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Fundamental Analysis


What Are Fundamentals? Beginner’s Guide

While trading in the cryptocurrency market, investors and traders tend to use different analytical methods to get an idea of whether the price of digital currency is expensive or cheap. This is what helps them to predict whether the price of an asset will go up or down. Some traders use technical indicators such as Nitros bull. Other traders prefer to use what they refer to as “Fundamentals.”

What Are Fundamentals?

Fundamentals analysis focuses on the well-being of the underlying asset. Think of it as a reality check, traders and investors will disregard the price action and just focus on what’s real about the asset. In cryptocurrencies – that helps us understand the valuation of these assets. While fundamental analysis can be a very useful tool, it is always recommended to use it in combination with other technical analysis to have a clearer picture of the price of a digital asset.

By using fundamentals, users can have clear information on whether a specific asset or cryptocurrency presents a good investment opportunity or not.

Let’s have a clear and practical example. Let’s suppose you are trading cows. Yes, cows. What would you look for to understand whether cows are overvalued or undervalued? Suppose cows are trading at $10 each for the last 3 years, it’s safe to assume that the price of cows will not change much as the demand for milk and meat is somewhat constant.

Now, imagine the world experiences an outbreak. A viral disease that is deadly across the world. Two months later, we find that milk is a cure for this disease. This would lead to an increase in demand for milk, but also a decrease in the supply of meat since most farmers would be reluctant to kill their cows for meat if they can sell milk.

As a trader, this would be a good signal to buy cows because their value would increase tremendously. It’s obvious that most traders would be doing the same which would cause a mania. As a result, the cows would end up being overpriced after a while. You as a trader would then have to decide when to sell your cows before the price starts going down again. This is just an example that would help you understand what we need to look for when analyzing fundamentals.

Which Fundamentals Can I Use?

You can use a wide range of fundamentals to understand the cryptocurrency market. You can start incorporating technical analysis and, valuable data related to quantitative and qualitative information you can find. The good thing about the cryptocurrency market is that most of the information to do basic and intermediate fundamental analysis is publicly available on websites such as TradingView, CoinMarketCap and many others.

Take into consideration that sentiment and news could also be used to perform fundamentals analysis. When positive or negative news hit the market, you could use them to trade an asset. Sometimes, you will have breaking news affecting the price of an asset. You can follow the Crypto University blog that has been sharing daily news on a regular basis for several months.

When Bitcoin was banned in China back in 2017, the market immediately crashed. Those who were fast enough to short BTC at that time were able to get some juicy profits.

General Crypto Fundamentals

We need to understand that the fundamentals change according to the asset you are analyzing. Thus, Bitcoin is going to have its own fundamentals. Interestingly, as each digital asset offers different solutions and has been developed with diverse features, we could find unique measurements for each coin.

Generally speaking, for a publicly trading company, we would use profitability, revenue and the assets they hold as information to perform our fundamental analysis. For cryptocurrencies, this does not apply. This is why we can use the information that is available related to development, transactions or usage.

Bitcoin Fundamentals

Bitcoin has some unique fundamentals that other assets do not have. For example, we could analyze the number of transactions processed by the Bitcoin network, speed of transactions or regulations in major parts of the world. This information can be found in pages such as Blockchain.com or Bitinfocharts.

In addition, we can certainly analyze the fees users have to pay when processing a transaction, the hash rate of the network (which will show the level of security of Bitcoin), the difficulty rate, the market capitalization in comparison with other assets and many others.

Other expert analysts use the Stock-to-Flow (S2F) model applied to Bitcoin, the number of BTC that are withdrawn from, or deposited into exchanges, or the amount of BTC that have not been moved in several years. Additionally, on-chain transactions to price could also be a good way to understand the level of transactions performed by Bitcoin in comparison to the price it has.

What it Means to Invest in Cryptocurrencies?

Investing in cryptocurrencies can be hard to understand for many investors. The value proposition may not be so clear to them and this can generate doubts among traders. This is why it is certainly important to understand what it means to invest in cryptocurrencies. 

Understanding how technologies evolve is something that we can do by looking at history. However, it becomes more difficult to be among the first adopters of a technology or a trend. It may not be so obvious where the world is going and what is going to happen in a few years. 

For example, investing in Ford before being what it is today would have made investors rich nowadays. The same can happen with other technologies, for example, self-driving cars and their mass adoption in the coming years. 

With cryptocurrencies something similar happens. There are many users around the world that consider Bitcoin valuable because it provides decentralized financial services and solutions. This provides power. It is basically making a bet on the future of this new coin as an innovative monetary solution with a high potential to grow and a low downside. 

Understanding Bitcoin Mining

Bitcoin mining is a process that allows the Bitcoin blockchain to create new BTC coins and bring them into the market. Bitcoin mining process is similar to that of gold. Gold needs to be mined. Companies invest a lot of resources to dig, search for and extract gold. The same happens with Bitcoin and its proof-of-work (PoW) system that works in a decentralized network of computers. 

Every single time we process a transaction on the Bitcoin network, it will be necessary for participants (miners) to verify using computers that the funds are legit and that they can be transferred. All the Bitcoin miners are rewarded in BTC for the mathematical problems they solve when confirming these transactions.

At the time of writing this post, Bitcoin miners are earning 6.25 BTC every block they mine – which usually happens every ten minutes. In order to be a profitable miner, you will need to spend hundreds of thousands of dollars and mine Bitcoin at scale. 

Understanding Altcoins

As we know, Bitcoin is the largest cryptocurrency in the world. But there are many other virtual currencies in the market. Every single cryptocurrency that is not Bitcoin can be considered altcoins. Ethereum (ETH), XRP and Litecoin (LTC) are altcoins. Altcoin also stands for alt + coin, or alternative coins to Bitcoin.

There are different types of altcoins in the market. In the next guides, we are going to share the various kinds of altcoins and their functionalities. You will learn about stablecoins, ERC-20 tokens and more. You can buy altcoins on a wide range of crypto exchanges. 

Each of the altcoins represent different things. For example, Ethereum can be considered the Google of virtual currencies because of what its network is offering (it works as a platform for creating decentralized applications and smart contracts). Altcoins such as XRP are used in order to process bank transfers and help the banking system work in a much more efficient way. 

Stablecoins

In the previous Fundamentals II guide, we have explained what altcoins are and how they work. One of the different types of altcoins in the market includes stablecoins. Stablecoins are cryptocurrencies that, as the name suggests, have a stable price. 

Stablecoins are usually tied or linked to fiat currencies, for example, the U.S. dollar (USD), the Euro (EUR) or even the British pound (GBP). The most popular stablecoin in the world is Tether (USDT). The company behind Tether claims it has 1 USD backing each USDT issued. 

Currently, Tether has a market capitalization of over $16 billion and it is the third-largest cryptocurrency in the world after Bitcoin (BTC) and Ethereum (ETH). Tether is also among the most traded virtual currencies in the world. 

Stablecoins are used to trade virtual currencies, process transactions or even save money. Cryptocurrency exchanges are already allowing users to trade BTC against USDT and vice versa. That means that you can sell BTC and receive USDT or sell USDT and receive BTC. At the same time, stablecoins can certainly be used to reduce exposure to volatile virtual currencies, including Bitcoin and Ethereum, but still have fast and easy access to the most used cryptocurrencies in the world. 

People in countries such as Argentina or Venezuela are using stablecoins in order to escape capital controls and have access to foreign currencies. Indeed, these countries now have black market rates for these stablecoins. 

ERC-20 Tokens Explained

ERC-20 makes reference to a token standard that is based on the Ethereum (ETH) network and that is used for smart contracts running on this network. Companies and developers have already been using this standard to create a large number of tokens running on top of Ethereum. 

Each ERC-20 token is linked to a specific ETH address that can receive tokens. At the time of writing this guide, there are hundreds of ERC-20 tokens, if not thousands. The most popular ERC-20 tokens include Tether (USDT) – the stablecoin that we have mentioned before – Ethereum (ETH) – the second-largest cryptocurrency – Chainlink (LINK), Uniswap (UNI), Binance USD (BUSD), Yearn.Finance (YFI) and many others. 

Fundamental Analysis

During the Initial Coin Offering (ICO) craziness in 2017, a large number of projects created their own ERC-20 tokens that were later sold to investors in the market. Many of these ERC-20 disappeared in recent years. 

If you want to receive ERC-20 tokens and you have an Ethereum address in your Ledger Nano S wallet (or any other ERC-20 compatible wallet), then you can simply send the ERC-20 token to this address. If you want to send USDT to your wallet, then you just need to use your traditional Ethereum address where you will receive your USDT. 

Take into consideration that this process does not apply for exchanges. Crypto exchanges such as Binance work with a different system and you will have to send your USDT (and any other ERC-20 token) to its respective address. Remember that you are giving the custody of your coins to an exchange when you use it as a wallet. 

You can check out our guide on cryptocurrency wallets clicking here


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