Crypto Investments — What is Technical Analysis (TA) and Fundamental Analysis (FA) and how do they differ?
Started back in January 2009, the cryptocurrency market is now worth over $200 billion USD, big enough not to be ignored by even those people who were bullish about this whole crypto market, calling it an outright scam. All of the cryptocurrencies come with a single promise, i.e. to separate ‘money’ from the control of the ‘central authorities’ which include governments, central banks and Federal Reserve (FED).
Due to its unique promise, the cryptocurrency market has attracted all kinds of people, from amateur traders who heard about bitcoin 10 minutes ago, to seasoned investors who spent years investing in stock market and have seen all the ups and downs. The crypto investment space isn’t entirely different from the traditional securities and stock market investments on a strategy level, but they do differ slightly when it comes to regulations and fundamental analysis which we will discuss further in this article.
When it comes to investments, there are two different approaches used by the people in the industry to approach the markets — Fundamental Analysis (FA) and Technical Analysis (TA). Both the approaches are at opposite ends of the spectrum and are used to evaluate future trends, forecasts and predictions about the prices.
Lets dive deeper and discuss both of the investment methodologies!
Fundamental Analysis (FA)
Fundamental Analysis, also known as ‘Funda’ or ‘FA’, is an evaluation method where you measure the intrinsic value of a cryptocurrency. You look at the market, the value proposition, the vision, etc to decided whether you want to invest in any particular cryptocurrency or not.
Unlike the traditional stock markets, there are no earnings reports to study, no profit per share to calculate and also some of the cryptocurrencies are still in their R&D phase. This is what makes fundamental analysis in the crypto space different from the traditional stock market.
To conduct a fundamental analysis to evaluate any cryptocurrency, you closely analyze the following things:
- Who is the team behind the coin and is it capable?
- What is the background of the team members?
- What is the problem that they are trying to solve?
- How do they differ from their competitors?
- What is the future promise of the project?
- What is their current traction?
- What influencers are talking about them?
You research each coin thoroughly and look at all of the above variables to decide whether you want to invest in that particular coin or not. Please note that the fundamental analysis is a long term investment methodology where you bet on the future gains instead of the short term gains.
Technical Analysis (TA)
Technical analysis, also known as TA, is an evaluation method which relies solely on the price charts and trading volume. Unlike fundamental analysis which is more geared towards long term investments, technical analysts are short term investors or day traders who are looking to make immediate gains which goes by the mantra of ‘buying low and selling high’.
While conducting technical analysis, you closely look at the patterns in the chart and look for the following things:
- Buying patterns of the consumers
- Trading volume
- Trends going up or down
- Past performance
- Industry news that can spark an immediate trend
Technical analysis is all about charts and buying patterns. When you see a lot of buying orders, you know that the price is going to increase and you eventually hold your coins to a level where the buying order reaches its peak and you sell your coins yielding a maximum profit. Similarly, when you see a lot of sell orders, you wait till the moment when the price of any coin reaches its absolute low and you try to buy at the lowest price.
FA vs TA, which one to choose?
The overall crypto space is very volatile, and there is no doubt that the crypto space is filled with day traders and technical analysts who benefit from the price volatility and speculations. Only a few coins in the crypto world such as bitcoin, ethereum, chainlink, etc. are worthy enough to be considered for fundamental analysis because of their very strong team, vision and the future promise that they are trying to establish.
The best investment strategy for crypto space in our opinion is to combine both FA and TA to a level where you can get the maximum profit and don’t end up investing in outright scams.