What is Fundamental Analysis in Crypto?
Before trading or investing in a cryptocurrency, investors carry out some analysis to determine the suitability of such an asset. There two methods of doing this analysis. The first is technical analysis which involves using technical indicators to determine the behaviour of the asset. The second method is fundamental analysis, which involves looking at conditions surrounding an asset to determine its value and to decide if it is worth investing in it.
This article focuses on fundamental analysis. We will discuss what fundamental analysis of cryptocurrencies is, what is involved and how it is done. We will also compare it with technical analysis and discuss when to use it to maximize trading and investment profits.
Fundamental analysis is the analysis of an asset by considering its fundamentals. What this means is that rather than use technical indicators to determine immediate price action, the analyst looks at the factors surrounding the asset. There are an infinite number of such factors, but for the sake of this article, we will just pick out a few of the most crucial ones and discuss. The following are major sources of information to consider in fundamental analysis.
Cryptocurrency news does not only provide news updates just so readers can keep in step with the happenings in the space. Asset-specific news provides invaluable information that can be used in fundamental analysis. Such news include what is happening around the asset, the public perception of the asset and the future plans and partnerships.
There are partnerships that can greatly impact the price of an asset by helping to promote it. News sources also give information about important people engaged with a cryptocurrency. Case in point is Dogecoin, the price of which has been greatly impacted by Elon Musk’s involvement with it.
Another typical example is the case of Ripple’s XRP which was delisted from top exchanges following the court case from the SEC. This ultimately affected the price significantly, although there has been a major recovery. All such information is crucial in getting a well rounded fundamental analysis of an asset.
Another critical information that can help in fundamental analysis is the quality of the team behind a project. The quality of the team working on a project can go a long way in determining if the cryptocurrency will do well in the long run. If the team is made up of people with a good trackrecord, the project may have a bright future. On the other hand if the project is led by an incompetent team then the the future could be bleak.
One characteristic of crypto assets is that they undergo regular updates and development. This makes it to be up to date technologically and ensures it is secure. In fundamental analysis, a look at how regularly a project is being developed can give an idea into its future performance. For instance, some projects have not seen any new developments for years on end. Such can turn off investors because it suggests that the project has no plans for the future.
You can easily check the activity by going to the GitHub page of the project and check the latest commits.
The usefulness of a cryptocurrency is important to its value. If a cryptocurrency project has a limited number of use cases then chances are it will not get very popular and the value is not likely to rise. Cryptocurrencies that offer multiple use cases are more likely to succeed because they offer more value to users. Studying the use cases of the asset is therefore critical in doing a successful fundamental analysis.
This is why projects try to increase the use cases of their projects in order for the cryptocurrency to see more adoption. This is one of the major ways that the value of an asset can increase over time.
As important as the team is in getting information about a project, the community gives even better information. Every crypto project has a community of people who either invest in it or are just fans. Visiting such forums gives you instant updates on what is going on. This could be scams or the latest update on the project or the plans for the future.
Such communities exist on Twitter, Reddit, Facebook etc. visiting them can give you an edge as you could get firsthand information from the developers themselves or from fans and investors sharing their experiences.
Cryptocurrency transactions are (most of the time) recorded on the blockchain. This can be easily accessed by anyone and it is a good source of information on a crypto asset. The transaction information tells you how much of the asset is traded and what the demand is for it. An asset with a high transaction volume could be in high demand and vice versa.
Other information such as the mining difficulty for cryptocurrencies that are being mined could also be of great value. For assets like Bitcoin that have a halving, information on when the halving will occur could also affect the behaviour of investors, so such information can be a good guide on the fundamentals of an asset.
Advantage of fundamental analysis
With fundamental analysis, it is easy to gather information to determine the future of an asset which will help you make the best investment decisions. If properly done, it can help save an investor from investing wrongly and thus losing their investment.
Disadvantages of fundamental analysis
Fundamental analysis focuses on the long term prospect of an asset. It therefore ignores sudden changes in the value of the asset and is therefore not good for traders trading in short time frames. It also requires a long time to gather the information and come up with a quality analysis. Conclusions on this type of analysis can be highly subjective as well, so they may not always yield a positive result for investment or trading.
How best to use fundamental analysis?
Fundamental analysis can be very reliable for analyzing digital assets for long term investment. However to get the best out of it, it is best to combine it with technical analysis. While fundamental analysis gives an idea of the performance in the long term, technical analysis will give the analyst an idea of how the asset will perform in the shorter term. This is particularly useful for traders who may want to trade more recent price changes.