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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.

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