FUNDAMENTAL ANALYSIS OF CRYPTOCURRENCIES
If you decide to invest in any type of asset, whether it is stocks or cryptocurrencies, it is important to remember that no matter how famous and hype the instrument is, you should always analyze it before you buy it.
There are many factors that directly or indirectly affect the value of an asset, and being able to interpret them correctly helps you profit from your investment. In particular, when valuing an asset, the investor is assisted by fundamental analysis, the task of which is to identify key events and activities that can affect the value of the asset in the future.
It is important to clarify that each asset has its own information field, from which the data for the fundamental analysis is gathered. For example, when buying stocks, its internal economy and market position are considered, when buying currencies, macroeconomic data should be followed, but what to follow if you decide to buy bitcoin? That is what we are going to talk about.
Cryptocurrencies are volatile and risky to trade, so novice traders often lose money in the crypto market if they don’t understand the rationale behind the rise or fall in prices of digital assets. To get a better understanding of how the crypto market works, you need to learn fundamental analysis.
Fundamental analysis is a method of predicting the value of an asset based on financial, production, macroeconomic, statistical or political indicators. Fundamental analysis is the approach investors use to establish the “true value” of an asset or business. By looking at a number of internal and external factors, they seek to determine whether the asset or business is overvalued or undervalued. This information can be used to strategically open and close positions.
Technical analysis also provides valuable trading data, but its conclusions are different. Technical analysts believe it is possible to predict the future behavior of asset prices based on past performance. To do this, candlestick patterns are identified and key indicators are studied. Traditional fundamental analysts usually look at the performance of a business to find out its real value. Indicators such as earnings per share and price to book value ratios are used. You can, for example, do this with several businesses in the same niche to compare their investment prospects.
The evaluation of fundamental factors is carried out together with the analysis of the situation on the cryptocurrency market in general. There are examples when the same news was perceived by investors both positively and negatively. Example: the news about the fork of VTS caused quotes to go up, while the ETN fork was perceived negatively – the price went down.
What news affects cryptocurrency quotes:
– Information about exchanges. Any hacks, attacks, temporary shutdown of exchanges can cause panic and a sharp outflow of money from cryptocurrency to fiat money. Analysis of the cryptocurrency market should begin with an assessment of how reliable the project itself and the wallet are.
– News about updates. We are talking about forks, consensus protocol changes, alpha and beta testing, upgrades, new functionality – all of this is often perceived positively if it meets investors’ expectations. However, immediately after the growth, a pullback is possible, if it turns out that investors overestimated the innovation;
– The accession of new members to the network. Usually perceived by investors positively, as it shows the interest of other participants in the economic system to the project. True, the accession may be formal. Fundamental analysis of the market is rigidly tied to startup leaders;
– Legislative changes or restrictions.
It is very important to pay attention to real market data. We recommend that you use the Fear & Greed Index.
You can also use services like Glassnode which makes blockchain data accessible for everyone: https://glassnode.com
Example: chart with number of Transfers to Exchanges – All Exchanges
We also suggest subscribing to opinion leaders such as Elon Musk. It is necessary to follow their statements about cryptocurrencies in interviews or on Twitter, because very often they become pivotal and have an extreme impact on the market.
The advantage of fundamental analysis is that you have information on the current mood of investors in relation to a particular asset and even the market in the medium and long term. With this data, you will not be afraid of intraday price declines, because the global trend for 6-12 months is upward, and minor drawdowns for the value of the asset are not dangerous. The investment horizon becomes longer, and the investment process itself becomes more flexible. In the event of a sudden change in market sentiment, you will have enough time to assess the cause and, if necessary, protect capital. For example, the moment bitcoin starts to decline significantly, you need to do more analysis and decide if it’s time to sell the cryptocurrency.
A significant drawback of fundamental analysis is the difficulty of interpreting it correctly and the lack of specificity. Many beginning traders take an insignificant event as a turning point and think that fundamental analysis will help to find entry and exit points from the market, but in fact it is the task of technical analysis.