You’ve seen digital currency enthusiasts making money through trading and investing in crypto assets. Maybe you’ve heard about extraordinary financial returns or listened to fellow Bitcoin for Beginners community members chatting about their crypto trading mistakes on YouTube. As you’ve witnessed others exploring the exciting and highly volatile world of crypto assets, maybe you’ve wanted to get involved in investing as well, especially if you believe in a bright future for digital currencies.

If you are interested in investing, you’ve likely heard about Technical Analysis and Fundamental Analysis. These are the two dominant theories of investing used in traditional markets and — by extension — when investing in crypto assets. Some investors use one type of analysis more than the other, while many other folks chose to leverage a combination of the two philosophies depending on their strategies and long-term goals. As more and more people get involved in investing in digital currency and crypto assets, understanding the two philosophies and what they mean can help you develop a set of values for your own investing style.  

We can frame this discussion by understanding the two styles as they relate to traditional assets, and then we can use that to discuss how the styles relate to crypto investing.

Where Do the Analysis Methods Come From?

The terms Fundamental and Technical analysis come from options trading philosophies. Using these methods, an investor gathers information in order to inform how they will place trades for assets (usually stocks in traditional asset trading).

Fundamental analysis involves valuing the company or technology underlying an asset and using that valuation to inform investment decisions. Fundamental analysis requires a lot more understanding of a business and its surrounding dynamics before placing a trade, and usually, trades placed using fundamental analysis are held for the long term.

In crypto investing, fundamental analysis requires understanding market forces, geopolitical and legal dynamics, and of course the underlying technology of a digital currency. Investors using fundamental analysis to decide whether to buy and hold cryptocurrencies are betting that those particular digital currencies will be around for a long time and will yield more value over time.  Of course, fundamentals for crypto also include the regulatory environment. We see Bitcoin take a hit each time a new country or entity threatens regulating or taxing crypto.

Technical analysis involves gathering data to observe past results that could be repeated in the future. Technical analysis requires reading charts, looking for patterns, and conducting statistical analyses to determine whether to place a trade, as well as preferable entries and exits.

There are many different techniques within technical analysis.  Some are simple — like tracking moving averages — while others are very complex — such as Fibonacci levels or Elliott waves.  There are tons of books on the subject and it would behoove any budding trader to learn about some of the basics techniques. While some say technical analysis does not apply to crypto due to its volatility, consider that people are the ones trading crypto and, regardless of the underlying asset, human psychology plays a big role.

Below is a side-by-side comparison of Fundamental Analysis and Technical Analysis.  Take a look and see if one or the other best matches your trading strategy.

	Fundamental Analysis	Technical Analysis
Generally Best For	Buy-and-hold investing over the long-term For traditional assets, you may get out of a trade after a year or sometimes even a decade	Higher velocity trading within a shorter period of time For traditional assets, you may get out of a trade within a week or two of placing it
Matches Your Personality If	You love exploring business models, technology implications, and all of the creative possibilities for different market dynamics	You enjoy applying highly analytical rigor to fast-paced decision-making
Dominant Time Period Considered	Future expectations	Historical patterns
It’s Time To Buy When	The asset is “on sale” – an investor actively waits for the asset to hit a particular price (or price range) and then generally doesn’t sell for a long time	A cycle is trending for the investor to make a purchase – an investor will place trades (including buying and selling) based on the tools they use in their analysis
Sample Variables Taken Into Consideration	Company/asset growth, earnings over the long term, global market dynamics, geopolitical media perceptions	Asset supply, demand, price action, volume, directions, progress, regressions, and moving averages
Advantages	Relies on understanding the future potential of an asset and can, therefore, be more reliable in the long run Takes into account more holistic and macro trends in the analysis Can be simpler in execution, especially if an investor’s goal is to buy and hold	Analytical rigor can create a higher degree of certainty Leveraging simpler methodologies can yield high returns in the short run Includes using vital techniques (like stop loss) to account for risk in a trading atmosphere
Disadvantages	Can require deep understanding and research into an asset An investor may not have access to crucial information required to understand an asset’s future (asymmetric information) May not take important past patterns into consideration if an investor leaves out technical/quantitative aspects in the holistic analysis	Analysis could be made unnecessarily complex Charts may appear to draw black and white conclusions, but the truth is that inputs to an analysis could change at a moment’s notice For investors who are used to the advanced toolkits of traditional assets, it may be difficult to find similarly adequate tools for crypto investing (although this is changing)

Technical vs. Fundamental Analysis in Crypto

The analysis method that speaks to you the most will likely depend on your individual background. Those who have experience in “conventional” trading may find it more simple to transition to technical analysis with crypto assets, while those with any variety of business strategy backgrounds may find it more intuitive to use fundamental analysis. If you decide to invest in cryptocurrencies, it is important to use a little bit of both to create predictions.

It can be particularly powerful to marry what you can pick up through the technicals of an asset’s chart prices with what you discover about the fundamentals of its underlying technology. No one is going to look at the market in exactly the same way as you or even have the same opinions about what given technical analyses mean. You want to build a story yourself and be confident in the trades that you place, so dive into the tools available to you and see what works best for your style.

For example, on the technical side, you will want to study a currency’s price trends whether or not you decide to run highly complex analyses on the numbers underlying the chart. Something as simple as an asset’s relative volatility will inform whether or not it’s something you want to invest in for a given period of time.

On the fundamental side, you will always want to make sure you understand the underlying technology and keep tabs on global regulations of crypto assets. Cryptocurrency is a rapidly evolving field, and so investment and technical regulations and changes will dramatically impact outcomes; assets can disappear overnight, and the passage of a new law can create sweeping modifications to an asset’s price.

Since crypto is so volatile, let’s consider some things a fundamental analyst would look at when trying to determine what can cause the price of certain coins to dramatically increase or decrease in a short period of time.  Here are some possible causes of sudden price changes:

Market Manipulation

Sometimes a very wealthy investor referred to as a “whale” in the crypto world, decides to buy or sell many coins at once. Particularly for coins with a low market capitalization, a large market order can have a huge impact on the supply and demand dynamics, and change the price. With lesser-known coins, market manipulation is often the reasons that their price swings by hundreds of percentage points. Chaincoin was a great example of this: via a coordinated effort, many people bought and held this coin, cause the price to shoot up… until some of them decided to dump their holdings and take in profits.

Profit-taking

If the price of a coin rises for a sustained period of time, investors will decide to lock in their profits, and start selling. If lots of investors do this at around the same price point, the value of the coin will drop. Not all investors have a HODL mindset, so this simple explanation is often right.

Hacks

If a coin, or software or service related to it, is compromised by hackers, the price of the currency may dip because of lost confidence in the project. This happened to the Ethereum ecosystem in the summer of 2017. There were a series of hacks affecting exchanges, ICO funds, and multi-sig wallets, followed by a drop in the price of Ethereum for several weeks afterward.

News

Crypto project teams often make announcements to their community on social media. These announcements can be regarding new alliances, team members, advisors, initiatives, or any number of relevant topics, and frequently affect demand for a coin depending on how they are received by the community. You can oftentimes catch the latest news about a particular coin on Reddit, Twitter, or a crypto news aggregator site such as CryptoPanic (www.cryptopanic.com).

Rumors

Before an official announcement by a project team, rumors will almost always leak out. Many people try to beat the price swings that follow an official announcement and will buy or sell based on these whisperings. For example, NEO’s price jumped ahead of a supposedly large announcement in November 2017. Investors were buying in anticipation of a big announcement, but when the actual news was underwhelming, the price dropped back to pre-rumor levels.

Upgrades and Changes

If a coin is about to undergo a change, such as a fork, upgrade, or coin burn, the price may fluctuate. New features or a highly-contested fork are valid reasons for changes in confidence in a given project, and will accordingly affect the price. If some coins are to be burned, the remaining coins might be viewed as more valuable. Or if a company misses a planned release date, the price of the coin could drop heavily as investors lose confidence in that team to deliver. Some examples of changes that affected prices are Ethereum’s Homestead release, Vertcoin’s block-rewards halving, and Electroneum’s delayed launch.

Conclusion

With crypto asset volatility exceeding that of more traditional assets, staying informed across crypto media sources becomes vital. (Luckily, we have rounded up some of the best for you right here.)

Any conclusion you draw should never be used in isolation. Ideally, you’re making informed decisions based on a mosaic of ideas, and the more methodologies you have in your toolbox, the better off you are.

Always remember: do not invest what you aren’t prepared to lose!

Disclaimer:

This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.

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