Crypto trading is as cumbersome as traditional trading as it involves the analysis of complex parameters. Crypto trading applies the same principles as in forex, commodity, and stock markets. However, there may be some variations in how the crypto trading realm functions. The volatile nature of crypto assets, considering that they are new class assets, causes this variation.
Successful crypto trading links almost entirely to the degree of an investor’s knowledge in analyzing various aspects of crypto trade and some vital parameters. There are two main types of crypto trading analysis that investors must learn. These include:
- Technical analysis in crypto trading
- Fundamental analysis in crypto trading
Crypto trading newbies and established traders must prioritize learning these techniques. Thus, the traders will make well-informed and profitable investments.
But the two techniques aren’t as challenging to learn as they seem at first glance. Today, we will cover these techniques. Crypto investors like yourself will leverage this information to maximize their crypto trading profits.
Fundamental Analysis Versus Technical Analysis in crypto trading
Technical Analysis in Crypto Trading
Crypto trade technical analysis entails the monitoring of historical market data of cryptocurrencies. This data is essential in making predictions on future price movements. Technical analysis relies on the price charts and figures. These charts create a theoretical picture of how the prices will behave in the future. Technical analysts in crypto trading use charts, indicators, and lines as part of their investment research.
One might think crypto trade technical analysis utilizes the ‘what goes around comes back around’ saying to found its basis of application. This analogy means that historical market data tend to create repeated patterns of behavior. Examples of historical market data are prices and volume of trade.
Some seasoned crypto investors even allude to the saying ‘history repeats itself’ in applying technical analysis. This saying is an indication that the careful application of technical analysis in crypto trading may be profitable to traders. However, technical analysis in Bitcoin and other digital coins is favorable in the short-term. Thus, most day traders and swing traders engage in technical analysis procedures.
Day traders monitor hourly price movements in the charts and the trade volume. These parameters help the day traders to determine when to enter and where to exit position. Therefore, technical analysis in Bitcoin trading is an essential part of day trading.
But the crypto market is highly volatile. Technical analysis alone is generally not suitable for long-term investments. When used in the long-term, the technical analysis must rely upon a long data stretch. The long data stretch provides a clear trend of data over time. This data assists in making informed speculations about the future price action.
Fundamental Analysis in Crypto Trading
Crypto trade fundamental analysis involves examining the crypto asset’s intrinsic value. Crypto trade fundamental analysis aims to determine whether the crypto asset is currently undervalued or overvalued. The findings of the analysis dictate the investors’ response to whether to invest in a particular cryptocurrency or not. The current valuation of a crypto asset ultimately determines its future price actions, hence the decision.
Crypto trade fundamental analysis focuses on both qualitative and quantitative aspects of the crypto asset. Qualitative aspects worth considering include the team and the motive for founding the coin. The team behind a particular cryptocurrency matters a lot. Do the team members have a background in the crypto industry? How have they performed in their previous ventures? Are they visionary to spearhead the technological changes and to challenge problems as they come? These are some of the questions a fundamental analyst must ask regarding the team members.
Another qualitative aspect considered in the fundamental crypto analysis is the crypto asset’s motive. A cryptocurrency might have low current market value but has a clear intent of pioneering financial reforms. For instance, let’s look at fundamental analysis in Bitcoin in 2009. The analysis would have discovered Bitcoin’s massive potential in decentralizing cash flows. Also, Bitcoin was more likely to be a worthwhile investment despite being valueless then. Fundamental analysis in Bitcoin would have revealed that it was bound to significantly rise in value owing to its motive and purpose.
The examples above show how fundamental analysis relies on vast multidisciplinary knowledge. The knowledge could be from political, social, and economic circles. Political activities heavily influence the behavior of crypto investors. Investor behavior, in turn, dictates price movements within the crypto industry. Examples of such political activities are proposed regulations and total bans on crypto-assets.
A fundamental analyst also relies on economic activities to predict future price actions. For instance, a well-informed fundamental analyst would have anticipated the incoming inflation at the early onset of the coronavirus pandemic. Thus, they would have invested in Bitcoin, which has proven to be a good hedge against inflation.
There isn’t an outright winner in the “Fundamental analysis versus technical analysis in crypto trading” debate. However, it is noteworthy that fundamental analysis unearths a crypto asset’s exact value. In contrast, technical analysis looks at historical market data to establish a cryptocurrency’s investment potential. The crypto market is highly volatile. Therefore, the reliance on historical data alone can result in a loss of investment.
The best practice is to leverage both techniques to your advantage. Highly successful crypto traders will tell you that combining technical and fundamental analysis is the best practice in crypto trading.
Fundamental analysis is highly dependant on the current events, news, and trends in the crypto world. Crypto news and events shape the price movements seen in the price charts, thus a vital ingredient of fundament analysis. It is essentially becoming necessary for crypto traders to be well-informed of the crypto world news.