Support: A Fundamental Aspect of the Crypto Markets

Jan 10, 2019   |   by Emmanuel Lai   |   

It is quite difficult to make sense of the markets. If anyone claims to have a crystal ball to the future, you should not walk, but run away from them as fast as you can. Investing, especially in the crypto-space, is by no means risk free. However, if we go in prepared, we can understand not just how, but also why the market behaves the way it does.

The Volatile Markets

2018 was a turbulent time for cryptocurrencies. Reaching almost 20,000, Bitcoin's meteoric rise has surprised countless investors, and made quite a few people wealthy, provided that they cashed out quickly enough. However, as quickly as millionaires were made, entire fortunes were wiped out with the sudden onset of a bear market. Bitcoin's ascent was overshadowed only by its rapid plunge, to the chagrin of many. Although there was a few months where Bitcoin, as an asset, experienced lower volatility than the Dow Jones Industrial Average, year-ending volatility was still remarkably high, as Bitcoin approached 3000.

The markets were fraught with hysteria and FOMO, or fear of missing out this year. Much of the price movements were psychological in nature, as investors acted out of euphoria, during the bull run, and panic during the massive sell-off. Those with both the foresight and the risk appetite to profit off the emotions of the public made a very handsome profit. However, those who succumbed to the pitfalls of FOMO and FUD, or Fear, Uncertainty, and Doubt, found themselves suffering the worst possible fate in the world of investing: buying high, and selling low.

What is Support?

Why did the freefall in price appear to stop at around $3000? The answer to this question is found in a concept called "support". Support is a concept in "technical analysis", a discipline in investing/trading where decisions are made based on statistical data. Analysts then interpret this data to predict short term price movements. A "support level" is a level in which a specific investment struggles to fall below. If it dips below the support level for a moment, it rises back up. The corollary for support is resistance, or a specific price that an investment rarely goes above.

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price"
Warren Buffett

The entire premise of successful investing is based on buying assets at a lower price than you believe they are actually worth. This is where the mantra of "buy low, sell high" comes from. A large amount of support comes from investors trying to pick up undervalued assets. Although falling prices may scare off a large amount of investors, those who believe in the potential of Bitcoin may interpret low prices as an asset going on sale for a bargain. Once a critical mass of investors decide that an asset is undervalued, they effectively create levels of support.

Just HODL On?

Many blockchain enthusiasts are "HODL'ers". In the crypto community, the term "HODL" refers to the act of holding a crypto asset for the long term. On a popular Bitcoin forum, a user made a post claiming that he was a poor trader, but was going to "hodl" because he believed in long term growth of his cryptocurrency. HODL'ers are often idealogically motivated, and refuse to sell the cryptocurrency of their choice no matter what. Some HODL'ers even believe crypto to be superior to fiat currency.

These people provide an extremely powerful level of support, because these are people who refuse to sell even when it appears that the sky is falling. A hardcore HODL'er may never exert any downward pressure on market price, but, like value investors, may swoop in when prices have declined, injecting life back into the markets.

A Word of Caution

The concept of support is technical analysis, not fundamental analysis. Technical analysis focuses on behaviors and psychology of buyers/sellers, rather than the underlying value, expected growth, and forecasted adoption of a cryptocurrency. Because it fails to account for fundamental changes to an asset, technical analysis is far from bulletproof. Events detrimental to a cryptocurrency can occur after the markets find support levels, such as the departure of a key developer, regulatory issues, or technical issues. These happenings can drive prices down even further.

Conclusion

There is no perfect way to predict or time the markets. Do not be tempted by charlatans selling get rich quick schemes. However, the markets do indeed have certain identifiable trends. With a blend of technical analysis, to determine where the charts are going, and fundamental analysis, to decipher the stories behind the charts, you can become a better-informed investor, instead of succumbing to unwarranted FOMO and FUD.

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Emmanuel Lai

Digital transformation professional with a focus on Robotic Process Automation. Passionate about fintech, process engineering, and fitness. Currently serving as a Strategic Adviser for Garden of Crypto.