Fundamental analysis is a process for identifying the underlying worth of a crypto asset and assessing internal and external financial and economic factors influencing its future price. You’re probably aware of how volatile cryptocurrency markets can be. However, with careful research, you may predict what is likely to occur. Fundamental analysis is one type of analysis you can apply.
What Is Fundamental Analysis?
Fundamental analysis is a method that cryptocurrency investors use to determine the intrinsic worth of a crypto asset. Investors look at a variety of internal and external elements to evaluate whether an asset is overvalued or undervalued. A trader can tactically enter or leave a position using this knowledge.
The Basics of Fundamental Analysis
The basic analysis principle is straightforward: if you can show that a desired item has inherent worth that is not reflected in its current market price, you may utilize this knowledge to trade and profit.
The goal of basic analysis is to identify projects that are likely to succeed. You then invest in such ventures, and after the team delivers and demonstrates its talents, other investors will take note, resulting in favorable price movement.
Because basic analysis can assist you in researching an investment to identify its future worth, the inverse is also true. If you discover that a crypto asset is significantly overvalued, you can still benefit by shorting it.
How to Do Fundamental Analysis in Crypto
Unlike in traditional companies, you usually don’t have a lot of data to sift through when evaluating crypto projects. However, you can still analyze crypto investments by looking out for the following factors:
- Target market: It is vital to consider the asset’s market size. A large market could mean that it is already over-saturated hence not a good investment. Niche markets, on the other hand, are small but can be highly profitable.
- Competition: How much competition does the project have, and is it prepared to beat the competition? If the project is unique, this is a great sign.
- Team: The team behind a project determines how likely it is to succeed. A project with skilled and experienced team members is likely to become successful.
- Roadmap: Most crypto projects have a roadmap, and it can be a great tool to gauge the value of their asset. The roadmap should be ambitious but not too ambitious.
- Status: Crypto projects don’t start at the same level. It’s better to go for assets from popular projects because they are more likely to gain value.
- Whitepaper: Whitepapers outline everything about a project. Even though they are mostly technical, you must read them before investing.
- Real-world use cases: Even if a project has excellent fundamentals, it’s essential to look at the benefits it brings to the real world because this could significantly affect its value.
- Price history and age: Crypto assets come and go. If a project has been in existence for a while and consistently maintained its value, it is likely to have longevity. That being said, you might get more significant results from smaller coins that break out into the mainstream.
- Liquidity and volume: A token with high demand is likely to have high trading volumes.
- Market cap: Market capitalization considers a crypto asset’s supply and derives its actual value based on this. A project with a low market cap is likely to have more growth potential than one with a higher market cap.
- Regulation: If a project is not following the stipulated rules and regulations, it will likely adversely affect its future value.
Fundamental Analysis (FA) vs. Technical Analysis (TA)
Traders and investors who are new to the cryptocurrency, forex, or stock markets are frequently perplexed about which method to pursue. Fundamental analysis and Technical analysis are diametrically opposed and use very different approaches to study different topics. Nonetheless, both give trading-relevant data. So, which is the best?
In reality, it may be more appropriate to question what each offers to the table. Fundamental analysts, in essence, feel that stock price is not always indicative of a stock’s underlying value – an idea that guides their investment judgments.
Technical analysts, on the other hand, feel that past price action and volume data can help predict future price movement. They are unconcerned with researching external causes, preferring to concentrate on price charts, patterns, and market trends. They want to find the best points to enter and exit situations.
Proponents of the efficient market hypothesis (EMH) argue that using technical analysis (TA) to consistently outperform the market is impossible. According to the hypothesis, financial markets represent all known knowledge about assets (they are “rational”) and already take into account previous data. “Weaker” versions of the EMH do not dismiss fundamental analysis, but “stronger” versions suggest that gaining a competitive advantage is impossible, even with diligent study.
Understandably, there is no objectively superior technique among the two, as both can provide significant insights into distinct areas. Some people are better suited to particular trading strategies than others, and many traders utilize a combination of both to see the larger picture. This is true for both short-term trades and long-term investments.
Advantages of Fundamental Analysis
Fundamental analysis is a strong tool for evaluating firms that technical analysis just cannot match. Studying a variety of qualitative and quantitative factors is a critical beginning point for any trade for investors all over the world.
Fundamental analysis is simple to perform since it depends on tried-and-true techniques and widely available company data. This is true, at least in traditional markets. Indeed, when it comes to cryptocurrency (which is still a young business), data is not always readily available, and the high correlation between assets suggests that FA may not be as effective.
When done correctly, it provides a framework for selecting stocks that are now undervalued but are positioned to rise in value over time. Top investors such as Warren Buffett and Benjamin Graham have often proved that conducting extensive company analysis in this manner can deliver significant rewards.
Disadvantages of Fundamental Analysis
Fundamental analysis is simple, but excellent fundamental analysis is difficult. Determining a stock’s “intrinsic value” is a time-consuming procedure that needs far more effort than just entering figures into a formula. Many variables must be considered, and the learning curve for doing so efficiently might be steep. Furthermore, it is better suited to long-term transactions rather than short-term trades.
This type of analysis also overlooks powerful market forces and trends that technical analysis can identify. As economist John Maynard Keynes once said:
The market can stay irrational longer than you can remain solvent.
Stocks that appear undervalued (by every metric) are not guaranteed to increase in value in the future.
Fundamental analysis is a well-established discipline that many successful traders swear by. By honing a technique, investors can not only learn to better assess the true worth of stocks, cryptocurrencies, and other assets but also gain a better understanding of businesses and industries as a whole.
Fundamental research, when combined with technical analysis, can provide traders and investors with a comprehensive understanding of which assets and businesses they can profit from. Many people in both the legacy and cryptocurrency markets like the mix of FA and TA.
However, given the nascency of the crypto markets, you should be aware that FA may not be as effective. Always DO Your Own Research (DYOR) and have a sound risk management strategy in place.