Understanding Fundamental Analysis is critical to safely navigating the crypto world. It helps crypto-traders make informed decisions, limiting the risk of losing all your digital assets in a very volatile market.
Fundamental analysis is how you check for the actual value of a digital asset and analyze the factors that can influence the asset’s price.
Fundamental analysis helps crypto traders see the big picture by assessing external factors (e.g. government policy or a news update on happening around the world); and industry trends (crypto-related announcements or events, BTC halving period, etc.) that can influence market behavior and the future price of an asset.
Fundamental analysis will help discover the actual worth of an asset and the potential values derived from such an asset.
Fundamental analysis uses three sets of data to predict the behavior pattern of assets. They are:
- Historical data: this gives a clear insight into past occurrences and a clear understanding of industry trends or behavior patterns that might occur again.
- News, publications, and other publicly known information about the project, its team, and those backing it, including their announcements and public perception of the project.
- Valuable information that is relatively unknown in the public space but is valuable, i.e., leadership structure and reputation, how the leadership handles crises, situations, etc.
Types of Fundamental Analysis
Fundamental analysis can be classified into two main categories –
Qualitative analysis: involves studying brand value, management decisions, the fiscal performance of the company over a given period, and other similar factors.
Quantitative analysis: is number-driven and considers the company’s fiscal situation and concludes the asset’s price based on the analysis.
Although both approaches to analyzing the market are different, they are essential for a detailed analysis of any project or the price of any digital asset.
There are also two approaches to carrying out a fundamental analysis:
- The top-down approach – examines the macroeconomic factors first and then looks into the specific project/token/digital asset.
- The bottom-up approach – examines the project/token/digital asset first and then analyzes the consequence of macroeconomic factors on the company’s performance.
Importance of Fundamental Analysis
Fundamental analysis helps uncover the actual value of a digital asset, the potential in the long run, and the pattern or trend in the market.
Fundamental Analysis help determines if a particular project is viable and worth investing in, understand the track record of those in charge of the project and the project itself, and the growth potential of such project.
Fundamental Analysis (FA) vs. Technical Analysis (TA)
Many investors confuse Fundamental Analysis and Technical Analysis; the two terms are seldom used interchangeably. Fundamental analysis seeks to make a studied guess based on the external information, industry, and company.
On the other hand, technical analysis uses internal market data such as price and trade volume to predict the price of digital assets. Technical analysis focuses on identifying patterns and trends that will repeat so that the trader can capitalize on them.