Seven important indicators that you need to know to predict the price of Bitcoin

A very common question for the novice investor is what factors or parameters in the economy to watch to figure out where the Bitcoin price is going. Of course, there can be a lot of these parameters, but we have tried to highlight the most important ones and make a checklist of the seven main price-determining items. Now you will be able to judge the state of Bitcoin on your own by looking at the performance of these important indicators.

 

Fear & Greed Index

This is a very popular visual indicator that shows the general sentiment of the crypto market. If you look at it right now, you can see that the crypto market is coming to life. 

By yesterday, one of the main indicators of mass sentiment (sometimes showing the level of crowd psychosis) crossed green zone for the first time in 11 months — for the first time in this long crypto winter this indicator signals a positive mood of investors.

USD Index (DXY)

This is the most important macroeconomic index; it shows to what degree the U.S. dollar as a currency is becoming stronger in the world. The pattern here is simple: the stronger the dollar, the weaker the so-called protective assets, and vice versa.

Protective assets are those that protect against inflation and devaluation of the dollar, which today primarily include Bitcoin and gold. Their value rises automatically as inflation accelerates, allowing their holder to protect his/her purchasing power. Conversely, if the dollar strengthens (DXY rises), protective assets tend to become cheaper.

Now look closely at the DXY chart, and you can see how the crypto winter was growing (as the DXY strengthened). You can also clearly see the dollar weakening in late 2022, when the current crypto market warming started (it would have started earlier if not for the FTX crash).

The value of the Fed’s key rate 

The Fed’s key rate determines the cost of money in the U.S. economy, which today defines the parameters of growth around the world. 

The higher the rate, the more expensive the money in the economy is for business. 

Given the specifics of modern business, which is highly dependent on credit resources, each increase in the rate reduces the profitability of the business. As a matter of fact, this is why there are so many bankruptcies and layoffs in the market, because the big cycle of rate hikes by the Fed has begun. If the rate continues to rise, businesses will have to fight more and more desperately for their survival, and the number of such negative effects on the economy will increase.

What does Bitcoin have to do with this? High-risk financial instruments are extremely sensitive to the value of money in the market. Simply speaking, the cheaper the money in the market, the higher the price of a Bitcoin. People have more money to afford to invest in exotic digital tokens.

The Fed raised its rate by 50 basis points in December to 4.25-4.5% per year, the highest level since the early 1980s. This is the seventh rate hike in a series of monetary tightenings since the beginning of 2022. Experts note that as the Fed is moving forward, it is slowing down the rate hike, raising it to a lower value in recent times.

The latter is the basis of the crypto market’s recovery, as it gives hope for the upcoming so-called Pivot — when the Fed turns around and starts a new cycle of rate cuts, which will definitely trigger a rally in the crypto market. This reversal will gradually make money more accessible and cheaper again, encouraging investment and more easy money spending.

What’s our prediction? Bitcoin will be hovering around current price levels, at least until the next Fed meeting. 

The next meeting is scheduled for February 1.

Inflation rate (CPI)

Interest rate decisions are largely determined by the level of inflation. Recall that the dollar inflation rate in 2022 was at its highest in 40 years, so the Fed is forced to take urgent hard action like raising the rate.

If the Fed’s speech is peaceful and the CPI continues to decline, we can confidently predict a further rise in the price of Bitcoin. To understand what kind of momentum the market will get, we should keep a close eye on the latest CPI data and every Fed meeting.

MVRV Indicator

MVRV is a very popular indicator among traders. We have given its technical description in a recent article here (by the way, at this link there are many other cool indicators). 

Here we will clarify its importance: it allows estimating the Fair Price for the asset at the current moment based on statistics. Accordingly, you understand whether it is too expensive to buy or, on the contrary, its price is undervalued. If the asset is overvalued, it means that the market has to cool down a bit for the price to fall back to normal. Conversely, if it is undervalued, the market is likely to rise soon! 

MVRV is a way to make investment decisions not on the basis of intuition and guesswork, but on the basis of mathematical statistics and rational calculation.

We suggest you use this good guide to learn how to evaluate any cryptocurrency with the MVRV Z-Score — it is the perfect tool for any beginning investor.

Hashrate

The hashrate of a blockchain is a measure of its computational power and stability. This parameter depends on the number of miners who have decided to support the network with their computing resources. This is an indirect indicator of the demand for or popularity of the network.

Simply speaking, hashrate shows the technical health of a blockchain. Up to this point, we have only considered economic parameters, but we should not forget that Bitcoin is first and foremost a technical project (and in this sense, it is even more important than all other indicators). Therefore, it is useful to sometimes look at its health and security level.

By the way, Bitcoin has had a great hashrate for the last six months (despite the crypto winter), it has never been so powerful in its history!

Bitcoin Dominance Indicator

The last indicator worth looking at is the Bitcoin dominance indicator. It shows what share of the crypto market Bitcoin holds.

The situation when Bitcoin’s share falls and other cryptocurrencies rise is called an alt-season. This period begins if within three months, 75% of the top 50 altcoins outperform Bitcoin in terms of total market capitalization. 

What does this mean to an investor in a practical sense? 

• When Bitcoin’s dominance falls, the leading altcoins are likely to grow much faster than the first cryptocurrency (alt-season start). And this is an important signal to convert your Bitcoin into more profitable altcoins. The rise of so-called new-age crypto (DeFi, NFT, GameFi etc.) also lowers Bitcoin’s dominance. At this point, capital flows into these alternative markets, and it is important for investors to keep their fingers on the pulse and follow the current trend in order to maximize profits.
• If Bitcoin dominance increases, it is the opposite signal to urgently park your investments in Bitcoin, exiting altcoins (which always fall by a higher percentage than Bitcoin).