Fundamental Analysis Explained
We are sure every trader knows about technical analysis. You bet... There are many legends and hypotheses which are associated with it. Some people think it's useless due to the high volatility of cryptocurrencies, the "otherness" of the market, a very strong influence of the news, etc. Others strongly believe in the effectiveness of the tool because it helps to determine a possible change in the price direction. What side are you on? It's up to you.
But little is known about fundamental analysis. Let's figure out what it is, how it differs from TA, and what method suits you best. With that said, let's get started.
Fundamental analysis is a way to predict the price of cryptocurrencies in the long run. All kinds of data are used here – from economic to technical and social data. Such an analysis is not suitable for short-term forecasts. Therefore, it is more suitable for holders who are willing to wait months (now and then years) for their investment to return.
What data does the fundamental analysis of the virtual currency rely on?
- Demand. This parameter allows you to determine whether the cryptocurrency will be attractive to users in the future.
- The status in the cryptocurrency market. Obviously, a coin with a capitalization of 1.000.000.000 has more advantages than one with a capitalization of 100.000. This indicator helps to understand how widespread the virtual asset is.
- The status in the traditional market. Here, the attitude of the authorities to the asset is evaluated. A widespread trend within the traditional sectors of activity as well.
- Status and activity of developers. This is another important element, so we can't discount it. The name of the creators can also influence the future prospects of the project. Moreover, it is necessary to take into account their activity – it will tell you how effectively the cryptocurrency is being upgraded as it grows.
Differences from TA
Fundamental analysis involves a deep dive into the available information about a financial asset. It helps to understand whether it is now necessary to include it in your long-term investment portfolio. When it comes to technical analysis, it allows you to determine the right time to make a deal.
Given the definition, fundamental is more used for long — term capital investments, while technical is used for short-term speculative transactions in the market.
Which One to Choose?
In practice, a combination of the two options is welcomed. They will perfectly complement each other. Their mix allows you to draw a more complete picture of the market. You will be able to predict the future direction of the price more accurately.
Despite all the benefits, fundamental analysis is not as popular as TA. The reason is obvious: it is used for long-term investment or when choosing the most attractive asset for investment. When it comes to the stock market, fundamental analysis takes a back seat. Despite this, the tool can still be useful for the trader, especially if it goes hand in hand with TA.