In cryptocurrencies, like most speculative financial markets, the strategy you use can make or break your trading career. Investors put in years of experience and training to come up with profitable strategies. Even as a beginner, it is possible to create a workable strategy and ensure you profit from the markets. However, before you do that, you need to have a deep understanding of the market dynamics at play. To that end, there are two types of analysis that crypto traders and investors perform – technical and fundamental analysis.
Technical vs. fundamental analysis in crypto
In crypto, technical analysis resembles that done in other markets such as forex and stocks. Usually, this analytical method banks on the fact that history tends to repeat itself. Technical analysts look at market and volume data from the past, all in a bid to identify recognizable patterns. Once a repetitive pattern has been identified, the trader can then search for similar patterns on the chart and trade them accordingly.
There is a science to this analytical method. Essentially, demand and supply drive crypto prices. If a coin has higher demand than supply, its price will naturally rise as more and more people buy into it. As the price rises, people start selling off their coins and taking profits as they expect a trend reversal. The more people sell, the higher the supply grows, and as soon as it outweighs demand, the price starts dropping. Technical analysts typically trade this cycle.
Fundamental analysis, on the other hand, focuses more on a coin’s intrinsic value. It involves analyzing a coin’s qualitative and quantitative value. If a coin has several real-life uses, for example, but its price is lower than its value would suggest, then that coin is undervalued. The fundamental analyst could then invest in this coin and wait to make a profit when its price spikes. Similarly, if they found an overvalued coin, they would short it and wait to profit when the coin’s price declines. That being said, let’s explore the tools most used by these fundamental analysts in their endeavor.
Popular fundamental indicators for the crypto
Bitcoin was the first cryptocurrency to market, and it has since enjoyed the top spot in market capitalization. It enjoys the bulk of the trading volume across the entire cryptocurrencies market. Bitcoin dominance is a ratio that compares Bitcoin’s market capitalization to that of the rest of the crypto market.
In the beginning, when Bitcoin was one of the few digital tokens in existence, this dominance was close to 100%. Nowadays, it has dropped largely because of the introduction of thousands of altcoins to the market. However, this ratio can still provide traders with some trading insights.
When the price of BTC is rising while its dominance rises, it points to a potential bull market for this coin. Therefore, traders would be looking to buy BTC. When its price drops while its dominance rises, this could point to a potential bear market for altcoins. This would prompt traders to sell off their non-BTC holdings. If Bitcoin’s price rises while its dominance falls, traders should buy altcoins as it points to a potentially bullish setup for non-BTC coins. Finally, if both the price and dominance index of BTC fall, it points to a bearish setup for the entire market.
Correlation to Bitcoin
In statistics, correlation is used to measure the relationship between two variables. When it comes to crypto, Bitcoin correlation refers to the relationship between its price movements and those of a specific altcoin. It is measured from -1 to 1.
A score of -1 or close to it would suggest that the altcoin in question and BTC are negatively correlated. This means that the price of these two coins tends to move in completely opposite directions. A zero or near zero scores suggests no correlation between the two prices. A score of 1 or anywhere close to 1 suggests a strong positive correlation. This means that the price movements of the two coins are in lockstep.
Typically, you’ll want to invest in assets with little to no correlation with each other. This helps offset your risk exposure, as poor performance by one coin will not drastically affect your portfolio.
Decentralization is a vital building block of blockchain technology and its products; cryptocurrencies are among them. Ownership concentration gives a measure of decentralization. It shows the distribution of a coin’s total circulating supply by classifying its owners into three groups.
Whales are those addresses that own more than 1% of the coin’s total supply in circulation. Investors own between 0.1 to 1% of this supply, while retail addresses are those that hold less than 0.1% of the token’s supply. Typically, you’ll want to invest in a coin whose majority supply is concentrated among retail addresses. This shows that the coin is truly decentralized, and a few malicious individuals cannot conspire to manipulate its prices.
Ownership concentration – Whales
As aforementioned, whales are addresses that hold more than 1% of a coin’s total circulating supply. They are further classified into low activity and high activity whales. The latter average above 300 transactions per year, while the former transact less than 300 times in a year.
Ownership concentration – Investors
Investors hold between 0.1 to 1% of a cryptocurrency’s total supply in circulation. Like whales, they are also classified into low activity and high activity investors, depending on the number of transactions they make on average in a year.
Like most other speculative financial assets, cryptocurrencies require a great deal of analysis before you can begin trading them for profit. To that end, there are two common analysis types- technical and fundamental. Technical analysis aims at analyzing past market data, while fundamental analysis takes a big-picture approach by focusing on a coin’s intrinsic value. For best results, both methods should be used hand in hand.