Fundamental Analysis is best described as the process of determining the future performance of a financial instrument by evaluating its intrinsic value. It refers to the evaluation of both the internal and external factors acting on the intrinsic value of tradable financial assets like stocks and digital currencies like production and historical earnings. When dealing with conventional instruments like shares and stocks, for instance, fundamental analysis involves the evaluation of the financial health of their native company.
The fact that most cryptocurrencies, however, have limited histories on revenues, earnings, and profits calls for a different approach to their fundamental analysis. It demands that you look beyond the coins past performance, most of which are rocked by massive volatilities, and into both socio-economic and political factors like a digital coin's adoption into the mainstream economy and possible regulations. You then have to interpret the potential impact they have on the future price of the coin.
It also is important to note that there is NO industry standard for fundamental analysis in the cryptocurrency market. Different investors have, over time, come up with various ways of determining whether digital currency is worth the investment. However, they all agree on the key role market capitalization plays in influencing this decision. This is achieved by multiplying the current price of the coin by its circulating supply. It has gradually evolved into one of the most significant indicators for investors looking to determine the coins potential for growth.
Bitcoin, for instance, has one of the most lucid market capitalizations and a clear growth roadmap. Initially, the legacy coin’s supply was subjectively limited to 21 million tokens, but with close to four million Bitcoins lost to the world forever, the number of coins that will ever exist has shrunk below 17 million. Given that it still has demand and supply as its biggest price influencer, industry operatives estimate that with the shrinking supply as mining becomes more expensive and more time consuming, the demand and price will increase implying that investors holding coins will trade them at a better price.
Trade volume is another critical tool in Fundamental Analysis that goes a long way in helping you understand the digital currency's popularity. Trade volume here refers to the number of crypto coins that changed hands for a specified period. It tells you how much a digital currency is bought and sold in cryptocurrency exchanges. Low trade volume means the demand is low, and vice versa. With over 2,000 digital currencies in the market, trade volume comes in handy in helping an investor identify the fast-moving coins.
helps you decide on an investment. For instance, before making a decision on whether to invest in a particular crypto coin, you need a detailed review of its past performance and future prospects. Even more importantly, you need to identify all the factors acting on its price and possible growth. Getting to know what can affect the value of the currency goes a long way in helping understand when to invest and which coins to invest in.
helps you decide on the investment period. Fundamental Analysis is helpful in understanding the value of your preferred digital currency in the near future- may be after some months or even a year. This effectively helps you choose the best trade entry point, as well as the most profitable investment period. For instance, if your analysis showed that several mainstream institutions were preparing to adopt the use of a particular coin or the underlying blockchain technology, you would be better off taking up a position for the coin.
helps you spot undervalued currencies (so-called “micro cap” coins). These refer to the little known alternative coins and their blockchain networks but with the greatest potential for growth. The fact that fundamental analysis involves taking a deeper look at all the factors affecting the value of currency including its mission and visions, helps you discover underperforming coins with the greatest potential growth where you can commit your investment. And this includes investments in new coins that present a positive disruption to the crypto industry.
helps you identify fake investments. Fundamental Analysis helps take away such emotion triggers as huge volatilities when making an investment decision. By looking at the different factors acting on the past, current, and future value of a particular coin, you are able to deconstruct bubbles and possible fraudulent crypto investment schemes. This effectively saves you from bad and potentially hurtful investments (pumped and dumped coins).
Microanalysis, as part of the larger Fundamental Analysis, is also referred to as the “bottom-approach” to analyses and involves checking on the current price of a coin and comparing to market performance. It involves using a set of tools to vet the performance of a certain coin in relation to the rest of the industry players and industry average in order to determine its viability as an investment. Such tools include coming up with such valuation ratios as the price to earnings ratio.
Macro analysis is a part of the Fundamental Analysis that involves the evaluation of factors that affect the value of a particular coin from the global industry point of view. It involves a deep analysis of all the different industrial, socio-economic, and political factors and how they ultimately affect the value of your preferred digital currency investment. These include the global politics revolving around crypto coins, past and upcoming legislation by individual countries for or against the coin as well as the overall acceptance of the coins by the populace and merchants across the globe. Most of these factors often have a significant impact on the demand of the coin. You, therefore, must look at how such external factors as increased electricity bills and the cost of GPU systems affects supply.
The looming government interference in the crypto world with threats of regulations, for instance, has one of the most significant impacts on Bitcoin prices as well as that of other crypto coins in the market. But considering the fact that the highly decentralized nature of the industry makes it impossible for effective regulation, most of these governments are targeting the institutions that facilitate its smooth trade. These governments have, for instance, exerted firm control on mining and crypto exchanges, and this tends to affect the supply of the said cryptocurrencies, which in turn affects the prices.
Technical Analysis refers to the process of forecasting the future price of digital currency by monitoring its historical price movements. It is also referred to as the charting approach to trading based on the fact that all its analysis is confined to the coins price history charts. Here, investors use a host of tools as moving averages and Fibonacci retracements. These are used to identify the highest and lowest price levels achieved, the trading volumes and trade patterns that the investor then relies on to make informed predictions about the immediate and foreseeable future price of the digital currency.
Fundamental Analysis, on the other hand, is thoughtful and in-depth research done on a financial asset to determine its intrinsic value. Investors using this strategy to cryptocurrency investments are always looking at the price value of a coin, both past, and present and relating them to an industry or global activity.
Whether you are using the Technical or Fundamental approach, there are few investment principles you would do well to remember. These include:
Do not risk more money than you can afford to lose.
Maintain a separate emergency fund
The crypto markets are highly dynamic and a strategy that worked yesterday may not be as effective tomorrow
You can also always use both strategies when vetting investments if you hope to make even more informed and more accurate forecasts
When it comes to cryptocurrency, don't allow your emotions to take control because you can easily give in to fear, uncertainty, and doubt. It can lead to panic sell or worse; you may lock your funds in worthless investments.