Crypto Academy

Scarcity for cryptos

scarcity for cryptos

6 min reading

Are you therefore a newbie in the crypto world, why not sit back while we widen your understanding through this article.

Why are we talking about scarcity of cryptos

Why are we talking about scarcity for cryptos?

What is scarcity?

According to the Oxford dictionary, scarcity is defined as the state of being in shortage of supply whatsoever. In the first instance, one would quickly think of lack or inadequacy. But with cryptocurrency, scarcity is not equal to lack. Are you therefore a newbie in the crypto world, why not sit back while we widen your understanding through this article.

Scarcity and cryptocurrency

There is some evidence that there is a correlation between scarcity and price. Cryptocurrency is in short supply when demand exceeds available supply. The scarcity of cryptocurrency is not due to its finite nature but to its potentially endless demand. Note that scarcity is not unique to cryptocurrencies as all assets are lacking. If there is no deficit, then there is no price either. Anything that has a price is rare. 

Things anyone can have are free, even if they have objective value to people. This is due to the number of digital coins in circulation. One of the main drivers of cryptocurrency supply is the interaction between supply and demand in the cryptocurrency market

The demand for cryptocurrency is primarily driven by its value as a medium of exchange, and the supply is determined by the supply of a cryptocurrency in circulation, which is known and predetermined in the long term.

What is price and how it is formed?

Thus, price is the mechanism by which markets balance supply and demand for rare items. When demand is high, the price increases until the demand decreases enough for the supply to be sufficient. Conversely, when the supply of a product exceeds demand, its price automatically drops until demand rises to absorb the excess. It is also impossible to conclude that there is a shortage of a product if there is no demand for it, regardless of its price.

Supply and demand

Like any asset, a cryptocurrency is considered in short supply when the demand for that commodity exceeds the available supply. When demand falls, it cannot be said that a cryptocurrency is in short supply, even if there is no demand for a certain period. However, cryptocurrency supply algorithms affect the price because they prevent supply from meeting demand.

Bitcoin scarcity

For example, Bitcoin price drops from $100 to $20. With this drastic drop in the price, we will notice that many traders will want to purchase more Bitcoins in the future. However, BTC owners will not want to sell their coins because for them it is a huge loss. They then keep their Bitcoin anticipating that eventually, the price will go up. During this period where traders want to buy and Bitcoin owners do not want to sell, we say that there is scarcity. Scarcity does not outrightly mean that there are no coins available but it’s simply because the price at which the digital currency is sold does not favor the asset owners.

Hence, cryptocurrencies are likely to evolve not because of their scarcity, but because of their inflexibility. As the market size increases, prices are also likely to fluctuate, becoming less frequent but much higher. As long as cryptocurrencies remain inelastic, their prices are subject to change without prior notice. However, you will be interested to know that cryptocurrencies have a unique quality that no other currency has, namely the almost perfect inelasticity of supply. This means that no matter how great the demand is, cryptocurrencies will always be mined at the same rate.

In conclusion, cryptocurrency cannot be said to be scarce, it is only volatile due to its inflexibility. As the size of the market increases, there is an increase in the demand for cryptocurrencies and because of this, we find that the prices begin to fluctuate. Having a static price for a cryptocoin does not solve the issue because cryptocurrency in its nature is volatile.

Conclusions

Fundamental vs Technical analysis

Technical analysis

5 min reading

How fundamental and technical analysis can be applied to the crypto-currency market.

Technical-vs-fundamental-analysis-2.png

Fundamental vs Technical analysis

Specifics of the crypto market

The crypto-currency market is quite young and volatile. Predicting market trends and possible price movements is not easy for both beginners and experienced traders. The right instrument and strategy are the most important factors for successful trading and investment.

Moreover, trading such volatile assets as crypto-currencies requires special skills and knowledge. You will learn how to choose the strategy, how to use fundamental and technical analysis by putting your theoretical knowledge into practice. In the article, we will explain what fundamental and technical analysis is and how they can be applied to the crypto-currency market.

History

The principles of technical analysis originate from the study of financial market data over a hundreds of years. In the 17th century, parts of technical analysis appeared in the writings of Joseph de la Vega, an entrepreneur in Amsterdam who dealt with the financial markets in the Netherlands. In Asia, technical analysis is said to have been developed by Homma Munehisa in the early 18th century and turned into an application of candlestick techniques and a means for charting technical analysis today. Journalist Charles Dow (1851-1902) summarised and carefully studied the data of the American stock market and published part of his recommendations in an editorial for The Wall Street Journal. According to him, it was possible to find patterns and economic cycles in the data, later to be called ‘Dow Theory’. Nevertheless, he never advocated the application of his ideas as a stock trading strategy.

In the 1920s and 1930s Richard W. Shabaker published several books in which he continued the work of Charles Dow and William Peter Hamilton in their books “Theory and Practice of the Stock Market” and “Technical Analysis of the Market”. In 1948, Robert D. Edwards and John Magee published Technical Analysis of Stock Trends, widely considered one of the fundamental works on the subject. This book is all about trend analysis and chart patterns and remains relevant today. In the early days, technical analysis was almost entirely chart analysis, as the power of computers was not available for statistical analysis in its modern sense. Charles Dow is known to have laid the foundation for chart analysis in the form of points and figures. With the formation of financial behaviour studies as an independent academic discipline in economics, Paul W. Azzopardi combines technical data analysis with financial behavioural research and introduces the term ‘behavioural technical analysis’.

What is fundamental analysis 

First of all, there are a lot of factors that can have a significant impact on the crypto-currency market and asset prices. For any trader or investor, it is important to analyze these factors and make predictions about possible trends. Thus, fundamental analysis of the crypto-currency market presupposes a deep dive into the information available about a financial asset. This means that you can assess the possible availability of the coin’s application, its total capitalization, analyze the history of the project, or certain facts about the company.

Why is it needed?

The main task of fundamental analysis is to determine whether an asset is overvalued or undervalued and whether it is worth investing in it based on your own perception of the project represented by this coin. Then you have to decide to open positions based on the information you have. At first, you may be confused, but by trying to analyze the economic and political situation, you can come to the conclusion that crypto-currency rates largely depend on how governments regulate or accept cryptocurrencies and digital assets. Or even the statement of a famous person can affect the rates. 

This is what notably happened to Dogecoin in 2021 when Elon Musk posted several publications on his Twitter account, and Dogecoin price rates increased by 50% in less than 24 hours.

What is technical analysis

Technical analysis is based on the assumption that price fluctuations in the market are not random and are caused by recurring trends, which can be used for making forecasts. Unlike analyzing fundamental factors, technical analysis provides much precise information and gives signals for trading any crypto-assets, including bitcoin. Moreover, the technical analysis reflects the psychology of traders’ behavior, which was formed at the beginning of the 20th century, when the first exchange services appeared. 

Can we use both?

Besides, advanced traders combine several different techniques for better results. This method is much reliable for trading on the cryptocurrency market. There are some technical analysis tools like RSI, Dow, Fibonacci and Nuage Ichimoku theory that you can successfully apply on bit4you platform. Using them, you can predict the possible price movements and improve your strategy according to the results.

If you are planning to switch on bit4you from traditional financial market to cryptocurrency market, you can use the same trading strategies, charts and indicators. The range of methods used by technical analysis is very wide. We divide them into four types: 

    • Trade statistics;
    • Support and resistance level;
    • Technical Indicators;
    • Candlestick Analysis.

Nevertheless, it is not enough to choose the right trading strategy. It is also very important to use fundamental and technical analysis. The main task of fundamental analysis is to identify key events and activities that may affect the price rates of the asset in the near future. If you analyze fundamental factors properly, you will discover much useful information. Of course, technical analysis can tell us something that fundamental analysis cannot predict. Therefore, many traders combine them in order to increase chances for profit

Conclusions

Moving averages

Moving averages

4 min reading

Do you want to profit from trading cryptocurrency? Then let's get acquainted with one of the technical analysis tools such as Moving Averages.

Moving averages

Moving averages and how to use them

You would need to study technical analysis indicators to be able to succeed in the crypto market. Moving Averages is one of these useful indicators (MA). Hundreds of indicators have been developed in technical analysis over the years. Moving averages, on the other hand, are regarded as one of the most dependable, objective, and valuable instruments.

What is it?

The Moving Average is the most common and, probably, one of the first indicators that a trader encounters when learning the fundamentals of trading. Moving Average is a trend indicator that shows the average value of the price of the selected currency pair over a given time. Moving Average indicator can be used to expose market trend direction, get trading indications on transaction beginning, and filter “noise,” i.e. tiny price variations. The moving average is superimposed on the price chart, and trading decisions are based on where it is concerning the price.

Indeed, the MA’s primary function is to smooth out the information presented by the chart by identifying the asset’s general trend. The MA line is just another way to validate the direction of an asset’s price movement; it can also indicate a shift in trend as well.

Types of MAs

Regardless of their variety, MAs are often divided into two types: simple moving averages (SMAs) and exponential moving averages (EMAs). Traders can choose whatever indicator is acceptable and will profit from its installation based on the market and the intended outcome. Use any sequential data collection, including opening and closing prices, maximum and minimum prices, trade volume, or other indicator variables to build the Moving Average. The only thing that distinguishes different forms of Moving Averages is the weight factors allocated to the most recent data. In the case of Simple Moving Average, all prices over the time in question are equally weighted. The latest prices are given more weight in the Exponential Moving Average.

Simple Moving Average (SMA)

SMA is a simple arithmetic moving average that differs from other MAs in that it has a different weighting factor that is assigned to its last indicators. These are the values of a period that are evaluated with equal weight. SMA generates a significant value in the form of the average value over a certain time.

Exponential Moving Average (EMA)

The EMA’s enhanced sensitivity to recent price fluctuations benefits traders who want the moving average to lag less in recent price swings. The disadvantage of employing the EMA is that it raises the likelihood of misleading or premature trade signals because it generates more trading signals. Moreover, traders frequently use a variety of EMA durations, including 10-day, 50-day, and 200-day moving averages.

How to use it on bit4you?

It is simple to use Moving Averages on the bit4you trading platform in the calculation of a consecutive data set, including opening and closing prices, maximum and minimum prices, trading volume, or values of other indicators. 

The principle of building a moving average is very simple – the indicator calculates the average price over a certain elapsed time and draws a line. The time interval is calculated in bars (candles), which you specify in the settings. On the bit4you website, you just need to click on the asset you are interested in and there is a price chart for the particular timeframe. Then, click on the Indicators button above the chart and select Moving Averages among other technical indicators. 

Further, there you can see the longer the time range, the stronger the signal. According to the illustration below, we can interpret a price-moving average by comparing its dynamics to the price’s dynamics. If the fast (green) MA crosses the slow (red) MA from bottom to top on the graphs, it signals a golden cross, indicating an entry into the market. If the blue MA crosses the red MA in the opposite direction – from the top down – it is a signal of the death cross, which indicates that the position should be closed. In other words, when the instrument price climbs above the MA, it gives a buy indication; when it falls below the indicator line, it is a sell signal. Because MA is customizable, the strength of the signal is determined by the time frame and length of the MA. 

Formula

We calculate Simple Moving Average (SMA) by adding the closing prices of each candle for a given number of periods and dividing the result by the number of periods. SMA = SUM (CLOSE (i), N) / N

Where: SUM is the amount, CLOSE (i) is the closing price of the current period and N is the number of periods.

The formula for Exponential Moving Average (EMA) is EMAt= a*Pt+(1-a)*EMAt-1

Where: α is a weighting coefficient with a value between 0 and 1 that reflects the rate of aging of past data: the higher its value, the greater the specific weight of new observations of a random variable, and the lower the old ones; 

Pt is the random variable’s value at time t;

EMAt-1 is the value of EMA in the period (t-1).

In conclusion, the MA is a very helpful and popular technical analysis indicator that allows traders to detect the uptrend and decline. Before trading, we also recommend using MA at multiple timeframes and in conjunction with other indicators. 

Conclusions

Dow theory

Dow theory

5 min reading

Technical analysis tools help traders to make a decision in the market. Learn more about this.

Dow theory

What’s the Dow theory?

Technical analysis briefly

Technical analysis is a universal method of analysis that applies to financial markets, stock markets, futures, options, and currencies. The basis of modern technical analysis is the Dow theory. Charles Doe was an American journalist, creator of the world-famous financial publication The Wall Street Journal and the Dow Jones Index, and co-founder of Dow Jones and Co.

History of Dow Theory

In the nineteenth century, Charles Dow was the founder and editor of the Wall Street Journal, as well as a co-founder of Dow Jones & Company. As a member of the corporation, he contributed to the development of the Dow Jones Transportation Index, the first stock index (DJT). He also described a market behavior hypothesis that is still in use today. The notion that the market could be anticipated only through the use of charts was innovative, and many 20th-century investors slammed it right away. What cannot be claimed now is that people make money in all kinds of markets using technical analysis based on Dow’s theory, supplemented with a variety of tools.

What is Dow Theory?

Charles Dow’s theory is a theory that describes the behaviour of stock prices over time. The postulates of this theory form the basis of the methods used by investors around the world, working both with the stock and index markets and with the foreign exchange market. At the heart of this theory are the studies of Charles Doe, which describe the behavior of stock prices that change over time. Such a concept as the Dow theory appeared after the death of Charles, and it was supplemented by other authors.

How Dow theory works

The Industrial and Transportation (Dow Jones) indices should confirm each other when the trend changes. If no such confirmation is observed, then there may not be a reversal. Trends should be confirmed by volume. Dow believed that a trend was confirmed if stock prices rose and trade increased with them. For a qualitative assessment of the market, it is always necessary to build a joint graphical model – a trading volume histogram on the price chart. The histogram structure includes bars of different heights. Each bar corresponds to its own trading period, which depends on the selected scale (1 minute, 5 minutes, 25 minutes, etc.). The higher the bar height, the higher the speed at which the market-maker updates the quotes. 

Each bar of the histogram corresponds to one chart figure (bar or candlestick), which determines the trading volume for the trading time (trading interval). The histograms are placed under the price chart.

The trend will continue until there are unambiguous signals of its termination. The author believes that the market will most often continue to move in the current trend, rather than change it. A trend change will occur only if there is an unambiguous signal about it: a breakout of trend lines and closing prices outside of it. There are three types of trends: primary (long-term), secondary (or intermediate), and small (or short-term). And a trend always has a direction. It can be: ascending, downstream and lateral (flat).

Principles of Dow Theory

Dow Theory consists of the following principles. A trend has three phases: accumulation, participation, and implementation. The accumulation phase is when investors start buying or selling an asset. But there are few such investors and they cannot contribute to the organization of the trend. At the stage of participation, traders begin to open deals on a new trend, which then gains strength.

And after the trend has arisen, the rush of buying or selling begins. When the price peaks, the investors close and get a good profit from it. After that, the trend starts to reverse. In the event that new traders support the trend, the trend will continue, if not, then a reversal will occur. The price takes into account everything. This means that the market price displays everything that can affect the supply and demand of the market. Indexes must be consistent. 

What is needed

The first thing you need to trade on the Dow Theory is a trading platform. Today there are a lot of companies that offer such services. Some of them even have a Demo mode that allows users to practice first. Dow theory states that certain stock indexes must be consistent with one another. This statement directly applies to indices such as the Dow Jones Industrial Average as well as the Dow Jones Transportation Index. According to the theory, the trend that has already formed and signals about its change should be confirmed by both indices. By the way, sometimes differences between the signals are allowed here, for example, one can come earlier than the other.

These principles are universal, and they must be studied by every trader who trades through technical analysis of the market since they are technically analyzed in the postulates of Charles Doe.

Formula

We would like to present you one of the possible variants for proving Dows axiom, based on the analysis of commercial structures profit on the real competitive market of goods and services, because the main goal of any commercial structure is profit and Forex is not far away from the real market of goods and services. It is known that the most obvious, simple, radical, reliable and unquestionable way to determine profit (P) is its representation as the difference between income (E) and all kinds of expenses (P):

P = E – P

Expenses (P) are variable (Pper), dependin on income (E), and constant (Ppos), independent of income:

P = Pper + Ppos

Therefore, the profit formula is usually represented as

P = E – Pper – Ppos

Using the definition of variable costs as Pper = K*D, we obtain, where K is the coefficient of proportionality, we write

P = (1-K)*D – Rpos

Expressing Profit (E) as the product of the volume/quantity of goods (V) and its selling price C, we obtain the following formula for determining profit in the traditional way

P = (1-K)*V*C – Ppost (1)

Any person looking at this formula (1) will exclaim: the profit depends on both the volume and the selling price of the commodity! And he would be right.

But, some sources shows how to derive an alternative formula for profit taking into account the provisions of the law of supply and demand, which coincides exactly with the traditional formula (1):

P = A*(Ts^2 – 2*Cp*C + Tsopt^2)/C (2)

Here, A, Tsr and Tsopt are constant coefficients calculated experimentally on the basis of actual trade data within selected data sample, where A>0 for monopolistic and A<0 for competitive markets, Tsr is market price and Tsopt is optimal sales price providing maximum profit.

Based on the absolute equality of the formulas (1) and (2), we conclude that the Dow prophecy in the form of the first axiom can be a proven theorem as it contains no other variables besides the price, and traders and market researchers can safely rely on the price analysis in their market research without being distracted by other market parameters.

Conclusions

RSI

RSI

5 min reading

Crypto investment has so many strategies. Let’s get to know one of the important tools for technical analysis, Relative Strength Index (RSI).

RSI

What is Relative Strength Index (RSI)?

What is RSI?

The Relative Strength Index (RSI) is a technical analysis tool and oscillator in the cryptocurrency sector that displays the strength of the price trend. It shows the intensity of the asset’s purchasing and selling and is regarded as one of the most effective analytical techniques for assessing the status of cryptocurrency. Traders who apply the indicator correctly may conduct a complete examination of the trend and use it to make credible forecasts of price changes.

That is, it is most successful when the market is reasonably tranquil. It displays a broken curve with points ranging from 0 to 100. According to this, there are some crucial points such as:

    • 70 to 100 points that the market is overbought and that a price decline is possible;
    • 0-30 indicates that the market is oversold and that a price increase is likely;
    • The middle zone is between 30 and 70. It means not to enter the deal since it could be dangerous with potential losses. Thus, opening orders when the chart exits the crucial zones 0-30 and 70-100 is the best option.

The RSI application is based on the usage of its patterns and models in the development of trading strategies. The tool displays the same values as the cryptocurrency price chart. Their interpretations, however, diverge. Traders pay close attention to the correlation or difference between the quotes and the data displayed by the RSI cryptocurrency indicator.

How to use it on bit4you?

However, the bit4you trading platform provides its users with all existing technical indicators. You can easily predict possible price movements and market trends by using different instruments. For example, after selecting an asset on bit4you, you will see a chart displaying how the price fluctuates over time. There is also a “Indicators” option above where you may locate RSI.

The indicator has 14 days and levels of 30 and 70 at first. If you wish to update them, you must first click on the edit button. Levels are occasionally modified for such combinations as 20 and 80, 40 and 80 for a bullish trend, and 20 and 60 for a bearish trend. You can also select a period ranging from 5 to 25. Keep in mind that when the number of periods reduces, the indicator becomes more sensitive to price changes. As a result, it will emit a large number of signals, some of which may be false. If you set the value 25, for example, the curve will become smooth, nearly without oscillations. Experts recommend setting the number of periods higher for a shorter time frame and lower for a longer one.

Connect the RSI chart’s tops and troughs and trade on the trend line’s breakout. Connect three or more points on the RSI line as it climbs to form an RSI uptrend line. Connecting three or more dots on the RSI line as it decreases creates a downtrend line. Indeed, RSI trendline breakthrough indicates a price continuation or reversal. Remember that an RSI trendline breakout frequently precedes a price chart trendline breakout, providing warning and an early opportunity to trade.

Formula

The RSI indicator formula consists of two equations. With the first equation, we will obtain the initial Relative Strength (RS) value, which is the ratio of average “Up Close” to average “Down Close” values across “N” periods. We use the formula below to get the data: 

RS = Average Up Close price / (Average Down Close price) for a given period.

The actual RSI value is calculated by indexing the indicator to 100 using the following formula:

RSI = 100 – 100 / (1 + RS).

In conclusion, the RSI indicator helps to determine the direction and strength of the trend, as well as its possible change and buying/selling signals. As a result, the indicator is suitable for both novice and advanced traders. By the way, we recommend you test how RSI works on Demo mode first. As a result, you will have a thorough understanding of how to apply this indication while avoiding the risks associated with real-world trading. Furthermore, RSI works well in conjunction with Bollinger Bands. 

Conclusions