Fundamental Analysis of Cryptocurrency

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Bitcoin has surprised many professionals and traders as it continues to reach new milestones. Together with the surge of Dogecoin and other coins, crypto trading is fast becoming an attractive business. Moreover, the potential of cryptocurrency as a new payment method and technological solution will help drive cryptos to become a long-term investment rather than just instruments for speculation.

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Traders are attracted to cryptocurrencies because of their unique characteristics, such as the following:

Volatility: Coins are best known for their wild volatility. They can oscillate violently, even compared to other relatively volatile instruments like Gold or Oil. Volatility can result in a much higher reward to investors.

24/7 access: Unlike some other markets such as stocks or commodities, the cryptocurrency market never sleeps. It is a truly decentralized market and is accessible to most traders regardless of level or capital capacity.

CFDs available: You can also trade coins as Contracts of Difference. This trading venue makes it even easier for retail traders, as they can gain access to leverage which can act to lower the required capitals and generate bigger profits from smaller deposits. Additionally, trading CFDs on cryptos also gives traders a chance to trade both rising and falling markets.

For these reasons, investors should approach crypto trading as a business. Instead of throwing money into some nameless coins and waiting for them to potentially shoot up someday, we should engage in some form of analytical approach to make informed decisions. This will help in selecting the right coins to participate in. One such analysis method is fundamental analysis. 

Can fundamental analysis be applied to the crypto market?

If you are an experienced trader, you know that fundamental analysis and technical analysis can help a trader to determine price direction of an asset. Fundamental analysis refers to the study of factors that determine the intrinsic value of a financial asset. For example, when it comes to fundamental analysis of a currency of a country, we can examine its macro-economic conditions, political situation and monetary policies.

Another example would be to apply fundamental analysis to evaluate the value of a company’s share. We could take into account a company’s management, profits, sales and competing capability. And we can get such information via announcements, statements, market research reports, financial reports and news.

At first glance, it may seem that cryptos do not have many fundamental aspects to analyze. They are considered digital currencies but because of their decentralized nature, cryptos are not backed by a national body such as a central bank. Geopolitical issues also have little to no direct impact on these types of digital coins.

Nonetheless, there can be information that may affect the long-term trend of a cryptocurrency’s value. Thus, any serious investor in crypto consider performing fundamental analysis before committing their hard earned capital.

crypto-blockchainTechnological Aspect

Bitcoin is founded as a product of blockchain technology. This hi-tech solution has a wide range of applications from management, security to payment. Using bitcoin in transactions, can provide users with anonymity. Similar to Bitcoin, other cryptos also have their own technological platforms.

To examine the value of a coin, we should start by understanding the technology behind it. The technology can often foretell the prospect of a coin as a future payment, adoption capability, and other factors. For example, although JPMorgan’s CEO Jamie Dimon is not a big fan of the potential of Bitcoin as a currency, he still appreciates the value that the blockchain technology can bring.

IBM as another example, has utilized Stellar Lumens (XLM) to build their World Wire project which aims to help institutions make international transactions cheaper and easier.  

The technological foundation is the core value of a coin. The most popular cryptos like Bitcoin or Ethereum have survived and thrived through bull and bear periods because of this. Their technological core and practical applications guarantee that they remain valuable in the marketplace. For example, whenever the price of Bitcoin drops, there are always investors willing to step in and buy because they believe in the core value of Bitcoin’s blockchain technology.

Based on a crypo’s technological attributes, traders can gauge its future potential. While coins backed by promising technology can be an asset to hold for long periods, others may only be viable as short-term choices.

The Supply

Since cryptos are not issued by central banks, they do not experience traditional inflationary pressures. Many cryptocurrencies are created with a finite amount. For example, Bitcoin has a total coin number of only 21 million and they are all to be mined by 2040. This scarcity is one reason why Bitcoin is the most valuable coin. Some other coins, however, have not had a cap put on it yet. An example would be Ethereum whose total coins have just crossed the 100 million mark.

The crypto market can be extremely volatile and illiquid at times. This can make it harder to fill orders efficiently at times. And so slippage and gaps can occur frequently within these markets, so you should take note of that.

Adoption as a Payment Method

Cryptocurrencies originated to serve as a future payment method. Therefore, their eventual adoption by government, corporations and payment services will serve to significantly drive their values. You may have noticed that whenever a coin is newly accepted for payment at a major institution, the value of the coin will often rise.

For example, Bitcoin reached its recent all-time high of above $44k right after Tesla announced that the company would accept this coin as a form of payment for their cars.

At present, most governments do not officially recognize cryptos because these coins are not issued and regulated by central agencies. At the same time, they have not imposed regulations on cryptos either. In other words, governments are most likely seeking a controlled solution.

Imagining one day, a developed country accepts a cryptocurrency as legal payment, would likely cause a domino effect inducing other countries to do the same thing and to push the value of such a digital token higher. 

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Competition between Coins  

It is estimated that there are now more than 2,000 cryptos available in the market and the number keeps rising. Many of these have been built on the technology of former coins with the goal of providing better security and convenience. Many of these ICOs claim to be the best payment method in the future. However, only are few are worth consideration. Except for the most popular coins, you should be cautious before investing in new cryptocurrencies.

Security & Safety 

Because there is no agency monitoring and guarding online crypto activities, they can be vulnerable to hackers and other cybercriminals. Back in 2019, there was a computer hack into Binance, one of the biggest coin exchanges in the world. The hackers managed to steal 7,000 Bitcoins which were worth $40 million at that time.

This breach, along with some others, cast doubt on the security of cryptocurrency trading. These events also decreased the value of coins. Worse yet, if you were one of the victims, no agency was there to back you up since crypto trading is still highly unregulated.

The difference between fundamental analysis and technical analysis?

While fundamental analysis focuses on measuring the intrinsic value of an asset, technical analysis looks for trading opportunities based on real-time statistics and repeatable patterns seen on the price charts. Some traders favor fundamental analysis for long-term strategies while opting for technical analysis for short-term approaches.

Others think the former is better for finding undervalued assets while the latter is better for identifying the best entry. All of these assumptions can be true depending on how you make use of them.

The biggest difficulty when applying technical analysis in trading coins comes from the unpredictable nature of cryptocurrencies. The movements of coins usually fluctuate in a much broader range in comparison to other financial instruments.

Support and resistance levels are frequently crossed without much effort. Therefore, studying the charts of coins from the technical perspective is never an easy job. Traders need to follow strict money management rules and be ready to cut their losses quickly.  

How has the covid pandemic affected bitcoin?

2020 was an extraordinary year in human history and the financial market was not an exception. The outbreak of the Covid-19 pandemic nearly halted the entire world economy but it also opened new horizons. The fact that many people have made the transition to start working from home has accelerated the digital transition and the crypto market has benefited from this trend.

Cryptocurrencies have long been considered a high-risk financial instrument. Naturally, for that reason, some investors felt that they should reduce their exposure and turn to safe haven assets such as gold or silver. Remember, the value of bitcoin fell to below $4,000 in the first quarter of 2020.  However, ‘work from home’ and financial investment trends pushed the price of major digital coins higher.

Additionally during this time, many central banks kept lowering the interest rate to boost the economy. This aroused the worries of inflation. As such many investors began to flock to cryptos as an inflation hedge. More and more investors began to realize the potential for digital coins for the future and were willing to put their faith and money in them, making them more valuable than ever.

So what is the difference between the 2020 peak and the 2017 peak? The answer can be seen in the sentiment of investors. Back in 2017, the bull run in bitcoin was seen as a bubble where investors were jumping in because of the fear of missing out.

A somewhat different situation happened in 2020. More and more investors began to view Bitcoin as a new long-term investment. These investors were not just individual speculators or technological geeks but also major funds and institutions. In other words, Bitcoin has moved more to the mainstream and is now being considered as a serious long term investment.

How does Bitcoin react to the statements of popular people and major financial giants?

The value of Bitcoin is often driven by statements made by popular people and its adoption by major corporations. Some celebrities have played a role in the public’s perception around cryptocurrencies. Among the leaders of big companies, there are two opposite viewpoints – one is pro-Bitcoin which is mostly held by hi-tech company leaders such as Elon Musk and Bill Gates while another is anti-Bitcoin which is held by conventional investors like Warren Buffet.

On January 29th, 2021, Bitcoin climbed to $38,000 after Elon Musk changed his profile description on Twitter promoting Bitcoin. Musk is the founder and co-founder of major technological brands such as PayPal, Tesla, and SpaceX. He always takes the spotlight whenever he speaks about something and is truly a key opinion leader (KOL). Any tweet he puts out can create a wave of financial buying or selling, be it in Tesla shares, Bitcoin or Dogecoin. Bitcoin and other cryptos are sensitive to such information like this from major influencers.

Elon Musk and Tesla have accepted Bitcoin as a payment method for their electric cars. There are two things we can learn from this. First, with another big tech company recognizing bitcoin, it will have a positive impact on the price of the crypto. Second, this act can be a sign showing that Tesla wants to accumulate more Bitcoin and store them. This can be an indication of their bullishness in considering Bitcoin as a long-term investment.

Media coverage is another factor we need to take into account. At present day, the power of the media shouldn’t be underestimated. The media can easily manipulate the sentiment of investors and present the public with less than objective information which can drive the price away from its true value, at least in the short term.

Download the short printable PDF version summarizing the key points of this lesson…. Click Here To Download


Cryptocurrencies have been increasing in popularity steadily over the last decade. The controversies around their application as a viable payment solution still exist. Nonetheless, crypto investing can bring fortunes to wise investors who know when to hop in and when to hop out. To be among of them, you need to understand the nature of coins and examine their fundamental aspects. This includes analyzing the technological base, supply, adoption, competition capability and security.

Cryptocurrencies are decentralized and not controlled by any entities. In rare cases, they can be subject to manipulation or fraud by bad actors. Therefore, applying fundamental analysis to determine the role of a coin in your portfolio is critical i.e. for short-term speculation or long-term investment. Last but not least, technical analysis is also useful and you should make use of it to look for the best entry and exit.

This article was written by John Williams, the chief crypto trader at NS Broker. He started in the cryptocurrency space seven years ago and is now a consistently profitable trader. At NS Broker, John helps new traders learn how to start trading cryptocurrency and teaches strategies that has contributed to his success.

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