How do fundamental and technical analysis work for crypto investors?

Crypto market analysis refers to the assessment of the market environment and other key factors that can affect the market trend. Doing so, which is a crucial and highly recommended step for investors to take before entering the digital asset market.

Many investors might be familiar with two terms from equities or futures trading: fundamental analysis (FA) and technical analysis (TA). However, what are the equivalents of FA and TA in the crypto market? How do these two tools serve investors?

TA refers to the analysis of past market trends and price movements before investing in cryptocurrencies. FA refers to the evaluation of all social, economic and political factors that may affect the value of digital assets. It is essential for any market analysis to include both analyses, which have different operating procedures and required indicators.

What is FA in the crypto market?

In the realm of digital assets, FA works on the understanding that the future potential should be based on more than just its past performance. It takes into account both microeconomic and macroeconomic conditions that may affect the market.

So, it could be taken that FA seeks to determine how external factors can affect the performance of digital assets. These considerations focus on less tangible and more qualitative aspects, such as the leadership of projects or liquidity and volume.

Generally, FA would examine aspects such as on-chain metrics that include active addresses and hash rate; project metrics that include the whitepaper, the team and the competitors; financial metrics that include liquidity and volume or supply mechanisms.

Based on such analysis, FA can address some questions such as whether a token or project will become more valuable in the future.

What is TA in the crypto market?

TA involves the analysis of the numbers and statistics that may determine the price movements and trading volume of digital assets. Investors identify past market trends and price movements to determine if digital assets are worth investing in.

Previous market trends and price movements are important information for TA. Technical analysts are adept at using charts, graphs, and mathematical equations to judge the past trends of digital assets. The main underlying assumption of TA is that fluctuations in the price of an asset are not random and generally evolve into identifiable trends over time.

Technical analysts employ a variety of indicators to determine market trends, based on charts and historical price action. Among the numerous TA indicators, simple moving averages (SMA), relative strength index (RSI), Bollinger Bands (BB) are the most widely-used and well-known examples. 

FA/TA? Which one should investors use?

Since TA looks at the past trends and prices, it could be used to examine the assets or projects that have a long history such as Bitcoin. In contrast, projects that have only existed for a few years or even less lack historical information and thus are not very suitable for TA. In this case, FA could be considered as it can provide insights into the developers of projects: whether they have a good track record and make for reliable and valuable investments.

FA is less technically demanding – investors don’t need to be a cryptocurrency market expert to do a good job. Developers of digital assets often make their basic information and financial data public on the Internet, to cater to investors following an FA strategy. 

TA requires analysts to have significant investment training and experience. As technical analysts must analyze equations, charts, and graphs, they need a high level of mathematical knowledge to discern market trends as well as falling and rising cryptocurrency values.

A central premise of TA is that market prices already reflect all fundamental factors. However,  in contrast to the TA approach that mainly focuses on historical price data , FA adopts a broader investigative strategy that places more emphasis on qualitative factors. As such, many investors now use a combination of both methods which gives them the best of both worlds. 

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