Cryptocurrencies are all too often known for their volatility and for that reason, proper analysis and thorough research is a vital step in the crypto trading path. Whether you’re new to the world of trading or you’re a seasoned player on investment platforms, fundamental analysis can be a useful tool regardless of your cryptocurrency of choice. But what is fundamental analysis and how exactly can it be useful when it comes to trading in cryptocurrencies? We’re exploring precisely that below.
What Is Fundamental Analysis?
Fundamental analysis is, in simpler terms, analysis conducted by you through research into a cryptocurrency. While technical analysis is a case of analyzing the performance of a cryptocurrency within the markets in terms of trends and prices, the fundamental analysis relies more heavily on the fundamental aspects of the cryptocurrency e.g. what the cryptocurrency can do, the problems it’s trying to solve and the potential benefits it could hold.
Market potential is also something worth noting, and can ultimately help you to work out whether any one particular coin could hold enough potential to be worthy of an investment for the future. While this isn’t necessarily beneficial for day-to-day trading, for those wanting to invest for a longer period, fundamental analysis is something you definitely need to consider.
Understanding these underlying forces can provide you with a much more efficient safety net, while ultimately helping to reduce some level of risk, as you have a clear understanding of how the cryptocurrency is likely to act dependent on certain situations.
With cryptocurrencies, their viability is often related to how people are reacting with the market at the time, and with cryptocurrencies still remaining in their infancy, fundamental analysis is much more important – as there is a minimal track record to go off of, which is what technical analysis can sometimes rely on.
Why Do I Need To Perform This Analysis?
When it comes to picking your investments, you need to be sure that you understand what to expect and what exactly the cryptocurrencies entail. For example, while Bitcoin has been designed as a peer-to-peer payment network, Ripple and Ethereum were created with business transactions and smart contracts in mind.
Trading in the short term could just mean a glimpse at the overall price of a coin but for those wanting to make a worthwhile investment for the future, understanding and believing in the project you’re putting your money into is a must.
Fundamental analysis, in some ways, can be considered to be much more valuable than any other risk assessment or analysis method. By understanding the true fundamentals of a coin, you can better understand how it might behave in the long term and even begin to analyse how it may stand up in the markets over time.
How To Perform Fundamental Analysis
Quite simply, fundamental analysis is about knowledge.
In order to have a clear understanding of the potential that a cryptocurrency can have in the market, you will need to gather transparent sources of reliable information and analyse this thoroughly before making your decisions. Obtaining the white papers of each coin you want to invest in will allow you to gain a better understanding of the coin’s design and its mechanics – providing you with much more of an insight into the coin’s overall fundamentals.
However, white papers tend to be very specific and jargon-fueled, so you will need to have a significant amount of knowledge about cryptocurrencies prior to opting for this. There are also a number of forums and community groups which can provide you with more of a detailed insight into what the coins actually do, and a lot of the sentiment around them from other fellow crypto-enthusiasts.
Further to this, you may want to consider starting your trading venture on a social trading network, as this can allow you to copy trades from other, more experienced crypto traders, and ultimately allow you to learn as you trade.
Questions To Ask Yourself When Conducting Fundamental Analysis
When it comes to fundamental analysis in crypto trading, you’re going to want to ask yourself a series of questions to ensure that you have a significant amount of knowledge on the cryptocurrency that you’re looking to trade, and its background.
For example, understanding the cryptocurrency’s existing marketing techniques, its age, if there is a rich list, whether the cryptocurrency was born from an ICO, whether or not it has the potential to solve real world problems, and if the cryptocurrency has a roadmap with achievable, realistic goals, are all questions to ask yourself before investing in a cryptocurrency.
Knowing who the developers are, or if they’re anonymous, can also provide you with a significant amount of information on whether or not the cryptocurrency is likely to be successful – for example, a developer with a strong background in computer science and cryptography, who is well-known for research in digital contracts and digital currency is likely to be far more reliable than one who has just graduated from MIT.
Fundamental vs. Technical: Is One Better Than The Other?
Whether you’d be best finding out the intrinsic value of a cryptocurrency or focusing on the statistical data can ultimately depend on your intentions when it comes to investments. If you’re investing for the sake of making a bit of money through trading, then you may find that technical analysis is more beneficial to you. Following market trends and keeping a close eye on the volatile prices can be a great way to ensure that you’re giving your daily investments the best chance and buying out when it suits best.
For those wanting a more in-depth investment for a longer period of time, then you may find that fundamental analysis is actually a better assessment for you to make. From the problems that the coin is trying to solve and the campaigning that they are doing, to the technology beneath it or general interest by other investors, analysing the fundamentals could be the difference between an investment that you are mentally invested in, and one that you simply throw money at or choose to forgo completely.
Fundamental and technical analysis both have their own benefits and the method of choice for you will depend on personal preference. Whatever the case, hopefully this guide has helped give you a head start into making your decision and investing in these exciting crypto markets.