Fundamental vs technical analysis in crypto trading
Written by Morgan Reeves
If you’re stepping into the world of cryptocurrency trading, discovering a strategy for your trading might seem overwhelming. Knowing the different approaches to analyzing the market – both in its current state and the historic movements – can help you find the best method for short and long-term trading.
What is a fundamental analysis (FA)?
In crypto trading, conducting a fundamental analysis is a way of determining the value of a financial asset. The analysis takes certain metrics to assess whether the value of an asset is worthwhile.
This includes looking at both financial and macro-economic factors to consider as part of looking at the micro-market of the crypto industry. Macroeconomic factors might include looking at the overall health of the economy, market conditions, and global geopolitical and economic circumstances.
For cryptocurrencies, fundamental analysis can also take other data into consideration. This includes information such as on-chain metrics, which is a newly emerging area of data science that focuses on open blockchain data. On-chain metrics look at nuanced data such as network hash rate, top holders, number of addresses, and transaction analysis. Because most blockchains are public ledgers with past information stored into the blockchain, there is a massive amount of data available for platforms and analysts to use.
Traders and analysts will seek to identify whether the asset is undervalued or overvalued after completing the fundamental analysis. These results can be used by investors to guide their decisions about whether to buy a crypto asset, the timing about a trade, or which crypto to invest in.
Using a fundamental analysis in cryptocurrency
While a fundamental analysis is frequently used in the stock market and on the foreign exchange, it is less appropriate for cryptocurrencies as the market stands right now. This is because there just is not a defined, all-inclusive framework for evaluating the crypto market. As an emerging asset class, cryptocurrencies are just too new for a proper fundamental analysis to be enough of a market analysis for trading by itself. A lot of the cryptocurrency market is influenced by sentiment, personalities, rumors and stories which a fundamental analysis does not take into consideration.
What is a technical analysis (TA) for crypto assets?
Technical analysts take a different approach to a fundamental analysis. The core part of a technical analysis is that past price action can offer insight into how the market might move and what direction a cryptocurrency might take in the future.
Instead of looking to find a cryptocurrency’s inherent value, a technical analysis uses past trading activity to identify opportunities and make value predictions moving forward. This can involve examining price movement and trading volume, as well as other technical indicators such as chart patterns such as candle patterns and resistance and support levels.
It’s worth noting that a technical analysis can be used for more than just forecasting the future market movements. The framework can also be helpful for managing risks and identifying opportunities. This is because a technical analysis makes managing trades more defined and quantifiable because it offers a way to understand market structure. The first step in controlling this risk in any financial industry is to measure it, and finding a way to measure it can offer an important tool in trading.
Using a technical analysis for crypto trading
Like a fundamental analysis, a tech analysis can be used on any financial market. Unlike fundamental analysis, a TA is very popular among cryptocurrency traders because it offers an approach to consider the future of an asset as well as a risk measure.
Should you use a fundamental or a technical analysis in your crypto trading?
Which approach to analyze the market depends on your trading approach. Instead of using one or the other, a highly recommended strategy is to use a combination of both fundamental and technical analysis. This increases the odds of discovering a trading strategy that looks at both the inherent value AND the future price of an asset.
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Using the right platform for trading is also an imperative part of your crypto investment journey. Bitcode Method is an excellent option for new and experienced traders to get to know the market without the need to watch the price action at any given time. The platform relies on smart, sophisticated algorithms to make trades on your behalf so that you can earn passively on your cryptocurrency holdings.
