Dispelling the Myth that ‘Charts Don’t Work in Crypto’
Originally published on: Circle Launches Crypto Exchange App in the US, Plans to Expand in Asia
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March 16, 2018
Perhaps the greatest lie ever told in crypto is, ‘Chart’s don’t work in Crypto.’
Personally, as a trader and an avid fan of charts and everything related to the process of technical analysis, the author finds that this statement couldn’t be more wrong.
Not only that, the statement just simply is not rooted in objective facts. When you ask the purveyors of this myth to explain why they think this is true, they merely state, ‘There is no regulation in cryptocurrency like you would expect in traditional markets.’
What do they mean by traditional markets? Are they referring to the Dow Jones (index), S&P 500, NASDAQ and other well-established American-based stock markets/indices? If so, what regulations do they see in place for these markets that would make technical indicators more ‘valid’ for those stocks/securities than cryptocurrencies/tokens?
Of course, if you ask this question, you’ll more than likely either receive:
- No response,
- A repeat of the same claim just repackaged in a slightly different manner.
Is it because these individuals have disingenuous intention to discourage you from using all of the tools at your disposal to ensure that you receive the best result possible? Probably not.
Unfortunately, this is a statement that stems from ignorance.
It’s a harsh word, yes, but one that has to be used in this situation.
Because the claim that ‘Charts don’t work with bitcoin’ is one that simply is not rooted in logic, at all. This statement usually comes from not only a lack of fundamental understanding as to how these markets and ‘regulations’ work, but a misunderstanding of charting and technical indicators as well.
See, the reason why ‘regulation’ is not relevant when assessing whether or not charts work is because human psychology is at the root of all investment decisions that people make because people are the ones that are taking the investment decisions.
Let’s go back to that lemonade stand example.
When you release your lemonade stand stock as an IPO, and it hits the markets, everyone has the option of offering a price on it. The price of your stock at any given moment in time is what the market values it at. Now, this could be ‘accurate’ or ‘distorted’ depending on who you talk to about it. Perhaps some people have a lot of faith in your work ethic, and your prowess as a business owner and they feel confident enough in your vision to grab as much of your lemonade stand stock as possible. Based on their knowledge of what they feel other very successful lemonade stand companies trade for, they are confident that the current price of $8/stock is an absolute steal. In their minds, they believe that you’ll grow the company to the point where each share will be worth $50/stock one day.
Those people that believe in your stock will buy up as much of those $8/stocks as they possibly can if they feel this way. Why not? However, in order for them to be able to buy your stock for $8/share, they need to find someone else that feels that the price will not increase in the short or long-term beyond $8/share. Because, after all, if they did think that were the case, then they wouldn’t be selling the share in the first place. They would wait to sell it, or they would ask for a higher price on it because $8 is way too low for them.
Perhaps they ask for $10, but no one is willing to buy it for that price. Perhaps others are looking to buy it for $8, but no one is willing to sell it for that price. So, both parties decide they can compromise with $9 and ‘meet in the middle.’Thus, the new price of your lemonade stand company after the first day of trading is $9/share.
That value of $9/share, in many ways, reflects how the market, as a whole, values your company. It means there is a general equilibrium between people that feel as though the stock is a good value purchase at $9/share because it will inevitably go up in the future. Where they can sell it for a profit, and there are some that feel as though the stock is an excellent sell at $9/share, because they anticipate that there are no higher gains to be made on it and if they wait to sell it, then they may lose out on potential profits.
Now Here is Where Market Psychology Really Kicks In
Most of these people that are investing in your company aren’t doing so because they love you so much and they want nothing more than to see you win in this life. Maybe a small percentage of them are just hardcore believers that are willing to go to the moon or bust, but the majority of the investors in your company are people that want to make money. Plain and simple.
So, not only will these investors be trading based on what they think your company will be valued at in the future, but they are also trying to gauge what the market believes that your market will be worth in the future.
So, let’s say John bought a bunch of your stock at $9/share. From that point, the price of your lemonade-stand stock skyrockets all the way up to $20/share. At this point, John has already made 100+ percent profit.
John’s a pretty smart guy though, and he makes an apt realization; the fact that the price of your stock has gone up means two things:
- Before the price traveled from $9 to $10 (market price), a shift in the market had to occur where more people were willing to buy the stock at $9 than there were willing to sell it. So, eventually, all the folks that were willing to sell the stock at $9/share either already sold their holdings or they made the realization that the appetite for this stock is so strong, that they should probably be asking for a higher bargaining price.
- Those that were offering to sell your lemonade stand stock are now reconsidering. Now that they can see the price is going up, they are starting to withdraw their sell offers because they see that the demand for the stock is going up, which will naturally raise the price.
The combination of these two factors is what typically creates a ‘bull run’ in any stock or security. Other investors that observe what’s going on start to join in the party too and buy up the stock because they see, ‘Hey, everyone wants that lemonade stand stock. It used to be $9/share, and now it’s $20/share! I should get in on this too!’
What brings things down, however, is the fact that people like John who bought the stock at $9/share may start to get antsy. At a certain point, John realizes that people will pause and ask themselves, ‘Why the hell am I paying $20+/share for this lemonade stand company?’ Eventually, the price of the lemonade stand company will reach a point where new investors won’t want to enter into the market because they see the value of the stock as being way too inflated for them. Let’s say $21 is that threshold where people make that determination that the price of the stock is just way too much for a lemonade stand company, no matter how good it is!
A Shift Would Occur in the Market
The ‘buy orders’ would start to decrease rapidly. Those that bought the stock for $20 will realize that there are hardly any players in the market that are willing to purchase it for above that price. However, that will not come until later.
People like John who bought the stock at $9 and feel that the price of the lemonade is reaching a tipping point will more than likely sell at the $20/share price mark. Why not? That is a substantial profit for John. Others like John will attempt to sell at the $20 price mark, but they would find that the number of people willing to buy it at that price has all but disappeared. Now there are only those that are willing to buy the lemonade stand stock for $19. Sure, they would sell to them. Why not? Selling for $19 after buying for $9 is still a substantial profit. There is a reason for them to hang their head over.
However, the people that just bought that stock at $20, may start to panic. They might look at this stock that they paid $20 and notice that it’s now going for $19 and then think to themselves, ‘What the hell, I just paid $20 for something that is already going for $19! What’s going on?’ Perhaps they are patient investors, and they believe that in the long-term the market will realize that the lemonade stand company will eventually be worth $80/share one day.
However, most of them will start to panic a little once all the $19 buyers dry out and the market price goes to $18. So, they would start to sell their stock as well at a loss because they would rather take that ten percent loss (from $20 to $18). Instead of taking the risk of the price going all the way down to $10 or $11, where they would take a steeper loss if buyers decide that they would never value it beyond that point again.
So, in addition to the people that bought at $9 and $10 who are now selling to take profit, people that bought the lemonade stand stock at $20 are also selling what they have in order to minimize their perceived losses. Of course, buyers can observe that the market price for the lemonade stand company has been dwindling, so buyers begin to dry up even faster. The goal of investing is to make money, so most investors are not going to buy something if they feel like the price is going to go down right after they buy it. That is antithetical to the whole process.
See the Rabbit Hole We Just Traveled Into?
That is how stocks, securities and yes, cryptocurrency, work. It has nothing to do with regulation and everything to do with how the market is valuing a certain derivative product or security at a given time.
The beauty of technical analysis is that it helps us to determine how the market is feeling at a given time.
See, if you’re a smart investor, you know that there is only so much that you can learn from looking at the market price of something at a given point in time. Most people would want to know what the price has been historically. Is it at a high? A low? What was it valued at when the day began? What did the market value it at last year? Did it suddenly plummet in the last two months? Why? Maybe the market knows something you don’t.
That is Technical Analysis
All of those questions that you’re asking in your head are all forms of technical analysis. Just by looking at a chart before purchasing something, you’re performing technical analysis.
Essentially this is what lets you know, ‘What’s going on.’