How to do fundamental analysis for cryptocurrencies and digital assets?
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As a crypto trader, expert or not, we need to know what events trigger prices to have an
upward, downward or stagnant trend.
Since the market is not always predictable, with reliable analysis, traders usually get a decent idea of what the scenarios will be for that particular asset.
When a trader has sufficient experience they know when to trade their position. They will identify market trends in advance and classify parts where they can consistently foresee what the next move is.
The question is how do traders know when to trade?
Well, they use two methods which are: fundamental analysis and technical analysis.
Technical analysis is when a trader studies historical price action to predict future price action. This method is used widely in trading and usually involves psychology and game theory. When enough people believe in an indicator and are anticipating a result, certain patterns often manifest themselves because of this shared mentality.
Fundamental analysis is when traders take a look at the actual real-world usage or value of an asset, meaning they do an analysis on every part of an asset that backs to its overall value.
In this blog, we will focus on fundamental analysis.
The basics of fundamental analysis
Fundamental analysis is not just catered to cryptocurrency, it is used widely in other markets.
The method is pretty straight forward: once you can identify that an asset has a value, you can trade based on your analysis and eventually make a profit. For instance, the crypto asset VeChain has shown a strong usage demand since it is designed to enhance supply chain management and business processes. This may potentially make the asset more valuable but it is very subjective.
Traders that use fundamental analysis usually classify assets that have a solid chance to succeed.
Traders essentially diagnose how fundamental variations like this are going to be received by market participants. In the majority of cases, it doesn’t matter how the trader feels about the asset, but how the market is going to perceive it.
How to do fundamental analysis in the crypto market?
Since crypto markets are in the beginning stages, it is primarily theoretical.
There are several influences to look out for when analyzing an investment :
All projects/ products have a target market and it is wise to consider how large it is.
If the product’s target market is large does not always indicate that it is a good investment. It is always good to research the product-market fit and see how quickly it can be adapted.
Competition is one of the significant factors in any industry, and traders use this to estimate the efficiency of a crypto project. Traders will think about the following:
Are there any competitors? If so, how many are out there?
If there are too many competitors in the space, it makes it problematic for traders to invest in these projects since an adoption would be an issue since there are too many players in the space.
Secondly, traders question how a company stacks up against its competitors?
Comparing a company with other competitors in the space can depict strengths and weaknesses, and help traders decide which competitor will last the longest in the space thus going for that as their investment choice. If the product is unique, that is usually a good sign of being the sole player on top.
Crypto projects that are going to strive have roadmaps. This give traders insight into the company’s upcoming strategies. Traders look at roadmaps to track major releases and see if there is any opportunity to trade prior or on that particular roadmap event. For example, Tron, which is widely known as crypto-coin usually has high volume whenever a major release happens. The roadmap will depict this and give the trader an idea of when to put their buy or sell orders in.
In the crypto world, partnerships are vital for assigning value to a company, but always understand the facts of the partnership before making any sort of decision.
For example, Enjin announced that they had partnered up with Samsung and the price soared by 70%, this is an example of a good partnership. Now, on the contrary, there are partnerships that don’t work out, for example, DigiByte was delisted from Polonix after Jared Tate, founder of DigiByte, had a tweetstorm against Polonix and Tron. The exchange then turned the tables on Tate by deciding that DigiByte no longer meets its listing standards and will be delisted from the platform.
Since the Bull Run in 2017, a lot of crypto projects have come and gone. If you notice that a particular crypto project has been around for a while, and has consistently maintained value throughout the turmoil of the market, this is a good sign of longevity and should be looked into investing.
For example, Litecoin has been around the same time Bitcoin was launched and has been in the top 10 ever since. This tells the trader that there is consistency when investing. On the other hand, Bitconnect, a “high-yield investment program”, was completely wiped out after they received a cease and desist letter and was classified as a scam.
Liquidity and volume
The big question every trader asks themselves is how often is this crypto traded?
If you notice that there is a lot of volume being pushed in a particular asset/ token, this symbolizes a good chance of profits. Just be mindful that when a coin rises it can fall really quick so always keep track of your price points.
For example, any partnership announcement usually pumps the price for a couple of hours before it shoots back down, so always time your price entry and exit.
Regulations matter in every market. If a crypto project does not comply with existing regulations, this can be a red flag and have a negative impact on the price of that coin/ token.
For example, Bitconnect was one of the biggest pyramid scheme that was shut down because it did not comply with the regulation.
In conclusion, certain parts of fundamental analysis can be very subjective. Often times things can only be compared relatively with other similar cryptocurrencies because these technologies have never existed before. And even then it might not be entirely accurate.
What is your approach to doing fundamental analysis or how would you do things differently? Let us know in the comments!
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