“Fundamental analysis is a method of evaluating an asset in an attempt to assess its intrinsic value, by focusing on economic growth, financial position, qualitative and quantitative factors among others affecting the asset.”
Cryptocurrency trading has taken shape since the start of 2017 when the market experienced a sharp reversal in prices of the digital assets. During the year the crypto market saw a significant boost in the number of investors buying into the industry. In December through January, early investors made massive gains on their initial investments as prices reached an all-time high.
The current market is on such an uptrend as Bitcoin (BTC) climbed above the $4000 USD mark showing signs of an upcoming bullish momentum. The increase in the price of Bitcoin coupled with the “alt season” we are in is pushing more investors to the field recently. However, before starting to trade on cryptocurrencies, you need to select an investment strategy which falls under two major categories; fundamental or technical analysis.
Check out the top red flags you should be aware of before making a cryptocurrency investment here.
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Fundamental vs Technical analysis
Fundamental analysis is an investment technique used by traders to predict the long term future of an asset, in this case, cryptocurrencies. To use this method, investors need to take into account all the factors that will affect the digital assets ranging from the macroeconomic, microeconomic, demand and supply factors as well as the market behaviors (behavioral effects).
Using this method for short term analysis is rarely profitable and will amount to losses given these factors take time to reflect on the market. As seen in the past decade, since the advent of Bitcoin, cryptocurrencies change in price in short periods which has raised questions on the use of fundamental analysis to predict future prices.
Enter technical analysis…
Unlike fundamental analysis, technical analysis focuses on the short term price movements of digital assets; a minute, an hour, a day or a week. This involves using the price charts to identify trends and patterns to which the trader makes a short term prediction of the price.
Most cryptocurrency traders (and generally other individual asset traders) focus on technical analysis as it offers an opportunity to make money quick. Given the high volatility experienced on cryptocurrencies in the past few years, T.A is quickly growing in the field of digital asset trades.
However, with the recent institutional partnerships and investments being seen in 2019 in the crypto sector, investors are pushing for more fundamental analysis on the digital assets. The fundamental analysis in crypto, however, is unique compared to the traditional way as investors continue to find new factors affecting digital asset prices. In the sections below we focus on the various metrics and factors that digital asset investors carrying out fundamental analysis need to know.
Unique factors to carry out cryptocurrency fundamental analysis
Market capitalization allows you to know the cash value of the cryptocurrencies in circulation. The value is obtained through the equation below:
Number of total coins in circulation*Price of the coin=Total market capitalization
This indicator gives a clear picture of how much currency is currently in use compared to other coins. A high market capitalization shows a greater value in the use of the coin and vice versa. This metric also allows investors to get a clear picture of the value the development team holds and other percentages of allocation of the coin. This offers a clear metric of how the future price of the coin may look.
However, it is good to note that some coins have a large market capitalization due to the huge number of circulating coins such as Tron (TRX).
One of the key areas users should be checking is the development progress of the cryptocurrency. A clear way of measuring this would be through the number of commits added on the GitHub page. Most of these cryptocurrencies are open sourced allowing developers from any corner of the globe to participate in development.
In a bear market, the number of commits on a project could be a better metric to determine development. A high number of commits means developers are working on the cryptocurrency and believe in the future growth of the blockchain project.
However, this method falls short, as some of the commits may not be really useful in the development process of the project.
Regulation and traditional markets integration
Since the sharp fall in cryptocurrency prices at the start of 2018, governments have issued a strong stance against digital assets. Regulation in the industry is taking shape slowly but surely as jurisdictions across the world aim for a smooth transition into this “new asset class”. A positive stance on a digital asset shows that the future of the cryptocurrency is set to grow as governments increase the trust of the people in the assets.
Internal Community stance
Cryptocurrency projects are run through community forums that offer a great opportunity to understand the coin better as well as the sentiments surrounding the coin. Positive sentiments and relations around the community members signals a positive impact on the coin’s price. The reverse is also possible where negative relations between community members will cause a drop in the price of the cryptocurrencies.
Other unique metrics and factors
Cryptocurrencies have very unique features given they are built on a decentralized platform, unlike stock prices that rely on a centralized entity. Some of the other unique features you should look at while carrying out fundamental analysis on cryptocurrencies include hard forks, mining rewards, change in development team leadership and partnerships with institutions as mentioned above.
The factors above do not offer a complete list of factors to make a predictable guess on the future of crypto prices. However, these are the major factors investors should look at before making a fundamental investment strategy.