Understanding Technical and Fundamental Analysis
|— Crypto markets have outperformed most traditional markets in the short and long terms. Due to this, an increasing number of retail and institutional investors are adding cryptocurrencies to their portfolios. |
— However, identifying the most promising assets is not a cakewalk. Technical and fundamental analysis are effective ways to find promising crypto assets having long and short-term growth potential.
— In this article, we will take you through the basics of both technical and fundamental analysis and explain which one is better for you to start with.
Wondering how to analyze a crypto asset? there are two ways: technical and fundamental analysis. Let’s explore.
All newbies do one common thing before they start out: they sit by the sidelines and bite their nails in anticipation and anxiety as they watch the markets rise and fall. When we speak of crypto, things get a little more extreme given the short-term market volatility.
As a crypto newbie, if you are having a sinking feeling in your stomach while you plan to dip your toes in the crypto markets, we totally get it. We’ve all been there, and it takes a while to learn how you can smoothly and safely approach crypto and potentially grow your wealth.
In this article, we will explain how you can do that.
Making sense of the price movements
“Buy low, sell high” is the simplest, most common advice that goes around in this space. But, you know it’s not as simple as it sounds, otherwise, we’d not have written this article nor would you have bothered to read it.
Even the most experienced traders and investors sometimes fail to time the markets and end up booking a loss. And truth be told, there’s no way around making mistakes. All you can do is learn to analyse the crypto markets so you can spot the right opportunities.
Now, there are two ways to analyze a cryptocurrency — technical analysis and fundamental analysis.
What are they? And which one should you use? Let’s have a look.
Technical analysis is a sophisticated process of analyzing the historical and current price and volume data of assets to predict their short-term price action. It can be used to analyze upward and downward trends in time periods ranging between a few minutes to a few days or weeks.
However, you must have enormous experience in using technical analysis tools and studying price patterns to be able to successfully spot trading opportunities. Due to the time and knowledge required to conduct technical analysis, this method to analyze crypto assets is mostly used by professional traders only. And even their strategies are prone to errors, and quite often, the best of traders book losses in short-term trades.
If you are new to the market, we understand that learning about trading tools, price patterns, and trading strategies can all seem extremely complicated. So, what you can do instead is to start with fundamental analysis.
Before we delve into fundamental analysis, here are the advantages and disadvantages of using technical analysis for trading cryptocurrencies:
- Huge short-term price swings are common in crypto markets. If you can use technical analysis to correctly spot these price movements, you can bag huge returns.
- Technical analysis is less resource-intensive than fundamental analysis because you can easily find all relevant historical price and volume data.
- Even the technical indicators used for analysis are readily available across most trading platforms and trading-focused social platforms.
- When you use technical analysis, you need to dedicate time almost daily to study and trade your preferred cryptocurrencies.
- Short-term investments using technical analysis can be risky due to the high volatility of the crypto markets.
To conduct fundamental analysis of a crypto asset, you do not have to be a technical guru or a trading pro. As fundamental analysis is about finding crypto assets that have long-term potential, all you need is some business and common sense.
If you can correctly understand the token economics of a project, judge the caliber of the team members based on their past experience, and the existing and potential demand of their product in the crypto space, you’re off to a good start.
For example, if you want to analyze a token, delve into its use case and see if it’s something useful or if the token is there for the sake of making the project a “crypto project.” Furthermore, study the project’s token distribution, revenue model, and so on. If you’re investing in a project that’s been around for a while, a simple Google search will show the traction they have in the market. You can further check the team that built the project and the VCs that back it to verify its credibility.
If you can do that right without following the hype, you’ll be finding the right cryptos to invest in.
- Fundamental analysis helps you plan your investment for the long term. And clearly, long-term investment is mostly safer for newbies than short-term trading.
- You can invest small amounts in the same asset at regular intervals over a long period of time and let your growth compound over time. This is a popular and low-risk investment strategy known as dollar-cost averaging.
- When you invest long term, you do not panic when markets fall or rise in the short term. You rest assured that your assets’ value will grow over the long term.
- You miss out on the many short-term opportunities that come by in the crypto market. But you can potentially buy the asset at a lower price when the markets dip and bring down the average cost per coin that you’ve paid over time.
Start with the fundamentals
By now, you know that following the hype will only get you so far in the crypto space. So, the best way to invest in crypto is through analysis. And speaking of that, technical analysis certainly has potential, but given the high risk involved, it’s not where you may want to start. The best formula is to do a mix of both technical and fundamental analysis.
You can kick start your crypto investments with fundamental analysis and then learn technical analysis as you go along. The important thing is that you learn!
If you’re wondering how decentralization can benefit you, check out our School of Block episode on decentralized finance – you’ll be hooked!