Approaching financial markets can be a daunting task. Legacy finance is filled with industry-explicit terminologies like collateralized debt obligations (CDOs), asset-backed securities, and exchange-traded funds (ETFs). If you’re not professionally involved in finance, or regularly exposed to the industry, financial markets can seem unnecessarily complex.
The underlying technology of cryptocurrencies rivals the complexity of various asset classes and terms used in finance, but it draws several more explicit similarities. In any financial market, charts are where investors pour over trends (e.g., technical analysis), fundamentals, and data to glean any sort of advantage in trading.
If you’re more of the passive investing type, you may occasionally glance at price charts for assets you’re invested in, rather than sitting in front of a screen scanning away all day.
Whatever your preference, it’s important to understand what you’re looking at with cryptocurrency charts. Specifically the structure, risk, and tools that populate market charts.
A Market Overview
Cryptocurrency asset prices are tracked through market charts, most of which are used by traders on standalone services like TradingView.
These charts plot the current price over time in specific intervals using candlestick patterns that originated in Japan. For example, a 5-minute price interval is represented by a single candlestick that opens at the beginning of a 5-minute epoch and closes at a specific price after the 5-minute interval. These candlesticks are chained together as the market flows to the right, and are underscored by the volume traded within the allotted time.
Virtually all financial assets, from commodities to equities, are traded on some iteration of a candlestick chart. One of the most popular charts is the price-by-volume (PBV), which weighs market prices with the volume traded. Volume is critical for the cardinal purpose of liquidity. In financial markets, liquidity is the ultimate goal in terms of microstructure.
The more liquidity, the easier it is to buy/sell without any slippage. Another advantage being that market manipulation is more challenging as it requires higher investment by malicious parties.
You will find PBV charts across the cryptocurrency market and it is critical to understand the risks, tools, and characteristics associated with them.
Understanding Crypto Market Nuances
You don’t need to be checking the charts all the time if you’re a passive investor in crypto. Instead, you can glance at price action every now and then if you’re in it for the long-haul. However, the situation is different for active traders.
Taking volume into account for any cryptoasset is absolutely critical. Many small-cap altcoins have minimal to near-zero liquidity, meaning that if you buy the asset on a low-volume exchange, selling the asset will be an arduous task. Studies have shown that close to 95 percent of all exchange trading is fake too, specifically in the instance of low-cap altcoins.
Be wary of buying an asset that has a low trading volume.
Many traders wield tools to analyze price movements on crypto charts, ranging from technical analysis (TA) to fundamentals. Moving averages, trendlines, and more instruments are typically available in the trading interface of an exchange market chart and can help traders map where price action may suddenly shift.
To note, understanding the nuances of technical trading is outside the scope of this article.
If you’re just entering the crypto market, passive and conservative investing with what you can afford to lose is the prudent strategy. Your salient takeaway from this post should be understanding the risks associated with trading and investing in cryptocurrencies -- or any other asset for that matter.
Cryptocurrencies are volatile.
Their prices fluctuate significantly more than vanilla blue-chip stocks or commodities like crude oil. Bitcoin’s price even surged more than $3,000 in under 48 hours once. Unfortunately, the reverse is also just as possible. Stablecoins (crypto coins pegged to a fiat currency like the USD or EUR) offer avenues for traders to swap in and out of volatile cryptocurrencies, but again, you should only invest what you can afford to lose.
Cryptocurrency charts provide real-time movements of asset prices, but those prices are subject to the vagaries of influential external news, large traders (whales), and broader market sentiment by the public. If you plan on actively trading cryptocurrencies, take the necessary time to learn and understand the nuances of the market.
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