Ultimate Crypto Trading Guide-Chapter 2-Cryptocurrency Trading Basics

Fundamental analysis is a method for assessing a financial asset’s valuation. A fundamental analyst studies both economic and financial factors to determine if the value of an asset is fair. These can include macroeconomic circumstances like the state of the wider economy, industry conditions, or the business connected to the asset (if there’s one). And these are often tracked through macroeconomics leading and lagging indicators.

Once the fundamental analysis is complete, analysts aim to determine whether the asset is undervalued or overvalued. Investors can use this conclusion when making their investment decisions.

In the case of cryptocurrencies, fundamental analysis may also include an emerging field of data science that concerns itself with public blockchain data called on-chain metrics.

These metrics can include the network hash rate, the top holders, the number of addresses, analysis of transactions, and many more. Using the abundance of available data on public blockchains, analysts can create complex technical indicators that measure certain aspects of the overall health of the network.

While fundamental analysis is widely used in the stock market or Forex, it’s less suitable for cryptocurrencies in their current state.

This asset class is so new that there simply isn’t a standardized, comprehensive framework for determining market valuations. What’s more, much of the market is driven by speculation and narratives.

As such, fundamental factors will typically have negligible effects on the price of a cryptocurrency. However, more accurate ways to think about cryptoasset valuation may be developed once the market matures.

What is technical analysis (TA)?

Technical analysts work with a different approach. The core idea behind technical analysis is that historical price action may indicate how the market is likely to behave in the future.

Technical analysts don’t try to find out the intrinsic value of an asset. Instead, they look at the historical trading activity and try to identify opportunities based on that.

This can include analysis of price action and volume, chart patterns, the use of technical indicators, and many other charting tools.

The goal of this analysis is to evaluate a given market’s strength or weakness.

With that said, technical analysis isn’t only a tool for predicting the probabilities of future price movements. It can also be a useful framework for risk management.

Since technical analysis provides a model for analyzing market structure, it makes managing trades more defined and measurable. In this context, measuring risk is the first step to managing it.

This is why some technical analysts may not be considered strictly traders. They may use technical analysis purely as a framework for risk management.

The practice of technical analysis can be applied to any financial market, and it’s widely used among cryptocurrency traders. But does technical analysis work? Well, as I have mentioned earlier, the valuation of the cryptocurrency markets is largely driven by speculation.

This makes them an ideal playing field for technical analysts, as they can thrive by only considering technical factors.

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Fundamental analysis vs. technical analysis – which is better?

That entirely depends on your trading strategy. Actually, why not use both? Most market analysis methods work best when they’re combined with other methods or indicators.

This way, there’s a bigger chance of finding more reliable investment opportunities. Combining different trading strategies can also help eliminate biases from your decision-making process.

This concept is sometimes referred to as confluence. Confluence traders combine multiple strategies into one that harnesses benefits from all of them.

The idea is that the trading opportunities presented by the combined strategies may be stronger than the ones provided by only one strategy.