What is fundamental analysis (FA)?
Analyzing the fundamentals of a financial asset is a crucial part of valuing the asset. To determine if an asset’s value is fair, fundamental analysts study both economic and financial factors. Macroeconomic factors can include the economy in general, market conditions, or the business tied to the asset (if one exists). Leading and lagging macroeconomic indicators are often used to track them.
Following the fundamental analysis, analysts determine if the asset is overvalued or undervalued. Using this conclusion, investors can make their investment decisions.
In the case of cryptocurrencies, fundamental analysis may also include a new area of data science that focuses on public blockchain data called on-chain metrics. Among these metrics are the network hash rate, the top holders, the number of addresses, an analysis of transactions, and many others. By refining complex technical indicators, analysts can assess certain aspects of the network’s general health by using the abundance of data on public blockchains.
Although fundamental analysis is popular in stocks and forex markets, it’s unsuitable for cryptocurrencies in the current state. Because this asset class is so new, there isn’t yet a standardized, comprehensive framework for determining market valuations. Additionally, there is a lot of speculation and narrative driving the market. Hence, fundamental aspects have a negligible impact on cryptocurrency prices. After the market matures, there may be a better way to calculate the value of cryptoassets.
What is technical analysis (TA)?
Unlike business analysts, technical analysts take a different approach. Based on historical price action, technical analysis suggests how the market might behave in the future.
Analysers don’t try to estimate the intrinsic value of an asset. Instead, they examine historical trading data to identify potential opportunities. A charting tool may include the use of technical indicators, price action analysis, volume analysis, chart patterns, and many others. It seeks to determine the strength or weakness of a given market.
As such, technical analysis isn’t only a tool for predicting the probability of future prices moving up or down. In addition, it can be useful as a risk management framework. Technical analysis helps define trades and make them measurable by providing a model for analyzing market structure. To manage risk, it is important to measure it first. Because of this, some technical analysts may not be considered strictly traders. For risk management, they may use technical analysis only as a framework.
A technical analysis can be applied to any financial market, and it is common among cryptocurrency traders. But does technical analysis actually work? In fact, as we said earlier, the valuation of cryptocurrency markets is heavily influenced by speculation. They are therefore an ideal playing field for technical analysts, as they can thrive by considering only technical factors.
