supply. If its holders decide to sell their allocated share in the open market, it can result in the cryptocurrency’s price dropping.
4. Market Sentiment
Market sentiment refers to the mood of investors towards a particular cryptocurrency. Just like human emotions, the emotions in the financial markets are also driven by fear and greed. Oftentimes, these emotions lead investors to make irrational decisions that result in explosive price rises and sudden market crashes.
When the market is bullish, the price of cryptocurrencies rises without a catalyst as the investor sentiment is high. On the other hand, bearish markets often showcase low investor interest or confidence, resulting in stagnant or lower prices.
5. Market Listings
Cryptocurrencies tend to surge in value when it is apparent that they will be listed on popular centralized cryptocurrency exchanges such as Binance or Coinbase. This is because CEXs have the power to bring in the wrath of new investors, thereby helping unlisted crypto projects raise capital.
These exchanges are easier to access and use for regular crypto investors as they can invest in tokens using traditional finance payment channels like bank transfers or credit/debit card.
However, there is also the risk of tokens sometimes being delisted by exchanges, which can negatively affect their price.
6. Celebrity Endorsements
Cryptocurrencies gain the spotlight when they receive endorsements from celebrities and brands. This gives investors confidence in the token, helping its price surge.
A prime example of this is the endorsement of popular meme token Dogecoin (DOGE) by billionaire Elon Musk. The Tesla CEO played a pivotal role in supporting DOGE during the 2021-2022 bull cycle.
7. Macroeconomic Forces
There was a time when the cryptocurrency market was isolated from macroeconomic forces. That is no longer the case as it has now become a multi-trillion-dollar industry. Every passing day, financial institutions, global corporations, hedge funds, and other institutional investors are putting their money into crypto assets, making them more sensitive to macroeconomic forces such as inflation and interest rate changes.
In 2022, Bitcoin and other cryptocurrencies faced multi-year lows along with risk asset markets after the US Federal Reserve and the European Central Bank raised interest rates from near zero in a bid to combat rising inflation.
The introduction of spot Bitcoin exchange-traded funds (ETFs) in the US in January 2024 has made the market more sensitive to macroeconomic forces than ever before.
8. Future Price Outlook
All financial markets are forward-looking, and investors put their capital into the assets with the expectation of gaining handsome returns in the foreseeable future. Promising cryptocurrency projects have the potential to change the market, attract extra capital, and trade at a higher premium than the rest.
The market narrative at any given moment also plays an influential role in the market’s perception of a crypto token’s outlook.
How to Predict the Price of a Cryptocurrency?
Now you know what market factors can influence the price of cryptocurrencies. Let us take a look at the top 5 methods used to analyze the price of crypto assets.
1. Technical Analysis
Technical analysis involves studying past market data, such as price and volume, to predict the future price movements of cryptocurrencies. The technique assumes that all known information about an asset is already reflected in the price, which moves according to trends that are most likely to persist.
The core principle of the concept is that an asset’s historical price action is the best guide to predict its future. In crypto, the tools used to analyze a token are price and volume charts like bar charts, line charts, or Japanese candlestick charts.
Technical analysis is particularly poignant for crypto price prediction for several reasons:
- The highly volatile nature of cryptocurrencies can create clear price patterns and trends that technical analysts can exploit.
- Compared to traditional finance markets, there are fewer institutional traders in the crypto space. This means the price movements in the crypto market can be less predictable and more prone to emotion-based trading – an environment where technical analysis can thrive.
- The price of cryptocurrencies doesn’t rely on conventional metrics like earnings of corporates, or P/E ratios, making technical analysis a more favorable tool for speculation and assumption.
2. Fundamental Analysis
Fundamental analysis in cryptocurrency involves evaluating an asset’s value through economic, financial, and other qualitative and quantitive factors. Unlike its application in the stock markets, where you use company earnings, dividends, or industry conditions, to analyze prices, in the crypto world the fundamentals rely on two different sets of indicators:
- Macro Influences
Macro influences like US dollar strength, global inflation rates, and market liquidity, influence the price performance of cryptocurrencies.
- Specific Crypto Fundamentals
To analyze the crypto market, it is important to use data types that only pertain to the price of cryptocurrencies, such as adoption, network hash rate, tokenomics, and development activity.
3. On-chain Analysis to React to Real-Time Market Events
Most blockchain networks are transparent in nature, which allows anyone and everyone to view and verify the history of transactions in real time as they take place. Analysts and investors can examine the blockchain to understand market trades, investor behavior, and peer-to-peer interactions.
By conducting on-chain analysis, investors can learn:
4. Sentimental Analysis: Fear and Greed Index
Sentimental analysis refers to the study of investors’ emotions and opinions about a cryptocurrency or the whole crypto market. The ‘fear and greed index’ is a very useful price prediction tool as it measures whether an asset is fairly priced at any given time.
The concept of the index is that when there is extreme fear in the market, then the token’s price goes lower, while extreme greed leads to high market prices.
Conclusion
Technical and fundamental analysis is crucial to being able to make accurate cryptocurrency price predictions as it takes references from past market trends to later assess economic and blockchain-specific metrics.
On-chain and sentiment analysis are tools that can help enhance your understanding of price movements in the crypto market to predict future valuations of tokens. It also offers deeper insights into the process that goes behind the valuation of cryptocurrencies.
It is highly recommended that you do your research and make investment decisions based on your attitude to risk, experience in the crypto market, the spread of your portfolio, and how willing or immune you are to risk financial losses.
