Does Technical Analysis (TA) work with Cryptocurrency…?

It depends on the Investor

In my day to day job I am a Financial Adviser. I use TA daily and consider it an important factor to consider before investing. Why? Because it can sometimes help establish the rationale behind price movements and give an insight into how the wider investor base is feeling.

Many Retail and Institutional investors in this space (maybe as much as 30%) believe TA is important and they use it to determine the majority of their trading strategies.

Whether you believe in TA or not, it does drive a large portion of price action in whatever market you are investing in due to the number of investors basing their decisions off of it.

How important is TA to consider in Crypto?

In my own experience using TA has proven fruitful when choosing to enter or exit a position. However, I personally believe that Fundamentals trump TA where Crypto is concerned.

The disparity between the Whales (Institutional investors) and Retail investors is huge in this space. This is largely the reason, along with a few others, as to why Crypto is so volatile and difficult to apply TA to. Whales have the ability to dictate price action and preemptively trade positions that they will trade out of at a later date after they have moved the price in their favour.

How do they do this?

Coinmarketcap indicates that Cryptocurrency as an entire market is valued at around $375b. Some believe this to be a hugely over inflated valuation. The same people estimate that for every $1 invested, $50 is added to the perceived market cap. If this is true, then a more realistic valuation for the Market would be around $7.5b in terms of FIAT.

If this same ratio is applied to daily trading volume then Cryptocurrency is sitting at around $400m (based on a daily average of $20b).

This then means that if a Whale (or a collection of Whales (a Pod!)) has $100m dollars to trade with, then theoretically speaking they would control 25% of the markets trading volume for the day.

I recognise that this is very much napkin math and pure speculation. But even if the ratios are halved, it still puts too much control of the market in the hands of Whales. This is where I’d like to see regulation step in. I’ll save my thoughts for another time on that one.

Is Technical Analysis a modern day Religion?

Getting back to TA.

TA appears to be a mathematical based belief system that cannot be proven or disproven. If enough people choose to use it and implement it, it essentially becomes a self fulfilling prophecy. TA attempts to represent crowd psychology, enthusiasm and sentiment through numbers.

In my belief, TA does work and can be used as part of a trading/investing strategy but as things currently stand with; next to no regulation, a potentially huge variation in realistic valuations, a huge disparity in wealth, and a potentially premeditated and coordinated effort to manipulate prices by Whales TA will struggle to get a real foothold.

The only answer in my opinion is to consider both TA and Fundamentals when entering or exiting a position. Remember, it’s a game of emotions. The charts reflect how we feel as investors. The TA simply try’s to turn those emotions into numbers on a page.

Just some of my own thoughts.

Good Luck all!