What is Fundamental Analysis in Crypto Trading

Fundamental Analysis Definition

Let’s examine what is FA in crypto. Fundamental analysis is a method of estimating the intrinsic value of digital assets by analyzing various factors that affect their value. The term FA in crypto originates from the stock market. Unlike technical analysis, which focuses on price charts and historical data, fundamental analysis looks at fundamental aspects such as the technology behind a cryptocurrency or stock, the development team, partnerships, market demand, regulations, and economic and social factors.

The main purpose of fundamental analysis in trading is to determine the true value of a cryptocurrency and identify undervalued or overvalued assets. The analysis includes examining metrics such as total coin supply, market capitalization, trading volume, level of decentralization, use in real-world applications, and other metrics that can affect a project’s long-term success and sustainability. By utilizing fundamental analysis, traders and investors can make more informed decisions and strategically select assets to invest in. Using fundamental analysis, traders can more confidently decide when it is best to buy and sell cryptocurrency by considering factors such as the technology behind the project and its market demand.

*Blockchain also allows us to perform on-chain analysis, which helps explain investor behavior and predict asset price changes.

Types of Fundamental Analysis

Trading fundamental analysis in cryptocurrency includes several key types of analysis that help traders and investors assess the true value and potential of digital assets. Let’s take a look at what Bitcoin fundamental analysis includes:

• Technology and Team Analysis

This type of analysis evaluates the underlying technology behind cryptocurrency and the development and project management teams. It is important to understand how innovative and reliable the technology is and assess the experience and reputation of the project team.

• Market Metrics Analysis

This analysis evaluates market capitalization, trading volume, liquidity, and total coin issuance metrics. These metrics help understand the market’s current state and potential growth.

• Ecosystem and Partnerships Analysis

This type of analysis looks at the ecosystem around cryptocurrency, including the presence of strategic partnerships, integrations with other projects and platforms, and the use of the technology in real-world applications. It is important to assess how active and sustainable the ecosystem growth is.

• Regulatory analysis

Regulatory analysis assesses the regulatory environment’s impact on cryptocurrency. This includes examining current and future legislative and regulatory measures in various countries and their potential impact on the price and adoption of cryptocurrency.

• Social Analysis

Social analysis includes assessing public perception and acceptance of cryptocurrency, social media and forum activity, and community engagement. Community opinion and activity can significantly impact a project’s credibility and popularity.

• Economic Analysis

Economic analysis looks at broader economic factors that can affect the value of a cryptocurrency, such as global economic trends, inflation, monetary policy, and the impact of traditional financial markets.

How to Do Fundamental Analysis in Crypto?

Explore the Product and Its Roadmap

Study how blockchain technology is used and evaluate the project’s White Paper to understand its purpose, unique features and technical aspects. It is also important to break down the project roadmap to know what key milestones have already been achieved and what is planned for the future. This will give you an idea of the cryptocurrency’s long-term outlook and potential.

Analyze Market Data & Financial Indicators

Next, you must analyze the cryptocurrency’s key market data and financial metrics. Include the following metrics in your analysis:

• Market capitalization: The total value of all coins issued.
• Trading volume: The number of coins traded in a given period.
• Liquidity: Crypto liquidity plays a big role in cryptocurrency, it determines the ability of an asset to be bought or sold quickly without significantly affecting its price.
• Total coin supply: The number of coins in circulation and their maximum possible supply. This data will help you understand the current state of the cryptocurrency in the market and assess its growth prospects. The market volume of cryptocurrencies is also important in understanding the activity and interest in a particular asset. This data will help you understand the current state of the cryptocurrency in the market and assess its growth prospects.

Screener fundamental analysis allows traders to quickly and efficiently select cryptocurrencies based on fundamental indicators that meet their investment criteria.

Assess External Factors and Market Trends

The third step involves analyzing external factors that may affect the cryptocurrency. These can be changes in legislation, economic situation, technological breakthroughs and general market trends. It is also helpful to consider a list of cryptocurrencies to determine which ones are most affected by these factors. It is important to understand how bull and bear markets affect investor behavior and asset prices. Evaluating macroeconomic factors and overall market conditions will help predict potential risks and opportunities for a particular cryptocurrency.

Don’t Rely Only on Rumors and News

Rumors and news can strongly influence short-term price fluctuations, causing FUD (fear, uncertainty and doubt) and FOMO (fear of missing out on an opportunity). Still, you should rely on them only partially when making investment decisions. Fundamental analysis crypto requires an objective and comprehensive approach. It is important to check sources of information and rely on facts rather than emotional market reactions.

Remember to Diversify Your Portfolio

Finally, remember the importance of diversification. Investing everything in one cryptocurrency can be risky. Split your investments between different assets to reduce risk and increase the likelihood of success. Diversification allows you to balance your portfolio and protect it from the volatility of individual cryptocurrencies. In addition, knowing how to convert cryptocurrency from one asset to another in time can help you adapt to changes in the market and maximize your investment opportunities.

Example of Fundamental Analysis

Take Ethereum (ETH), a decentralized platform for smart contracts and decentralized applications (dapp). Key metrics include a market capitalization of over $300 billion, high trading volume, and liquidity. The regulatory environment is favorable and technological breakthroughs such as sharding support growth prospects.

The impact of external factors, such as regulatory changes and economic conditions, is important. The fundamental analysis example confirms the project’s strengths, including an experienced team and an active community. To manage risks, it is recommended to diversify investments and convert cryptocurrency promptly, depending on market conditions. Try analyzing another well-known cryptocurrency, such as Bitcoin (BTC) as an experiment.

Key Indicators in Crypto Fundamental Analysis (FA Crypto meaning)

Network Value to Transactions Ratio (NVT)

NVT (Network Value to Transactions Ratio) shows the ratio of a cryptocurrency’s market capitalization to transaction volume. This indicator helps determine how much an asset is utilized in the network. A high NVT may indicate the cryptocurrency is overvalued, while a low NVT may indicate undervaluation.

Market Value to Realized Value Ratio (MVRV)

MVRV (Market Value to Realized Value Ratio) compares a cryptocurrency’s market value to its realized value (the value of all coins when they were last moved). An MVRV above one may indicate that a cryptocurrency trades above its realized value, indicating an overheated market. An MVRV below one may indicate that the asset is undervalued.

Stock-to-flow model (S2F)

The Stock-to-Flow model estimates an asset’s scarcity by comparing its current stock (stock) to its annual production (flow). This indicator often estimates the value of assets such as gold and bitcoin. A high S2F value indicates that an asset is in short supply, which may indicate that it is precious and has the potential to increase in price.

Fundamental and Technical Analysis (TA): Connection & Differences

Technical analysis (TA) analyzes historical prices and trading volumes using charts and technical indicators, predicting short- and medium-term price movements. Of course, there is difference between fundamental and technical analysis. Fundamental vs technical analysis: FA assesses the intrinsic value of an asset by analyzing economic, financial, and qualitative factors such as technology, team, and market demand, which is more suitable for long-term investing. TA uses tools such as moving averages and support levels, while FA relies on financial statements and metrics such as NVT and MVRV.

Both techniques aim to predict future price movements and utilize historical data, but in different contexts. Combining TA and FA allows for confirmation of signals: FA helps select promising assets, while TA finds optimal entry and exit points. This combination improves risk management and allows you to use short-term trends to achieve long-term goals.

Pros and cons of FA

Conclusion

Let’s repeat: What is fundamental analysis? Fundamental analysis is, in simple words, a tool for traders seeking long-term success in the cryptocurrency market. Investigating macroeconomic factors, analyzing technology, and assessing market demand can significantly improve the results of trading strategies and contribute to more informed investment decisions. The best way to succeed in trading is to know how to combine fundamental and technical analysis.