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The foundation of investment research in crypto (and other assets too) comprises technical analysis (TA) and fundamental analysis (FA). In today’s article, we are going to understand what FA and TA are and which one is ideal for an investment strategy.
Fundamental analysis (FA) is used by investors to determine the "intrinsic value" of a crypto asset or project. The primary goal is to examine a variety of internal and external factors to determine whether a crypto asset or business is overvalued or undervalued. Investors can use that information to enter or exit positions strategically. Fundamental analysis enables both non-technical investors and experienced traders to trade the market movements in the crypto world confidently. Long-term traders can develop more informed strategies with higher odds of success by using fundamental analysis.
For example, the majority of decentralized finance (or DeFi) applications are built on the Ethereum blockchain. If the market participants believe DeFi will grow, Ethereum's value may rise in the future as well. There are three main categories of crypto FA metrics:
On-chain Metrics
On-chain metrics are those that can be observed by inspecting blockchain data. It includes:
i. Transaction count
ii. Transaction value
iii. Hash rate
iv. Transaction fees
v. Staked amount
vi. Status and active addresses
Financial Metrics
Financial metrics involve evaluating the productivity and performance of an asset. It includes:
i. Market capitalization
ii. Liquidity
iii. Trading volume
iv. Supply mechanisms
Project Metrics
On-chain metrics deal with observable blockchain data, whereas project metrics are more qualitative by analyzing the following factors:
i. Team behind a crypto project
ii. Whitepaper of the project
iii. Tokenomics and utility of the coin
iv. Initial distributions
v. Competitors
vi. Project roadmap
Technical analysis (TA) in crypto includes the use of mathematical indicators based on previous price action data to forecast future trends in the market. The basic idea is that markets follow certain patterns and that once established, trends in one direction frequently tend to follow the same path for some time. TA's main assumptions are as follows:
All information about the asset is contained in the price.
Statistical analysis can help predict what the price will do next.
Markets are a reflection of human psychology.
Technical analysts use equations, charts, and graphs to identify trends and patterns that support a buy or sell signal. As the underlying asset is unimportant, technical analysts will compare these signals to others that support a similar narrative. Traders examine prices using a variety of charting tools known as indicators to identify profitable opportunities. TA takes into consideration that an asset's price reflects opposing selling and buying forces. These forces are closely related to traders' and investors' emotions (essentially fear and greed). Some common TA indicators include:
Simple Moving Averages (SMA) - The SMA is calculated using an asset's closing prices over a specified time period.
On Balance Volume (OBV) - The OBV is a volume-based technical indicator. It examines a coin's total trading volume over a specified time period.
Relative Strength Index (RSI) - The RSI is known as a momentum indicator. It compares the magnitude of the recent growth to the recent downturns of an asset to determine the speed and change of price movements of the asset.
Moving Average Convergence-Divergence Indicator (MACD) - The MACD is a popular momentum-based technical indicator among traders. It depicts the relationship between two moving averages of an asset's price to reflect trend momentum.
Below is an image that contains Technical Analysis on Bitcoin containing RSI, trendlines on candlesticks, volume, and other data.
Source: Tradingview
While fundamental analysis encourages investors to seek an asset's inherent value, technical analysis is concerned with methods for forecasting asset price movement. Further, while fundamental analysis takes into account more objective indicators of an asset's potential long-term value, such as network activity, use case, business model, and roadmap, technical analysis focuses on the market performance of the asset.
Understandably, neither strategy is objectively superior, as both can provide valuable insights into distinct areas. Some people are better suited to certain trading styles than others, and many traders combine the two to see the big picture.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.