A crypto can be considered oversold if a large amount of selling has pushed the price down over a period of time but in fact, the price does not reflect the true value, meaning the crypto could actually be undervalued and likely to go up.
Stock, crypto or the speculation of any other asset or commodity is neither pure science, pure art or guesswork, but rather a blend of all three.
Nobody knows for sure where anything is going.
In the film, The Wolf of Wall Street the trading manager played by Matthew McConaughey in the famous chest-bumping scene tells Leo Dicaprio that nobody knows where the price is going, up, down, sideways or in circles, not least the traders.
In real life, in order to have any kind of success in trading or investing, you clearly have to have some idea, otherwise, financially at least, it will be game over really fast.
The name of the game is to somehow anticipate if a crypto or stock is undervalued or overvalued and trade accordingly.
In the very simplest of terms, a stock, crypto or other asset or commodity will either be temporarily overvalued in which case the price may correct and come down, temporarily undervalued and likely to go up or correctly valued or at fair value and not going anywhere anytime soon.
When a stock or crypto is considered by traders as undervalued at its current price, this is known as being oversold.
What is oversold in crypto?
Let’s take bitcoin as an example as it’s the most well-known cryptocurrency and let’s face it, a lot of people are in it.
Is bitcoin overvalued and the price is going to come crashing down or is it currently undervalued and likely to keep going up?
If it’s undervalued it is oversold, literally meaning that it has been “over” “sold” due perhaps to negative sentiments which has driven the price down due to excessive selling. In fact, the price should be higher and perhaps there is an upward correction coming in which case it could be a good time to buy.
What is fair value?
In order to understand if a crypto coin or token is oversold or undersold, it’s helpful to know where the middle is,
This ‘middle’ is the fair value and in the world of stocks, traders will usually make calculations based on things like earnings per share and the price-to-earnings ratio.
These figures can help a trader get an idea of if the stock is undersold or oversold when compared to competitors in the same industry and based on this information make a decision whether to buy, sell or ignore.
What is the opposite of oversold?
The opposite of oversold is unsurprisingly, overbought. In much the same way it literally means that. It has been “over” “bought” and could see a downward correction.
How can we tell if a crypto is oversold, overbought or at fair value?
Crypto is generally way more difficult to accurately predict as it doesn’t have the history or the same traditional fundamentals that traders can use to evaluate a stock or commodity like profits, dividends, market data, economic conditions and so on.
Crypto is highly volatile and so one of the only real indicators is past price performance, demand and supply dynamics and expected returns, looking to the future to anticipate future growth and of course some instinct for what may happen in the future.
If we look at bitcoin again, it’s not a company per se and doesn’t actually own the infrastructure, the computers that support the blockchain and is purely a cryptocurrency and blockchain.
So how can we determine if bitcoin is likely to go up or down in the future?
We would need to look at bitcoin’s position and importance in the larger crypto universe, where does bitcoin fit now and how could bitcoin and its blockchain fit into the overall crypto space in the future?
How will governments deal with crypto in the future and how about its network effect?
We could do the same with Ethereum, the second-largest crypto after bitcoin.
Ethereum is more than a cryptocurrency, it’s an entire ecosystem. Will this ecosystem continue to be a major player in DeFi for example or are there competitors lurking on the sidelines that could knock Ethereum off its perch?
Let’s use this example to imagine an oversold scenario for Ethereum.
Imagine, there’s talk of Ethereum losing its hold on the DeFi space and people start selling in droves, this drives the price down.
In fact, however, this sentiment has been total FUD (fear, uncertainty and doubt) and now Ethereum is in fact trading lower than it should be and could be likely to correct and go back up. This would be a case of being oversold.
What is an oversold indicator?
There are some technical methods used by traders to try and ascertain if a crypto, stock or commodity is oversold, overbought or at fair value.
A couple of methods used include using relative strength index (RSI) and Bollinger bands.
The RSI indicator looks at the pace of recent price changes to try and determine if a crypto is oversold, overbought or at fair value whereas the Bollinger bands consist of lower, middle and upper bands.
The middle band reflects the cryptos moving average position while the lower and upper bands measure and record price deviations relative to the middle band.
A crypto would be considered to be oversold when the values shift towards the upper band, the contrary would be true if the values shift towards the lower band in which case a crypto could be showing signs of being overbought.
In the world of traditional trading, it’s difficult enough to know in which direction a stock or commodity is likely to head, in crypto it’s perhaps even more difficult.
In its most basic form, the most important thing to be able to understand is if a stock or crypto is overvalued (overbought), undervalued (oversold) or in fact where it should be (fair value).
If you are able to determine if a crypto is in fact oversold, it could be the perfect time to jump in!