The quality of good traders and experts is that they know when to trade. The cryptocurrency traders recognize the Price Trends of the market and predict what will happen next. Traders analyze fundamentals of the market to know whether the price will rise, fall or stay the same. Also, they examine what causes the price to go up, down or remain constant.
There are basically 3 ways of performing an analysis– Technical, Fundamental and Sentimental Analysis. In this article, we will focus on Fundamental Analysis.
Fundamental Analysis focuses on examining the factors that affect the prices of cryptocurrencies. Financial, economic and other such qualitative and quantitative factors are considered while analyzing the market.
Fundamental analysis evaluates features and elements to measure the value of the crypto assets. Rather than following the passion and interest of people, it follows conception in analysis. Traders do deep research and perform this analysis to know the potential of a currency.
How to do Fundamental Analysis?
There are various factors to consider when doing Fundamental Analysis. These are:-
- Market Capitalization
- Coin Supply
- Trade Volume
- Use Case
- Founders and Developers
- Potential Roadblocks
1) Market Capitalization- It is the aggregate market value of a company. This is generally the first thing that fundamental cryptocurrency traders analyze. Market Capitalization is vital as it tells how much room for growth there is.
Some traders are biased towards the currencies with lower prices. New investors prefer to own one whole unit of cryptocurrency instead of a small quantity. Though, a low-cost cryptocurrency has the same market capitalization as a high-cost cryptocurrency only if it has a much higher circulating supply.
2) Coin Supply- The law of supply and demand applies here too, low supply and high demand increase price. When the supply of cryptocurrency will decrease, the demand will increase its price.
The law of supply and demand can also be reversed. This is why traders need to pay attention to the coin supply when planning to invest and doing fundamental analysis.
3) Trade Volume- It is the amount of a cryptocurrency that is exchanged during a certain period of time. In simple words, trade volume indicates how much cryptocurrency is purchased and sold on crypto exchanges.
When there is a low volume trade of a cryptocurrency, it means that there is an almost negligible demand for it. Trade volumes can be checked on cryptocurrency exchanges like PCEX.
4) Use Case- Use cases of cryptocurrencies are of the utmost importance before investing. Some cryptocurrencies exist just because their founders and developers make investors their prey. Some investors don’t evaluate whether the currency they are investing in is solving any problem of the public and is of any significant use.
Always ask questions such as, is the currency improving anything currently done? Is it cheaper, faster and easier to solve the problem?
Hence, it is advisable to create a network of cryptocurrency investors to judge the utility potential of a currency.
5) Founders and Developers- For every fundamental analysis, investigating the founders and developers is important. The cryptocurrency market has attracted a lot of dishonest and fraud people who are trying to cheat investors.
Before investing in any cryptocurrency, traders and investors should always first spend time researching about the founders.
6) Potential Roadblocks- There are always some potential roadblocks in the way of cryptocurrencies. Traders should always find where the company is legally based. Not everyone is an expert on copyrights and privacy laws but can check on the cryptocurrency forums and discussion groups.
Despite having large manpower and resources available, Bitcoin also had scaling issues. Traders should always be aware of this factor.
Next is to find out the important competitors of the company. Bitcoin had the advantage of being the first cryptocurrency project. It gained much popularity before others stepped in.
7) Roadmap- Some cryptocurrency companies don’t have plans of what they are doing. They do start with the aim of changing the world but are not successful in that. If a company does not have a roadmap or plan, the project of cryptocurrency will not go anywhere.
The company’s project should clearly state what and when things have been done and will be done.
With the various number of cryptocurrencies available in the market, it is true that not all are worthy of investment. The chances of making the right investment decision can be done by performing fundamental analysis. The factors that traders need to look upon before making a fundamental investment strategy have been explained above.