The market trend of digital currencies follows the laws of the financial markets closely. Both react according to the market’s supply-and-demand relationship and the macro and micro environmental influences, with each individual crypto-asset similar to a stock in the traditional financial markets. They each have their respective characteristics and supporting value propositions. Therefore, investors can form a more accurate forecast of market conditions by assessing market trends, news, fundamental and technical analysis based on available data.
This article will briefly describe the basic concepts, characteristics and usage of fundamental analysis for investors.
What is Fundamental Analysis
Fundamental analysis is a method of analyzing the development of the basic market trend, relying more on objective facts and established data that has occurred, and determining the future market through the analysis of past data. Fundamental analysis is the basic way for investors to determine their investment approach on a more macro level after understanding and mastering the patterns of the K-line (candlestick) charts.
In the field of cryptocurrency trading, fundamental information includes the macro global financial environment (impact on the cryptocurrency markets), the future prospects of the field to which the project belongs, etc.; the micro fundamental information includes the background of the project team, white paper analysis, product delivery progress, financing, Community operation, number of users, coin holder addresses, market capitalization analysis, profitability, etc.
There are two points that investors need to pay attention to when conducting fundamental analysis:
Fundamental analysis is constantly changing and modifying the analysis results with the continuous changes in market trends. In the field of cryptocurrency, transactions are 24/7 uninterrupted. Therefore, fundamental analysis should never be quantifiable. Blindly quantifying the results of fundamental analysis is very likely to result in loss of money.
Fundamental analysis does not exist alone, and needs to be used in conjunction with news and technical analysis. In actual operation, if you look at the short-term market situation of a certain currency and blindly determine the fundamental analysis while ignoring the impact of the macro environment, this can also lead to short-term investment mistakes.
Advantages and disadvantages of fundamental analysis
Advantages: Fundamental analysis is one of the quickest ways for investors to grasp market sentiment. Through fundamental analysis, investors can get a more accurate and macro view of the basic information of a single currency, making this a suitable entry-level approach for medium to long term investors to make market predictions and investment decisions.
Disadvantages: Fundamental analysis cannot be quantified, so the results of any fundamental analysis are not time-sensitive. It is impossible to obtain accurate future market forecast results when using fundamental analysis by itself. Therefore, fundamental analysis can only see the macro trend of the currency, but cannot accurately predict the short-term market, which is one of the reasons why fundamental analysis is only suitable for medium and long-term investments.
Examples of using Fundamental Analysis
In the practice of fundamental analysis, it is necessary to have a comprehensive understanding of the basic information of the currency. The more detailed the information, the clearer the understanding of the macro trend and the micro-economy.
Taking Bitcoin as an example:
We can analyze the position and historical trend in the market, medium and long-term price highs and price changes. In MEXC’s currency project section, investors can see the issuance time, total issuance, total circulation, issuance price, white paper, official website and other information of the currency in the details of the currency project of MEXC to first determine BTC’s position in the market.
Use the latest market data and real-time transaction data to determine the microeconomic changes.
Through the project details, it can be seen that the total amount of BTC issued is 21 million, with 17,834,087 currently in circulation, with an issue price of 0.0025USDT. The market news alsos shows that BTC is the absolute leader in the space.
The current market price of BTC is then determined through the real-time market and the latest transaction price, and the total appreciation rate since the issuance is calculated to be about 16.8 million times.
Through the monthly candlestick chart, we know the performance of BTC in the short-term and medium-to-long-term macro markets. It can be seen that there will be a sharp upward trend from the middle of 2020 to the end of 2021, and a macro adjustment trend in the beginning of 2022.
Then, based on the analysis of basic data and information such as the number of active addresses, the total market value, the total lock-up value, the number of transactions, and transaction fees, it is determined whether it is possible to invest in it in the medium and long term.
Of course, in the actual use process, you can use a simpler calculation formula to obtain macro results for reference and comparison, and then determine the choice of a currency for investment.
After knowing the total market value (P), total lock-up (TVL) and other simple information of multiple currencies, the P/TVL ratio can be calculated for a simple comparison, so as to know which currency has more room for appreciation.
Investors can determine the investment direction and approach through the P/TVL ratio combined with the market value to realized market value ratio (MVRV), inventory-to-flow ratio, project white paper, project team background, competitor performance, etc.
Conclusion
Fundamental analysis can help novice investors quickly form a basic understanding of the market and a certain currency, learn to analyze the advantages and disadvantages of a currency and market performance, and continuously analyze market fundamentals to allow investors to quickly grasp the macro market.
However, we also need to see that fundamental analysis also has its limitations. Investors should combine a variety of analysis methods to carry out comprehensive and reasonable trading strategies. The market trend results obtained only by fundamental analysis cannot fully accurately present the market trend or direction.
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