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Risks Associated with Crypto Price Prediction and How To Navigate Them

As helpful as crypto price predictions can be, it’s not always accurate. Several things can influence crypto prices, making market movements extremely volatile. Despite conducting thorough technical analysis and considering market sentiment and news, trades can still go sideways due to several factors.

Risks Associated with Crypto Price Prediction - Header Picture
Risks Associated with Crypto Price Prediction – Header Picture

In this article, we’ve gathered some of these dangers and included proactive steps to avoid them. By the end of this article, you should be well-informed and able to mitigate some of the risks associated with crypto price prediction. 


Dangers of Crypto Price Prediction

The following are some of the most common problems associated with crypto price prediction today.

  1. Price manipulation
  2. Market volatility and sideways movement
  3. Overreliance on historical data
  4. Black swan events
  5. Trading Psychology

1. Price manipulation

It’s common for whales to artificially inflate the price of cryptocurrencies just to profit from it. Typically, they do this by trading vast volumes of the coin or token in question, creating a bullish trend that makes for a great long signal. 

When your price analysis picks up this trend, it can be very easy for you to enter that trade with the hopes of making quick profits. But you could be easily liquidated as most whale movements are very swift. As soon as the cryptocurrency hits a price these whales are satisfied with, they withdraw their holdings in large volumes, causing the price of the cryptocurrency to fall.

This is called a pump-and-dump strategy, and because the crypto market is decentralized, there are no rules against this. Cryptocurrencies with relatively low market caps are usually targeted since their prices are easier to manipulate, but these days, even major coins like Bitcoin can be affected.

2. Market volatility and sideways movement

Although technical indicators can be handy for short-term price predictions, they do not always indicate how the market moves. When you use momentum indicators like the RSI or Stochastic Oscillator, you get a good idea of when a cryptocurrency has been overbought or oversold and when it experience a trend reversal.

An Example of Stochastic Oscillator by Investopedia
An Example of Stochastic Oscillator by Investopedia

However, prices can stay in these territories for extended periods, invalidating the long or short signals you create and enter. Sometimes, crypto prices can remain on neutral ground, moving sideways for a long time. This can make price prediction dangerous and even unreasonable.

3. Overreliance on historical data

Most technical indicators and price prediction tools rely on historical price data to determine future price movements. Without considering current happenings and market sentiment, you might lose money from entering misinformed trades.

When you use substandard AI trading systems for price prediction, they will likely be overoptimized for specific situations and only give signals based on how prices previously played out. Although this happens in the crypto market, price movements don’t always play out as they did in similar situations.

4. Black swan events

Black swan events refer to random contingencies that drastically affect the price of a cryptocurrency or DeFi asset. Things like an SEC crackdown, a new government regulation, or the exit of a significant team member can significantly influence crypto prices.

Sadly, price prediction cannot account for these sudden drastic events, especially in the long term. So, they can quickly invalidate any entry or exit signals you generate.

5. Trading Psychology

Sometimes, your mindset may limit you from making profits from signals. Fear and greed are two important emotions you must master to benefit from crypto trading.

Display of Fear and Greed on the Crypticorn Dashboard - Screenshot
Display of Fear and Greed Index on the Crypticorn Dashboard – Screenshot

Fear, for instance, may cause you to use a lower-than-recommended percentage of your trading capital to enter a trade backed by solid prediction. So, even when the trade pulls through, you’ll make much less than expected.

On the other hand, when greed makes you use higher leverage than recommended for trade because you feel it will go through, the trade could liquidate and leave you at a loss.


How to Mitigate Price Prediction Associated Risks 

While experiencing losses and unrealized profit from crypto price prediction is sometimes unavoidable, you can at least mitigate these risks to some extent.

  1. Proper position sizing and stop loss configuration
  2. Adequate sentiment analysis
  3. Stay informed
  4. Research and due diligence
  5. Avoid overreliance on price prediction tools

1. Proper position sizing and stop loss configuration

Properly sizing your positions will enable you to retain a significant portion of your capital even if you experience losses. Typically, each trade should take no more than 10% of your entire trading capital. You can adjust it a bit higher depending on how sure you are of the success of that trade.

Risky trades should take less than 10%. 5% is a recommended benchmark. And when you’re trading degens, we recommend you use even less.

For your stop loss, choose a value not too distant from the entry price you plan to trade at. Typically, we recommend 10% below the entry price. 

Example of percentage losses in Crypto Futures Trading Pictures
Example of percentage losses in Crypto Futures Trading Pictures

2. Adequate sentiment analysis

When you want to trade a specific token, make sure to check what traders are saying about it. Sentiment analysis is one of many factors that technical analysis doesn’t quite consider.

So, you have to be particularly keen about it.

Is market sentiment about a specific trading pair positive or negative? Use tools with superior sentiment analysis capabilities, like the Crypticorn Price Prediction Dashboard, to gain balanced insights into traders’ opinions.

3. Stay informed

Once you enter a trade, keep an eye out for current crypto happenings. If it’s a blockchain token, look for activities on the blockchain that could impact its price, such as a team member’s departure, a security breach, or even something positive so that you can adjust your position.

Keep an eye out for major cryptocurrencies. When top coins like Bitcoin enter bearish trends, they often take the entire market with them. So, stay informed to avoid being liquidated.

4. Research and due diligence

If you know how to perform technical analysis, you’re at a significant advantage when copy trading. You can quickly analyze the market to verify if a trade will be profitable before you enter it.

Furthermore, do background checks on the blockchain project before making any long-term investment. Does the token have any long-term utility? What upcoming events on the roadmap can influence its price in the short run? These and more are questions you should ask.

5. Avoid overreliance on price prediction tools

While tools like Crypticorn Price Prediction Dashboard can be very useful for spotting cryptocurrencies that can fetch you profit in the short run, you should avoid relying on them completely. 

Chat for cryptocurrency price predictions with artificial intelligence
Chat for cryptocurrency price predictions with artificial intelligence

We always recommend that you learn how to conduct proper technical, fundamental, and on-chain analysis. This will enable you to make your own predictions and quickly identify when a trade recommendation won’t work.

Unlock Your Trading Potential: Enhance Your Strategy with AI-Driven Crypto Price Forecasts
Unlock Your Trading Potential: Enhance Your Strategy with AI-Driven Crypto Price Forecasts

Conclusion

While crypto price prediction can be very profitable, it doesn’t come without its risks. This article discusses some of them, such as black swan events, and steps to mitigate them. With this information, you can make informed and balanced trading decisions.


FAQ

How reliable are crypto price predictions?

The reliability of crypto price predictions largely depends on their source. When you get price speculations from a vetted crypto analyst with years of crypto trading experience, there’s a high chance that the price predictions will be very reliable. 

Why is crypto hard to predict?

Cryptocurrency prices tend to be challenging to predict because of how volatile the market is. And this is caused by various factors ranging from market cap to the token’s utility. Regardless, when it comes to making long-term predictions, prices of major cryptocurrencies like ETH and BTC tend to be easier to speculate.

Who controls the value of cryptocurrency?

No one individual controls the values of cryptocurrencies in general. Regardless, specific influencers like Elon Musk can deliberately make posts that can significantly move their prices in the short term. Large crypto whales and government officials also have the ability to influence crypto prices. However, their effect on the crypto market in general is limited in the long term.

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