Measuring the price of bitcoin
Knowing the current price of bitcoin and its short-term direction will help you know when to buy, hold or sell. However, analysing bitcoin price charts is often daunting for a beginner, but need not be with the help of some simple foundations.
Though the price of bitcoin is utterly fundamental to its use and growth, there is no single measure of value. You will find a different bitcoin price depending on where you look—geographically or at different exchanges within a country. A price aggregator like Coinmarketcap demonstrates this point.
The simple answer is that price reflects demand and context. These two factors vary significantly from country to country. Zimbabwe and Venezuela - both experiencing hyperinflation of their domestic currencies - are two countries where its citizens have good reason to value bitcoin more than countries where traditional currencies are more stable.
Though its price isn't uniform, one thing is universal, it is always changing. It changes all day every day, by varying degrees and that constant change is illustrated in a bitcoin price chart. The jagged lines of a bitcoin price chart illustrate the impact on its value from the continuous exchange of bitcoin between buyers and sellers. When buying demand is greater than desire to sell, price rises and vice-versa.
Each exchange - where you can buy bitcoin (learn how to buy bitcoin here) - publishes its own prices based on its own trading activity and illustrates this in price charts which tend to be either basic price charts or the more complex candlestick charts.
Types of bitcoin charts
The two main types of bitcoin charts reflect the level of detail that the user wants. Some users are looking for simple and easily digested representation of bitcoin price movement.
Those with a vested interest, such as traders and early adopters understandably, require a comprehensive way of interpreting the change in bitcoin's price, its fundamental influences and potential direction.
Simple price charts
The simple line bitcoin price chart should be very familiar from school days plotting data on two axes. It displays price on the vertical Y axis - Euro, Dollar etc - over time on the horizontal X axis which can be viewed by day, week, month or hour depending on how granular you want to get.
A simple line chart will default to a linear scale giving equal weight to price change across the entire scale.
This is useful for a broad overview of price movement, but linear scales can obscure the significance of change. Is, for example, an increase from $10 to $100 - where price increases by a factor of 10 - as significant as an increase from $100 to $200 - a mere doubling?
The use of Logarithmic price scale addresses that issue. The log chart is plotted so that prices in the scale are not positioned equidistantly, but rather in a way that two equal percent changes are plotted at the same vertical distance on the scale.
Some simple price charts - such as those used at Coinmarketcap.com - will plot lines for both BTC and USD values and add a secondary X-axis for market capitalisation, essentially the value of all coins in circulation for the given currency given the current price.
While the simple price chart is straightforward and easier to understand it represents an average of price for the time scale chosen, and doesn’t take into account the crucial influence of volume.
CMC provide separate volume bar charts but for those that want much more detail about what the average is hiding, the Candlestick Chart - combining a more complex representation of price along with volume - is much more appropriate.
Bitcoin Candlestick charts explained
A bitcoin Candlestick Chart is so-called because the individual data plot points of a simple chart are replaced by a candlestick shape vertical rectangle with a wick at the top and bottom.
To make it easier to discern price trajectory, rising and falling prices within a candlestick period are differentiated by colour. Green indicates that the price rose within the period range, while red indicates a price fell.
The candlestick components unpack a simple closing price value for a given period telling you the following:
The Opening Price
The opening price for a time period will be the bottom of the candle body if the price rose within that period, and the top if the price fell.
The Closing Price
This is simply the inverse of opening price. If the price rises within a time period the closing price will be the top part of the candle body, if the price fell it will be represented by the bottom part.
The highest price reached within the chosen time period will be indicated by the highest point of the top wick.
The lowest price reached within the chosen time period will be indicated by the lowest point of the bottom wick.
Looking across a range of time and the dominance of one colour over another reveals the direction the price moved during the period, which is also discernible from a basic price chart, but the additional elements provide context showing you the extremes to which price moved which provide clues to volatility.
Longer candles show greater change from one period to the next, while longer wicks show greater change within a period.
Combining candles with volume
As much as candlestick charts provide better context to bitcoin price change, you cannot seriously understand price movement without combining it with a measure of volume traded.
A falling bitcoin price on the back of relatively low volume is less bearish (indicative of long term downward change) than falling price with high volume. For this reason candlestick charts are generally accompanied by a bar chart of volume which tell the real story of what is moving price.
Bitstamp Tradeview provides a greater example of a candlestick chart. By hovering your cursor on a candle the Opening (O), Closing (C), High (H) and Low (L) are returned along with the Volume (V). The basic candlestick chart is just the tip of the iceberg in terms of analysis; you can choose a Volume bar chart from the ‘Indicator’ drop-down menu to actually plot traded Volumes.
The crucial importance of volume
Volume is the most fundamental indicator of price direction but is just one of an array of technical analytical methods that are useful in trying to figure out where price will go next. The most common include:
Resistance & Support Levels
When the market is experiencing strong downward or upward pressure there will be a price point which checks the momentum. This is often a number of psychology weight such as $10,000. For the a rising price that is called the Resistance Line (aka ceiling) and falling prices tend to check at the Support Line (aka floor).
Another commonly used technical analysis is the moving average, literally an updated average price for a given period e.g 50 day MA. These can provide useful insight when varying ranges are combined, so the 50 day MA crossing above the 200 MA is indicative of upward momentum and the reverse is perceived very negatively - known as the Death Cross.
In just the space of a few hundred words you should hopefully have got to grips with how to read a simple bitcoin price chart. Though they provide an easy way to see the direction of price, to understand the context of change you need the broader range of data-points that a candlestick chart provides. Even then you are just taking the first step into the fascinating world of technical bitcoin price analysis where volume, resistance and support levels and moving averages are just three of a multitude of ways of discerning why the price of bitcoin is moving and what might happen next.