There are two broad sets of actors within the crypto space: traders and investors. These two groups are not limited to individuals alone; institutional traders and investors are equally active players within the crypto space. As traders or investors, should we rely on fundamental or technical analysis of crypto projects?
How should traders and investors analyse these types of projects in deeper detail with fundamental or technical analysis?
Fundamental analysis
Traditionally, fundamental analysts concern themselves with an asset’s value by looking at its financial statements, including income statement, balance sheet and cash flow statement. In the cryptocurrency industry, most companies are either privately held or operate a DAO. In this context, fundamental analysis will look for parameters such as:
- Market cap
- Liquidity
- Tokenomics
- Price to Earning ratio (P/E)
- The team
- Token utility
- Community size
Market cap: This is short for market capitalisation. It is calculated by multiplying the price of a crypto project’s native coin or token by the circulating supply. The rule of thumb here is that a high market cap suggests that the project is healthy and not readily susceptible to market manipulation by whales or pump and dump schemes.
Liquidity: The ease with which you can easily buy and sell any particular crypto matters a great deal. Cryptocurrencies are usually available for trading on exchanges. Even when they are, the bid-ask spread of any currency on trade shows how liquid they are. The bid-ask spread is the gap between the highest bid and the lowest ask. Generally, lower spreads indicate higher liquidity.
Tokenomics: This covers the token size, allocation and monetary policy of any particular crypto. A token with too much circulating supply suggests it’s not scarce. Hence it may become diluted in price. How the tokens are allocated also affects how well the crypto project may fare. A project with the team and a few people controlling a large amount of the total supply suggests that crypto may face concentration risk, where a dump by any of the few large holders may badly affect that token price. Finally, the monetary policy of any crypto project is also essential to consider. How does it handle inflation which may dilute token prices over time? For example, Bitcoin employs halving, Ethereum adopted EIP-1559, Binance follows a quarterly buyback and burn etc.
P/E ratio: The price-to-earnings ratio is expressed as a percentage and means how much the market is willing to pay for every dollar generated by the company. It helps to know if a coin/token is already overbought or sold. Another way is by calculating the Net Value to Transactions (NVT).
NVT Ratio = Market Cap/Volume of On-Chain Transactions over 24hrs.
A low NVT ratio suggests a good buy as it means the tokens are not overvalued compared to network usage.
Team: Founders or the management team of any crypto project significantly impact how it will fare in the industry. Take, for instance, Ethereum. Vitalik Buterin, alongside brilliant developers like Gavin Wood, Charles Hoskinson, launched Ethereum, which has grown tremendously today. Since then, Gavin Wood has founded Polkadot while Charles created Cardano. Anyone considering fundamental analysis when making crypto investment decisions would most likely back the new projects created by Ethereum’s early founders because of their antecedents. For fast-rising crypto projects like Binance and SwissBorg, their success has been primarily due to the quality of their team. Cyrus Fazel of SwissBorg is becoming one of the most influential crypto founders, with SwissBorg’s recent growth. At the same time, CZ of Binance is known for his brilliance in execution, leading the largest cryptocurrency exchange by daily trade volume.
Token utility: A token's utility refers to the guarantee of holders who purchase a project coin/token to consume some of the network's products with such tokens. Ether, used for paying transaction fees, powers the Ethereum network, Cardano network users pay fees using ADA, the network’s native token, and SwissBorg app users can lock their BORG to enjoy Premium services. The utility of any crypto project must be ironclad; otherwise, it is just one of the many other tokens not good for anything other than speculation.
Community size: Size also matters as a considerable metric in fundamental analysis. A large community would most likely mean that the project’s token serves a vital utility. And more users flooding into a particular crypto project makes it easier to achieve critical mass and generate a network effect. Therefore, fundamental analysis considers the size of the crypto project community to assess if it will perform in the long term.
Technical analysis
Technical analysts concern themselves with the price and volume data, studying patterns on a chart created by price to determine where the market will move next, based on historical performance. Technical analysis involves the careful study of price charts spanning different intervals such as minutes, hours, days and months.
Some key level analysts look for support and resistance levels, with support acting as a floor at the bottom of the current price range and resistance acting as a ceiling above it. For example, if Bitcoin were ranging between $53,000 and $57,000, $53,000 would be support, and $57,000 would be resistance. If the token’s price broke below support, that would be a bearish signal, while breaking above resistance would be bullish.
Many technical analysts use indicators such as moving averages, Bollinger Bands, and MACD to gain more information about a price and make better forecasts.
Technical analysis demands a bit of mastery when compared to fundamental research. The rule of thumb here is that the longer trends produce more reliable outcomes than shorter trends.
Should I use fundamental or technical analysis?
Both fundamental and technical analysis seek to predict price movements using different approaches. The difference between the two is that while fundamental analysis in crypto may consider non-monetary parameters like the team behind a project, the utility of the token, and the community’s size, technical analysis is solely fixated on the price movement of cryptocurrencies based on past records.
Like I pointed out earlier, most crypto players fall under two categories; traders or investors. Even the traders can choose to trade for more extended periods than extremely brief or short periods like scalping or day trading. Investors, on the other hand, have a long-term outlook while considering crypto. Regardless of the analysis method you prefer, both have their advantages and disadvantages.
Pros and cons of fundamental analysis
The pros of fundamental analysis include:
- Suitable for long-term investors: Fundamental analysts draw inferences from future projections rather than past events represented as price charts. Hence, fundamental analysis works better for parties looking to make a long-term investment decision or report on the cryptocurrency industry.
- Less overwhelming than technical analysis: As this doesn’t necessarily require specialised skills like reading and interpreting charts and trend lines, fundamental analysis is far easier to engage in than technical analysis.
- Can provide a more comprehensive outlook on a project: Piecing all the available information about a project together through fundamental analysis gives a broader picture to aid decision making than technical analysis.
- For large projects, it can be easy to find this information: Directories like Coinmarketcap, Glassnode and several other resources help provide adequate offline and on-chain information for bigger and established cryptocurrency projects.
However, there are some cons to fundamental analysis:
- It is difficult to predict short-term price movements: As it doesn’t focus on price movement using charts, fundamental analysis cannot predict the short-term price movement that most crypto traders engage in.
- Seen as subjective: what one person sees as a strong team/good community isn't the same as what others consider a proper consideration for a solid fundamental in a crypto project.
- Fundamental analysis criteria don't always translate into price performance: although fundamentals provide a holistic picture when analysing a project, they don’t necessarily translate to price performance. A good example is community size, which may or may not even impact the price of a token.
- It can be time-consuming to get an in-depth understanding of a project, especially smaller projects where this information isn't publicly available.
Pros and cons of technical analysis
The pros of technical analysis include:
- Technical analysis is relatively easier to compute than fundamental analysis. It considers fewer metrics, like price and volume data of crypto assets.
- There are existing guidelines on what different technical signals mean: while fundamental analysis is open to an investor’s interpretation, technical signals are established based on past price data, which means investors have a guideline of what to expect when a signal is triggered.
- It helps users identify new trends: Technical analysis primarily focuses on identifying new trends and trend reversals; hence it is easier to time the entries and exits for trades using technical analysis.
The cons of technical analysis include:
- Technical analysis tools may report mixed signals: results in technical analysis are sometimes conflated, with each ending up confusing trading decisions.
- It requires specialised knowledge: although it is pretty easy to gather data in technical analysis, it requires practice to understand how to interpret charts and trends.
- Susceptible to errors due to extreme volatility: for any indicator used in technical analysis to work correctly, it must accurately predict future trends. Most digital currencies are notorious for their extreme volatility, which can also affect the results of any indicator adopted.
The SwissBorg app makes it easier
On the subject of fundamental and technical analysis, SwissBorg makes things significantly easier for traders and investors in cryptocurrencies by offering automated analysis of each of the app’s tokens.
The team developed an automatic asset analysis that is updated hourly for all the products listed in the SwissBorg app. The app uses automated analysis through artificial intelligence (AI) to assist users in forecasting Bitcoin and other cryptocurrencies systematically. Crypto traders and investors get hourly analysis of their favourite coin listed in the app.
This analysis intelligently combines the Cyborg Predictor (which provides a prediction for the next 24 hours), the SwissBorg Indicator and other indicators such as RsI, MACD, Bollinger Bands, community sentiment over the last 24 hours, showing technical analysis results, market statistics and more. In a nutshell, SwissBorg offers the best tools for weighted investments.
