How to Predict the Price of Cryptocurrency Using Fundamental Analysis
With cryptocurrencies, one thing is clear: New investors are entering the space en masse with the total market capitalization of all crypto assets exceeding $ 2 billion for the first time in September of this year, a multiplication by ten since early 2020.
CoinMarketCap data currently lists over 15,000 cryptocurrencies. The industry is expected to reach a global market capitalization of $ 4.94 billion by 2030, growing at a compound annual growth rate (CAGR) of 12.8% from 2021 to 2030.
Beyond the numbers, crypto is also attracting a younger clientele. A study published by the National Opinion Research Center (NORC) at the University of Chicago shows that most cryptocurrency traders are under the age of forty.
Another report from BTC Markets showed that there was a 24% increase in the number of 18-24 year olds investing in cryptocurrency during the 2020-2021 fiscal year. The same study found that the rate of new female users signing up to the BTC Markets cryptocurrency exchange rose 172% in fiscal year 2020-2021, compared to a growth rate of 79% for men. .
However, an intriguing snapshot from the NORC study is that 62% of people say they don’t understand crypto, while 31% cited this lack of knowledge as a reason they don’t invest.
Analysis is crucial for forecasting. So how can investors predict cryptocurrency prices? The common assumption that crypto prices are linear is an oversimplification of the factors affecting a coin’s value. Cryptocurrencies can often experience sharp rises and falls in price.
You may be wondering what kind of analysis you should use and how microeconomic and macroeconomic conditions affect cryptocurrency markets, or you may be wondering how variables determine value.
In this article, we detail the end-to-end process of fundamental analysis through a forecasting lens to help you learn how to predict the top winners in cryptocurrencies.
How to predict cryptocurrency prices
There are three main types of analysis that have long been considered essential in the financial world. The earliest form of financial analysis dates back to the 18th century, when merchants developed the first candlestick charts to interpret and predict rice prices in Japan.
The three central forms of financial analysis are:
Technical analysis is the study of statistical trends based on indicators such as historical price movements, price patterns and charts.
Fundamental analysis involves the assessment of all aspects of the market including domestic and global factors, as well as political and economic conditions.
Quantitative analysis examines the historical performance of the market. It is used in conjunction with fundamental and technical analysis. Investors can perform quantitative analysis through calculations of financial ratios such as earnings per share (EPS) or discounted cash flow (DCF)
Fundamental analysis is especially useful for those looking to predict whether a crypto might rise or fall, as it draws inferences from future projections rather than past events represented as price charts.
Fundamental analysis can potentially aid in long-term investment decision making by helping traders determine the value of a cryptocurrency based on a wide range of information available.
What is fundamental analysis?
Fundamental analysis is a method used by investors in the financial markets to assess and study the variables that affect value.
By assessing the intrinsic value of a cryptocurrency, you can determine whether the price is overvalued or undervalued. This can be done by analyzing qualitative factors such as the state of the economy, cryptocurrency market conditions, the management of the crypto company, or market capitalization.
If you’ve ever found yourself looking directly or indirectly at the fundamentals of a cryptocurrency project, from its market cap to the usefulness of its native token, then you’ve performed fundamental analysis.
The main differentiator between fundamental analysis and technical analysis is that the former does not consist of immediately apparent factors, in the sense that they are less tangible and more qualitative than statistical trends, such as historical market data or data. price charts.
Fundamental analysis looks at the big picture, considering as many factors as possible, while technical analysis focuses on price action and historical trading volume to help investors identify market opportunities. short term negotiation.
While the purpose of technical analysis is to identify trend changes that precede the fundamental trend, enthusiasts of fundamental analysis subscribe to the idea that there must be a cause and an effect between fundamental factors and price changes.
The advantage of fundamental analysis is that it focuses on external factors and how these can affect the performance of cryptocurrencies in relation to the relevant microeconomic and macroeconomic conditions that could have an effect on the markets. .
The mechanics of fundamental analysis
To learn how to predict cryptocurrency trends, you will need to get used to two different approaches to fundamental analysis.
The first is a top-down approach – more widely used than the second bottom-up approach. It prioritizes macroeconomic, national or market factors such as the economy, interest rates, inflation, employment and gross domestic product (GDP).
A bottom-up approach does not focus on macroeconomic and market cycles and instead focuses on microeconomic factors such as a company’s financial profits or income.
Fundamental analysis of cryptocurrency follows principles similar to those of other financial markets that contain more traditional assets like stocks. There is less emphasis on a company’s financial statements, balance sheets, or historical financial performance.
Investors looking to learn how to predict crypto market trends may instead consider the following parameters:
The coin’s market capitalization
Circulating supply and total supply of tokens
Token utility and use cases
Community size – an important measure to achieve wider adoption of cryptocurrencies
The crypto project leadership team
The exchange volume of the token
Listings on major crypto exchanges
Partnerships with trusted institutions
The latest news around the room
When performing fundamental analysis, it is essential to note that no single measurement can give you the complete picture of a cryptocurrency investment. By examining the full scope of the aforementioned information, you can develop a more complete view of a given project and possible changes in the prices of cryptocurrencies. You can also use a company’s white paper to create a larger image.
Additionally, you can examine blockchain metrics, which reveal crucial aspects of a cryptocurrency’s underlying technology and processes.
For example, a hash rate is the combined total computing power used to extract and process transactions on a blockchain. For example, bitcoin uses a proof-of-work algorithm based on crypto hashing, and lower hash rates are known to indicate a loss of mining interest from investors.
When performing fundamental analysis for the purpose of predicting the movement of the cryptocurrency, other factors you can use include user adoption rates and media coverage.
Cryptocurrency-specific news can provide useful information about the public perception of a cryptocurrency, as well as the company’s plans and partnerships, which could drive the growth or downfall of the cryptocurrency. Overall, any relevant news regarding the development of the cryptocurrency project or the economy at large can help reshape estimates based on fundamental analysis.
“When predicting the price of a cryptocurrency, you need to consider scarcity, general adoption, and government regulation,” said Milko Trajcevski, financial analyst at Invezz.
“I look at historical price performance to see what caused respective peaks or drops in value. Some cryptocurrencies may even rise in value thanks to the hype on social media, while others are constrained by blockchain technological concerns such as scalability, ”Trajcevski told Capital.com.
“You can also look at a crypto’s record value to see how much it has increased each month, then create a realistic picture for yourself of how far you think the price will go.”
Read more: What is Decentraland and how does it work?
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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade a CFD.
You can still benefit if the market moves in your favor, or suffer a loss if it moves against you. However, with traditional trading, you enter into a contract to exchange legal ownership of individual stocks or commodities for cash, and you own it until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the total value of the CFD trade to open a position. But with traditional trading, you buy the assets for the full amount. In the UK there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs come with overnight costs to hold trades (unless you’re using 1 to 1 leverage), making them more suitable for short-term trading opportunities. Stocks and commodities are more normally bought and held longer. You could also pay a commission or brokerage fees when buying and selling assets directly and you would need a place to store them safely.
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