Cryptocurrency is a new asset class and since its rise in 2017 many people consider crypto as an investment opportunity. In traditional finance the asset’s attractiveness is usually estimated through fundamental or technical analysis. Cryptocurrency traders also successfully apply these methods to cryptocurrencies. What is fundamental and technical analysis and how exactly they can be applied to the rapidly changing crypto market?
Fundamental analysis aims to estimate the intrinsic value of the asset by taking into consideration both quantitative and qualitative factors. It is good for estimating an asset’s attractiveness in the long run. In traditional finance, fundamental analysis includes macroeconomic factors (overall economy and industry) and microeconomic factors (company’s numbers, financial indicators and perspectives). The goal is to estimate whether the asset is undervalued or overvalued at this particular point and make a move accordingly.
The procedure of fundamental analysis for stocks and equities has been established long ago, but it can be tricky to apply it to crypto assets since the industry is still evolving. The closest thing applicable to crypto market from the world of traditional finance is a fundamental analysis procedure of a start-up. It’s not always possible to get reports on earnings, revenues, profit margins or other relevant data in crypto industry, which makes it similar to a start-up with little information and financial results available.
How do you estimate fundamental value of cryptocurrency? First of all, conduct crypto market analysis and research on technology’s potential. The questions you should be asking yourself are: Is the technology innovative? How many people/projects actually use it or would benefit from it? What is the market share of the project? Who is the team behind the project and what they’ve already achieved? How many partnerships does the project have and what is the nature of the partnership? After answering all these questions you may draw a conclusion if the asset is worth considering and how risky would be investing in it. You may read here an example of fundamental analysis conducted by our team on Ripple.
Technical analysis is a quantitative method that estimates an asset’s price movements. It focuses more on price figures and charts, than on the reasons behind them. It’s an essential part of intraday and other short-term trading activity. Since statistics is the cornerstone of technical analysis, it doesn’t differ a lot in crypto and in traditional finance. Technical analysis consists mainly of reading charts on certain timeframes and looking into different indicators, trend lines and indices. With technical tools you’ll be able to determine which way the trend is going, whether an asset is overbought or oversold, to what level the asset’s price will fall. The slight difference between technical analysis in traditional finance and cryptocurrency is that the crypto market is more volatile and therefore traders often use log graphs to mitigate the volatility and detect trends.
As you see, fundamental and technical analysis can be applied to crypto market as well although with some peculiarities. Before investing in some coin, make sure to conduct fundamental analysis and find out if the coin has prospective for growth or it has been overpriced. Don’t forget to look into technical indicators as well, they are very handy in determining whether the asset is overbought or oversold. If you’re a day trader, no need to mention that technical analysis’ tools should be your best friend. Automated crypto trading also makes life easier for day traders. Join TradeSanta software platform and find out how automated trading bots can trade cryptocurrency 24/7 for you according to your strategy.
FAQ
Is fundamental analysis useful in cryptocurrency?
Yes. To conduct fundamental analysis on crypto, start with researching the project’s potential. The questions you should be asking yourself are: Is the technology innovative? How many people/projects actually use it or would benefit from it? What is the market share of the project? Who is the team behind the project and what they’ve already achieved? How many partnerships does the project have and what is the nature of the partnership? After answering all these questions you may draw a conclusion if the asset is worth considering and how risky would be investing in it.
Does technical analysis work in crypto?
Technical analysis in crypto consists mainly of reading charts on certain timeframes and looking into different indicators, trend lines and indices. With technical tools you’ll be able to determine which way the trend is going, whether an asset is overbought or oversold, to what level the asset’s price will fall. The slight difference between technical analysis in traditional finance and cryptocurrency is that the crypto market is more volatile and therefore traders often use log graphs to mitigate the volatility and detect trends.