Evaluating Bitcoin as an Investment - Technical Analysis

Investors should apply investment tools to evaluate Bitcoin prices

Answers can be revealed in a Bitcoin price chart. Getty Images

Making a decision on an investment requires due diligence by an investor. That includes the need to evaluate that investment based on a fundamental analysis of that investment, as well as a technical analysis of that investment's pricing trends.

When considering an investment in Bitcoin, you need to be aware of what Bitcoin is and how it's used. It's not like a stock as there's no company information or structure underlying it.

Unlike a company, there's no specific product(s) that management can provide forecasts or estimates on expected future sales.  Unlike bonds, there's no underlying interest rate or payment of principal assured from a Bitcoin investment.

Fundamental Analysis

When you're doing your fundamental analysis of Bitcoin as an investment, you'll have to utilize different metrics and analysis than stocks or bonds, but it's a necessary step before making an investment. First of all, you'll need to become aware of what Bitcoin is and what it's not. Here's a good starting point.

Once you're comfortable with your understanding of Bitcoin, you'll need to continue your education to evaluate it as an investment option.  Fortunately, there's much data available about Bitcoin to do that. You'll need to become knowledgeable about Bitcoin's role as a form of currency and evaluate factors such as the supply of Bitcoin, both in use, and being created.

 

You can track the transactions done with Bitcoin, as well as the creation stats associated with Bitcoin. It's good to also be aware of how many existing, and newly created Bitcoin wallets there are. These will show trends and data that should be considered and evaluated before making an investment into Bitcoin.

A good guide to areas to consider when doing your fundamental analysis of Bitcoin is here.

Technical Analysis

One of the things that highlights the maturation of an investment and provides a basis for trading in that investment is when that investment can be evaluated on a technical basis. Bitcoin has been trading on exchanges for a long enough time that evaluating it on a technical basis is appropriate. When Bitcoin was a thinly traded currency, it was apt to display wide price swings that made applying the rules of technical analysis for investments difficult. 

Currently, traders and investors in Bitcoin are actually depending upon an evaluation of technical analysis of its price trends as their primary driver for making investments in it. The theory behind technical analysis is that the price of an investment moves in trends. By mapping out the charts that display the price changes of an investment over time, an investor can find these trends.

These trends will often indicate if an investment is in an uptrend (increasing price) or downtrend (decreasing price). Over time, these trends provide an ability to draw lines between the high prices and low prices of these trends. This allows one to draw a "channel" which shows the price fluctuations within that trend.

These channels will often naturally create a range that will indicate when an investment is hitting a resistance level (trying to increase its price in the range) and when it's hitting a support level (the price that seems the floor for an investment). You then include techniques such as "head and shoulders" and "candlestick charts" for further analysis. Effective application of technical analysis can often indicate when an investment is due for a "breakout" from a range which can indicate potential for an increase, or decrease in price.

Resources

As I said, Bitcoin has matured to the point as an investment that technical analysis can be applied appropriately to the currency as an investment. Here are some Bitcoin-specific guides to help you get up to speed:

In fact, there are now regular publications that provide their own analysis of Bitcoin trends and recommendations. This is an indication that many investors are using this tool for evaluating Bitcoin's investment potential. If you want to be a prudent and prepared investor in Bitcoin as well, you should consider technical analysis and these resources for your own analysis as well.