Like with any other asset, investing in crypto is all about buying at the bottom and selling at the top. The bigger the difference between these two points is, the bigger your profits are.
However, it’s not always easy to tell when a digital currency has reached its top. This leads to many traders failing to exit their positions on time and holding onto assets that have very little chance of recovery.
While no one can predict the market with 100% accuracy, there are ways to tell if the top may be in. In this article, we look at four of them and discuss what to do in each scenario.
Unrealistic Prices
Inexperienced traders may see that a new coin on the market is experiencing a massive surge in price and think it’s a good time to buy it. However, sharp price spikes, especially when they’re not backed by major news or development, may not necessarily indicate that it’s the right time to invest.
These sudden hypes can be driven by speculation, promotions, and short-term excitement. Unrealistic prices like this may actually be a signal that a coin is close to topping out. Once casual traders have heard about it, most of the profits have already been taken by early investors.
That’s why, instead of buying into these spikes, the best time to get your hands on new crypto currency is during its early stages. New projects are emerging at all times, and many have the potential to deliver strong returns over time. The best approach is to analyze new coins and try to detect those with high potential before they explode.
The best indicators are usually an active development team and real community interest. Buying in these early stages gives you a better chance to profit from long-term growth, rather than chasing inflated prices.
The Relative Strength Index
One of the best tools for telling when a cryptocurrency is overheating is the Relative Strength Index (RSI). You can access it on the majority of trading platforms and use it to analyze whether a coin is overbought or oversold.
It’s displayed as a line that moves between 0 and 100, usually in a chart below the cryptocurrency price. When the line goes above 70, it’s usually an indicator that the coin is overbought. This means that its price has gone up quickly.On the other hand, when the line sits at 30 or below, it means that the coin is oversold and may currently be undervalued.
RSI is something you should always pay attention to when investing in crypto. It cannot be used as a clear indicator on its own, but when combined with other indicators, it can signal whether a coin is topping out or not.
A high RSI may suggest that it’s a good time to sell and take profits before the price starts to pull back.
The Crypto Fear and Greed Index
Regardless of what cryptocurrency you’ve invested in, the overall sentiment of crypto is always going to impact its value.
There are times when investors are worried about the performance of digital currencies, which may cause them to panic sell. Similarly, there are times when greed takes over, and more people look to jump in.
While you can get an idea of the overall mood of the market yourself, some tools can calculate it for you. Just like RSI, the Crypto Fear and Greed Index tracks the current state of the market and rates it from 0 to 100.
The higher the score gets, the more likely it is that greed is driving buying decisions and more people are entering the market. It may also be an indicator that a crypto is approaching its top.
The Crypto Fear and Greed Index isn’t perfect, and you cannot rely solely on it to analyze the market but it can give you a better idea of where the market is at the moment. It’s available on most of the major exchanges and allows for a quick analysis of the situation.
Mainstream Hype and Social Media Frenzy
Everyone has, at some point, seen a social media post about a cryptocurrency they should “buy before it’s too late”. This means that this specific crypto is getting mainstream media attention, and more people are likely to invest in it.
Casual traders looking to make passive income often jump in at this stage without analyzing the market or understanding the underlying value of the coin.
This extra exposure can push the prices even higher in the short term, but it’s typically a sign of the final stage of the hype cycle. The reason behind it is that most retail investors have already piled in.
At times like that, crypto whales, sharks, and early adopters will look to make a profit while prices are high. They might decide to sell some of their holdings, causing increased supply in the market.
Eventually, this may lead to the coin’s price dropping, especially if traders start panic selling and the demand cools off.
In other words, excitement and mainstream hype may seem like a strong indicator that cryptocurrency is going to perform well, but it’s often a signal that the top could be near.
Conclusion
Nothing is set in stone when it comes to crypto investing, but when a coin is about to top out, there are usually some warning signs. It’s important to do research yourself and use all available tools and indicators to predict what’s going to happen next. Excitement amid ongoing buyer enthusiasm may not always be easy, but it can pay off long-term.
