What is a fundamental analysis meaning in cryptocurrency trading?
Many investors go into a long-term cryptocurrency position due to the hype, and that’s always bad news. However, this mistake is often exasperated by the fact that they didn’t do their research on the project in question. One of the most important processes for starting a new crypto investment is performing proper fundamental analysis, but what is it?
How does fundamental analysis work in cryptocurrency trading?
Fundamental in traditional investments involves digging into the companies records. Investors in these areas may be interested in what kinds of profits the project makes or their plans for expansion. However, it’s important to remember that cryptocurrencies are not companies. In fact, many of them, like Bitcoin and Ethereum are community projects.
This means that you need a different approach, and you’ll need to focus on the long-term usefulness of that project. This includes investigating their plans for the future, how solid their plans are, whether they are capable of funding their goals and how much community backing they have.
Why is it useful and important?
Unfortunately, the cryptocurrency craze has brought about a lot of projects which have no real use case. While there are outright scams which run away with investors money, there’s also the issue of tokens which don’t need to exist. These are tokens created to crowdfund a platform, but their usefulness ends there.
Even if these platforms are a success, it could still be a losing investment for you when you realize that the token isn’t needed at all for the project to function! Performing proper fundamental analysis for cryptocurrency can protect you from projects, which are not sound in their construction.
How is a fundamental analysis done?
Fundamental analysis is not difficult, but it does require a lot of work. The best place to start is the crypto project’s whitepaper where you can read about the team’s plans. Of course, you don’t have to stop there, and it’s always a good idea to get differing opinions.
You can do this by visiting community forums for the project like Reddit or Bitcointalk forums. Other investors will present concerns which you may not have initially thought of. Just remember that it’s important to verify these facts for yourself and not follow other people’s advice blindly.
An example of a fundamental crypto analysis
Jimmy has found a token that he really likes, and he’s been hearing about how great of a project it is on Reddit. However, he decides that he needs to decide for himself whether the project is good by doing fundamental analysis.
He dives into the white paper, and he finds that while the project itself looks good, that the token has very little usage other than collecting money from investors. With no use case for the token, he decides to pass on this investment, and instead put his money into another project, which has done a better job of utilizing its token.
When to use cryptocurrency fundamental analysis?
It’s always a good idea to have at least a basic knowledge of the fundamentals of a project. However, if you’re more interested in day trading where you won’t be holding a project for very long, then you may be less concerned with this. If you are looking to make long-term plays though, you should always do a thorough fundamentals analysis before investing.
How to learn it?
Learning fundamental analysis is not nearly as intimidating as learning technical analysis. In fact, getting a grasp of the fundamentals can even be fun if you enjoy learning about new cryptocurrency projects.
The easiest way to learn is by immersing yourself in discussions, reading the source material or even watching videos of other people performing this analysis to give you an idea of what you should be looking out for.
Fundamental analysis checklist
What should you be looking for when you do your crypto fundamental analysis? Essentially, you want a coin or token that provides exceptional value at an attractive price. Here’s a checklist for you!
Your first step should be to evaluate the technology behind the project. Is it unique? Is it better than other options available? Will people want to use it?
• Use Case
Even if the technology is good, that means nothing for you if the token has no value. What’s the use case for the token? Does it tie into the platform? Will people actually want to own this token?
Who’s behind the project? What qualifications do they have? Do they have the resources and capital to complete their goals?
What’s on the map for the future? Every good project should have a solid roadmap that they stick to. If a team continually misses their goals it can be a red flag.
What’s the supply of the coin? Coins with too large of a supply can have a hard time maintaining price traction. You should keep this in mind when investing.
• Social Activity
Every project needs a community. Is the team engaging with investors and users? If their social media looks dead, then the project may not have a real chance at being a success.
• Trading Activity
What type of trading activity do they have? Be wary of assets with very low volume, you could find yourself stuck with a dying coin or token that you’ll never be rid of.
What tools can be used for a fundamental analysis?
In order to make your job a little easier, there are tons of tools available to help you filter information. You should use these to quickly compare metrics like supply and trading volume.
Why fundamental analysis may not work for crypto markets?
Markets are often driven by emotions, and in some cases, even the best analysis will fail, because it takes a logical approach when humans aren’t always logical.
Fundamental VS technical analysis in cryptocurrency trading
Fundamental analysis focuses mainly on the merits of a particular investment, while technical analysis doesn’t really care about those things. A trader focused on technical analysis only listens to what the chart tells them so they can identify trends.