Trading, whether it be with traditional stocks or newer cryptocurrencies, does not have a specific formula for success. Instead, traders and investors use various tools and techniques to make their decisions. These techniques can generally be divided into two categories: fundamental analysis (FA) and technical analysis (TA). In this article, we will discuss the basics of fundamental analysis.
Fundamental analysis (FA) in crypto is a method of evaluating the value of a cryptocurrency by analyzing its underlying economic and financial factors.
This approach differs from technical analysis, which focuses on analyzing past price and trading data to predict future price movements.
One of the key components of FA in crypto is evaluating the coin’s technology and use case.
This includes analyzing the coin’s underlying blockchain or distributed ledger technology, as well as its specific features and capabilities. For example, a coin that offers faster transaction speeds or improved privacy features may be considered more valuable than one that does not.
Another important factor that is considered in FA is the strength of the development team.
This includes evaluating the team’s experience, expertise, and track record in the crypto space. A team with a proven track record of delivering on its goals and executing successful projects may be considered more valuable than one that is relatively new or inexperienced.
Adoption and interest in the coin is another important factor to consider when performing FA. Coins that are being widely adopted and used by individuals and businesses, or that have a strong community of supporters and developers, may be considered more valuable than those that are not.
Overall crypto market conditions, regulations, and other macroeconomic factors are also important considerations when performing FA. For example, a coin that is well-positioned to benefit from a growing trend or regulatory change in the market may be considered more valuable than one that is not.
The goal of FA is to identify coins that are undervalued or overvalued in the market, and to make more informed investment decisions based on a coin’s intrinsic value.
There are several popular indicators used in fundamental analysis (FA) of cryptocurrencies.
Some of the most commonly used indicators include:
Market capitalization: This is the total value of all coins in circulation, and is often used as a way to measure a coin’s overall value and popularity.
Network value to transaction ratio (NVT): This indicator compares a coin’s market capitalization to the value of transactions on its blockchain. It can provide insight into whether a coin is overvalued or undervalued based on its level of usage.
Token velocity: This indicator measures how quickly tokens are being traded and exchanged, and can be used to assess the level of demand for a coin.
Developer activity: This indicator measures the level of activity on a coin’s Github repository, such as the number of commits and pull requests, which can provide insight into the coin’s development progress.
Social media and community engagement: This indicator measures the level of engagement and interest in a coin on social media platforms and within its community.
Partnerships and collaborations: This indicator measures the number and quality of partnerships and collaborations a coin has with other companies and projects, which can indicate its level of adoption and support in the industry.
Tokenomics: this indicator is related to the coin’s supply and demand. How the token is distributed, how much is in circulation, and how much is locked up can indicate the coin’s long-term potential.
These indicators should be used in combination and with a thorough research, as none of these indicators alone can give a complete picture of the coin’s intrinsic value.
There are several different types of fundamental analysis that can be used to evaluate a cryptocurrency.
Some of the most common types include:
Qualitative analysis: This type of fundamental analysis focuses on evaluating the qualitative aspects of a coin, such as its technology, team, and community. It involves assessing the coin’s overall potential and evaluating the coin’s use case, adoption, and competition in the market.
Quantitative analysis: This type of fundamental analysis focuses on evaluating the quantitative aspects of a coin, such as its financial metrics and economic indicators. It involves analyzing data such as the coin’s market capitalization, trading volume, and tokenomics (token distribution, inflation, etc.).
Economic analysis: This type of fundamental analysis focuses on evaluating the economic factors that can influence a coin’s value, such as interest rates, inflation, and overall market conditions.
Industry analysis: This type of fundamental analysis focuses on evaluating the overall state of the cryptocurrency industry and the coin’s position within it. This includes analyzing the trends and developments in the industry, as well as the coin’s competitors and partnerships.
Valuation analysis: This type of fundamental analysis focuses on determining the intrinsic value of a coin by considering a combination of quantitative and qualitative factors. This includes analyzing financial metrics, tokenomics and the coin’s overall potential.
Fundamental analysis (FA) vs. technical analysis (TA)
Fundamental analysis (FA) and technical analysis (TA) are two different approaches to evaluating and making investment decisions about cryptocurrencies.
Fundamental analysis (FA) focuses on evaluating the underlying economic and financial factors of a cryptocurrency to determine its intrinsic value. This includes analyzing factors such as the coin’s technology and use case, the strength of the development team, the level of adoption and interest in the coin, and the overall state of the crypto market. The goal of FA is to identify coins that are undervalued or overvalued in order to make more informed investment decisions.
Technical analysis (TA) on the other hand, is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts believe that the historical performance of a security is a good indicator of its future performance. Technical analysis tools include trend analysis, chart patterns, volume analysis, and moving averages. The goal of TA is to identify patterns and trends in the historical data to make predictions about future price movements.
Both FA and TA are popular methods used by traders and investors to evaluate cryptocurrencies, and they can also be used in combination to get a more comprehensive view of a coin’s potential.