Predicting the price of bitcoin can be quite difficult due to its high volatility. This makes it often impossible to get it right. However, because it involves buying and selling, as well as the need to make profits, there is a high need for prediction.
The use of a bitcoin price prediction tool allows one to make a relatively good prediction, especially if such a tool considers historical data. Below, we will discuss some Bitcoin price prediction tools that are quite useful.
Bitcoin Price Prediction Tool
Due to the volatile nature of cryptocurrencies such as Bitcoin, it can be exhausting trying to identify the top and bottom of the markets. Some tools, however, have been developed over time to help traders and investors predict the market tops and bottoms. Let’s look at a few.
This metric indicates what the market top may be using a simple ratio between price and the 200-day moving average (200 DMA), which brings about a speculative bubble. This means that the price has significantly exceeded the intrinsic value or the point of seller exhaustion.
Using this metric, two values need to be given close attention and they are 1 and 2.4. When 1 is obtained as the multiple, it means bitcoin prices have risen above the 200 DMA when values are above 1, or that prices have fallen below the 200 DMA for values less than 1. This indicates that the market favors the bulls when the metric is above 1, and favors the bear market when below 1, though there is an exception.
Once there is a multiple above the 2.4 threshold, it indicates the start of a speculative bubble. This is important as the burst of bubble which will eventually come, will result in rapid depreciation. Using simulations or statistical data, it was concluded that the best results were obtained when the Mayer multiple was below 2.4.
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Top Price Model
Created by the analyst, Willy Woo, this model for predicting the price of Bitcoin is a fitted model that multiplies the all-time average price by a factor of 35. This average is obtained by calculating the sum of daily market cap values and dividing it by the market age in days.
It helps to indicate the Bitcoin market tops and has been tested over three times showing the correct retrace point each time, indicating some level of accuracy.
This particular tool may be less volatile than the Mayer Multiple tool as it does not depend on a 200 DMA like the latter, which is relatively slow compared to the average.
The Bitcoin MVRV Z-Score Ratio
This method of predicting Bitcoin price involves the use of statistical normalization to measure the standard deviations of the spot price from the realized price. When this tool is employed, high values in the market indicate that investors continually hold large unrealized profits, indicative that the sell incentive has reached its peak.
The tool is useful in predicting when the Bitcoin market hits the top. Alternatively, bottoms are indicated when the market is heavily underwater and investor capitulation is likely underway.
It uses blockchain analysis to identify periods of over or undervaluation of Bitcoin with its fair value. It employs three metrics which include the market value, the realized value, and the z-score line.
The market value is the actual price of Bitcoin multiplied by the number of coins in circulation. The realized value on the other hand is the price of each Bitcoin at its last movement, adding up the individual prices and getting the average, and multiplying it by the number of coins in circulation. The z-score is the standard deviation test that eliminates the extreme in data between the market value and the realized value.
This tool is quite effective in identifying when the market value moves unusually high above the realized value, which is indicated by the z-score and indicates a market top. It also indicates when the market value is lower than the realized value, leading to huge profits.
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The RHODL Ratio
The model analyses the buy and sell patterns between older and newer investors and uses this to predict the top of the market.
Using this method, the market bottom occurs when older, smarter investors buy and hold a maximum volume of the supply while the market top occurs when older investors sell off their holdings and newer speculative investors buy up the supply.
This indicates that there is a peak in the market when the total amount of newer coins is high relative to the older coins. It makes use of the realized value HODL waves which are the different age bands of coins weighted by the realized value of coins within each band.
The RHODL ratio looks at the ratio between the one-week band and the band of one to two years while also calibrating increased hold over time and for lost coins by multiplying the ratio by the age of the market in the number of days.
Anytime the one-week value proves to be significantly higher than the one-to-two-year band, it indicates that the market is overheated and may be highly profitable in this period.
Reserve Risk Metric
This method uses on-chain data to the maximum, highlighting the effects of holders who refused to sell their holdings in the bull market. As investors continue to hold on to coins, price continues to grow due to the scarcity of coins, resulting in fewer destroyed coins. This will eventually result in a lower trend.
However, prices will eventually get to a point where holders want to sell and when this occurs, opportunity cost is realized by the investors and the metric will trend higher resulting in blow-off tops.
It tracks the risk-reward balance relative to the confidence and conviction of long-term investors and holders. It compares the seller incentive to the strength of the HODLers who continue to resist the temptation.
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Stock To Flow Ratio (S2F)
A leading Bitcoin price model, the model was created by Plan B and determines the price of Bitcoin being pushed by scarcity. Built on the premise that scarcity promotes the value of any substance, it prices Bitcoin to other scarce assets like silver and gold.
As Bitcoin currently has a given number of coins in circulation, with no interest in producing newer coins, demand will continue to increase due to the rise in the number of traders. As a result, the coin will be scarce, meaning a continued value increase. So, as its stock to flow continues to rise, the Bitcoin price will also continue to increase.
This method, however, has its drawback as it focuses solely on the supply of Bitcoin and not on the demand aspect. Demand and supply are the two factors that determine the price of any asset and neglecting one for the other will present a biased view that may result in reduced prices if demand falls.
There are a lot of Bitcoin price prediction tools available; however, the accuracy of anyone may be difficult, so it may be advisable to use a combination of two or three of these tools to get an idea of the price of Bitcoin.
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