Many crypto traders are accustomed to relying on the readings of various indicators and market signals, but this approach is effective only when forecasting for a short period of time. For a deeper and longer-term assessment, it is necessary to use fundamental analysis of cryptocurrencies. In this article we will talk about what that is and how to implement it.
What is fundamental analysis
Fundamental analysis allows you to predict the price of digital coins in the long term. Anyone who wants to use it should take into account all the available information and analyze the factors that can influence cryptocurrencies.
In the short term, fundamental analysis is useless. Investors resort to this method only when they want to understand the general picture of the price behavior of an asset. Forecasting the value of cryptocurrencies for several years ahead is complicated by the volatility and uncertainty of the young cryptocurrency market.
Classical fundamental analysis arose in the American stock market. The first to use it were Benjamin Graham and David Dod, who proposed the following postulates:
- Changes in the price of any asset are caused by certain reasons.
- The reasons for the price movement can be identified by conducting a detailed analysis of the asset.
- Each piece of news or event has its own consequences that affect a price.
- Those who have the most information and are able to make the right decisions will be able to predict the price of the asset in the future.
The key features of FA of cryptocurrencies
All the ideas written above can be applicable to cryptocurrency trading as well. However, traders in the cryptocurrency market have been forced to adapt this asset valuation method to the peculiarities of digital coin trading, since the traditional tools that are used to predict price movements do not work here.
Cryptocurrency traders look at these indicators:
- A project’s team, its reputation and the background of key participants;
- A project’s roadmap describing its medium and long-term development plans;
- The relevance of the problem that this or that project is intended to solve (demand for the product on the market);
- A project’s white paper;
- The presence of an MVP (minimally viable product)
- A project’s monetary policy features, including the maximum supply volume, issue, block generation speed, frequency of the reduction of rewards to miners, etc.
- A cryptocurrency’s capitalization, trading volume, price volatility;
- The volume of transactions a project has and the average size of fees;
- A project’s infrastructure development (including: on which trading platforms is the coin presented, what popular wallets support it, has there ever been a delisting of this token on popular exchanges, if so, for what reasons, etc.).
Pros and Cons of fundamental analysis
Fundamental analysis as a method of forecasting the price of an asset in the future has certain advantages. The main advantage is that it allows you to determine overarching trends. However, there are a number of points that keep many traders away from using fundamental analysis, including:
The large number of factors to pay attention to – Anyone who trades using fundamental analysis has to be aware of everything that happens in the world of cryptocurrencies, otherwise he will not be able to assess the current market situation. At the same time, while you have to store a lot of information in your head, most of the information you take in will turn out to be absolutely useless.
Cause and effect relationships get disrupted – The same news can lead to different results depending on the general situation and other factors. Once the cryptocurrency market has reacted to a type of event, there is no guarantee that it will react the same the next time such an event takes place.
The risk of making incorrect interpretations – When using fundamental analysis, there are risks of making incorrect interpretations of specific market situations. For example, you can assume that this or that event will lead to an increase in the value of cryptocurrency, while, in reality, the price will remain unchanged or fall. In the cryptocurrency industry, fundamental analysis is more subjective than technical.
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