Fundamental Analysis by WhiteBIT Expert: How to Predict Cryptocurrency Price
For most modern people, it is evident that cryptocurrency is becoming more and more popular. Since the beginning of 2020, the total capitalization of the cryptocurrency market has grown almost ten times, and according to forecasts, it will continue to do so. It attracts many young people who want to engage in trading.
At the same time, the overwhelming majority of beginners admit that they need help understanding the cryptocurrency market. A responsible approach and the ability to analyze the market will help you learn how to predict cryptocurrency price changes and make a profit from it.
How to predict cryptocurrency prices?
For a long time, the world of finance has identified three main types of market analysis:
- Technical analysis is the process of studying the trend of an asset based on indicators (such as historical price movements, price patterns, and charts). The goal of a trader is to understand the psychology of market behavior, find similar situations in the past to form a forecast for the future, and understand what moments are perfect for entering/exiting a position on an asset.
- The fundamental analysis assesses all aspects of the market, including domestic and global factors and economic and political conditions.
- Quantitative analysis is used with the two types of the above analysis and overlooks the market’s historical performance. Quantitative research uses financial ratio calculations (earnings per share (EPS) and discounted cash flow (DCF).
Fundamental analysis will benefit those who want to understand whether crypto rates will rise or fall, as it considers the conclusions drawn from forecasts, not events from the past, in the form of price charts.
Fundamental analysis can theoretically help make investment decisions, as it helps determine the value based on a large array of available information.
What is fundamental analysis?
Fundamental analysis is a method of studying and evaluating the variables that affect the value of an asset.
The essence of the method is to search for information that will allow you to find out whether cryptocurrency prices are too high or too low and make your forecast regarding changes in value in the long term. At the same time, most of the necessary data is contained in open sources.
Before choosing a cryptocurrency to buy, traders must collect data about the project and assess the basic idea and financial performance. Analyze the state of the economy, cryptocurrency market, and management of the cryptocurrency project.
Thus, the fundamental method of analysis is focused on external factors and their influence on the behavior of cryptocurrencies in the current micro and macroeconomic conditions.
The main difference between the fundamental and technical methods is that the first does not consider factors that lie on the surface. In the case of fundamental analysis, a much broader picture with many factors is taken into account. In contrast, technical research focuses on price changes and trading volume history, allowing investors to determine short-term trading prospects.
The mechanics of fundamental analysis
To learn how to predict trends of a popular cryptocurrency, it is necessary to understand two approaches to fundamental analysis.
These are the so-called top-down and bottom-up approaches. The first approach is used much more widely.
The top-down approach prioritizes macroeconomic, market, or national factors: inflation, economy, interest rates, and gross domestic product (GDP).
When using a bottom-up approach, attention is on microeconomic factors: historical financial results, company financial statements, and balance sheets.
Obviously, the factors above are mostly related to traditional finance sectors. Crypto investors can consider the following factors:
- market capitalization;
- circulating supply and a total supply of assets;
- use cases and usefulness of an asset;
- the size of the cryptocurrency community (an important factor for the wider adoption of the cryptocurrency);
- team of leaders and creators of the crypto project;
- total trading volume;
- listing of assets on major crypto exchanges;
- partnership with reputable organizations;
- current news about cryptocurrency;
- state regulation.
At the same time, when using fundamental analysis, it is essential to remember that every indicator will give a partial picture of investing in cryptocurrency. To understand a particular project and possible changes in its cost, the investor must study it and consider the entire array of factors listed above
To build the broadest possible picture, it will undoubtedly be helpful to study the technical documents of the project and the features of the blockchain, which reveal essential aspects of the processes and technologies that underlie a particular cryptocurrency.
For example, hash rate is the combined processing power used to mine and process transactions on a blockchain. Bitcoin uses a Proof-of-Work algorithm based on cryptographic hashing, and low hash rates may lead to people losing interest in mining.
The list of factors to consider in the fundamental analysis may be completed with a few other points. You can also evaluate the acceptance rate and mood of users and the degree of media coverage.
One way or another, news related to crypto will allow you to assess the public perception of cryptocurrency. Also, studying the information will provide an opportunity to evaluate a company’s strategy and partnerships, which in the future may affect the changes in the price of an asset.
Generally, any vital news about a crypto project can help traders adjust their expectations based on fundamental analysis.
Fundamental analysis should be one of many bases for your trading decisions. The chances of success are much more significant for a trader who combines technical and fundamental studies.
After fundamental analysis, you will get a complete picture of the project’s potential. Having determined the asset’s actual value for yourself, you can proceed to technical analysis and thus, step by step, form your own trading strategy.