Fundamental analysis vs Technical analysis​

Before proceeding, we need to know perfectly well the distinction between the two analyses: fundamental and technical.

As we mentioned earlier, the former consists of studying the asset and what is behind it.
The goal is to identify the opportunities with the best potential, invest in them, and confidently wait for time to take its course. Numbers are important, but no weight is given to current price trends.

In contrast, technical analysis is totally focused on charts, trends, statistics and so on. It is the travel companion of traders and aims to highlight opportunities for speculation. Therefore, this tool is mainly dedicated to short-term trading.
In this article on technical analysis you can learn more about it.

To better understand the differences, let’s take an example by imagining the shares of company XYZ.

Incrypto (andnoncrypto) fundamental analysis , we will ignore the chart and study the coin or the company itself: plans for the future, arrival of new products, sales volumes over time, health of the balance sheet, and so on.
We will be able to tell if XYZ is viable so that we can possibly invest in it in the future (3, 4, 5 years or even beyond 10).

Withtechnical analysis we will instead go to view the chart, identify the trend, consult the price and volume history.
In this way we will be able to decide whether the trade we had in mind is valid, or we can set up an ad hoc one: for example, is the trend downward and should it continue? then we will opt for short positions, so as to sell XYZ’s shares short, buying them at a lower price later.

Therefore, technical and fundamental analysis share only the word “analysis”: otherwise there is really a lot of difference.

However, they can be combined to give a complete overview: the XYZ company is solid and with good plans for the future. Right now, however, technical analysis shows that the trend is downward. We may therefore postpone buying the stock so as to get a better price.
In any case, this last point is not a must: if the fundamentals are good they will remain so regardless of the current value of the asset.

A final small “detail”: it is not uncommon for technical analysis to conflict with fundamental analysis. An example is what was written two lines above: good fundamental analysis (therefore future growth) contrasted with technical analysis (negative trend).
Depending on the strategy we have in mind, we will then have to decide whether to ignore this or use it to our advantage.

"When combined, technical and fundamental analysis can be very useful and complementary tools"

Investment or trading?

We promise: this will be the last premise!

Investment or trading, mentioned in the past lines, are two totally different things.

The former has a long life, is based on fundamental analysis, and can lead to gains over time.
An investment is like a newly planted tree: it takes a lot of patience and care before you can reap the benefits. Once grown, the tree will be solid, have deep roots, and be long-lasting.

Trading is based on technical analysis and aims for speculative gains. Potentially, trading on the runs out even in a few minutes.
Here we are dealing with a seasonal seedling: it grows frantically and its gifts sprout quickly. Once its task is completed, it dies out.

Investment means believing in a project and becoming part of it. Trading, on the other hand, means ignoring the intrinsic value of the asset and aiming for quick gains.

Neither is better than the other-it depends on the strategies we want to follow.

Now we are really ready to continue.

"Warning: investment and trading are two completely different realities and should not be confused"

Fundamental analysis and cryptocurrencies: the essentials

Studying fundamentals is easier than conducting technical analysis: no charts or setups, no frenzy or market psychology to consider.

However, proceeding with a crypto analysis is still no light task.

So let’s see what are the most important elements to focus on so you can be ready to unearth all the new opportunities.

THE PROJECT.

The first thing to study is the project as a whole. Whether it is a blockchain with its own coin or a simple token, we should ask ourselves these questions:

1. What is the goal of the crypto project?
2. Are real needs being met?
3. What does the team look like?
4. Are there any major partnerships underway?
5. What are the planned milestones?

Of course, the list is not exhaustive.
We can deduce the answers from reading official documents, whitepapers, press releases, articles, interviews, and so on.
There is real detective work behind it, but after all, it is our money.

Let’s take an example and think about MakerDAO answering the questions posed above.

1. The goal of the project is to create an ecosystem for a totally decentralized stablecoin .
2. Absolutely: decentralization and freedom are at the heart of the crypto landscape. Users needed a stablecoin without big companies behind it, and MakerDAO filled that need.
3. The team consists of individuals with a proven track record in finance, cryptocurrency, marketing and programming.
4. MakerDAO offers a comprehensive ecosystem. Several leading players implement the coin DAI, accept it and allow it to be exchanged.
5. Documentation shows the various goals set. Growth so far has been very positive and governance ensures continuous improvement and development.

That said, we would be able to say that MakerDAO is indeed a reliable project.

Whenever we come across a coin or project of questionable value we think about these simple questions.

TOKENOMICS

In the world of cryptocurrencies we need to pay so much attention to tokenomics, that is, the totality of information about the coin or token we are interested in.
Some elements we should consider:

• Maximum supply: is it present? If so, what is it? For supply and demand mechanisms, there is a big difference between a supply of 10 million and a supply of 100 billion.
• Is the maximum supply already available or will it be reached years from now? In case it takes time, in what manner?
• Is the coin deflationary? If so, to what extent?
• What is the distribution of the coin? It is obvious that if 50% of the coin is in the hands of the team there is a need to be careful.

Again, this list is not complete and is only meant to give some food for thought.

ORIGINALITY

Is the project in question something innovative and original or a clone of something already seen?

We also pay attention to details such as this (which then are not at all).

COMMUNITY

How many people are following the project? How exalted are they?

Usually, if the number is large and the hype skyrocketing it is better to wait for the bubble to deflate before investing. This observation applies regardless of how innovative, original, and high-potential the project may be.

Beware also of those cases where a strong community masks the shortcomings of the object of study: we might fall into a trap, invest and then find out that the project is not as great a beauty as we thought!

BEYOND CRYPTOCURRENCIES

A few small notes for operating in the world of finance.

The study of financial statements and the health of the entire commodity sector of the chosen company will be essential.

We will also need to assess plans for the future, as well as any critical issues that may arise along the way.

Particular attention will have to be paid to key figures in the company, including any changes.

After that, if everything is positive, we can proceed to purchase the shares or assets related to the company itself.

Portfolio and risks

After conducting a project analysis, we need to figure out what percentage of our investment portfolio it should cover.
There is no perfect number; it is up to us to choose.

Diversification is a very important operation but it should not become dispersion. It is better to follow 4/5 projects, holding the coins, rather than having our hands in the pie everywhere.
By doing so we will have better control of the assets and be able to follow them more effectively.
Finally, we are going to optimize the capital we have decided to invest.

It is crucial to pay close attention to crypto risks. For example, a portfolio of only altcoin, perhaps emerging, will certainly be more volatile (and risky) than one composed of Bitcoin, Ethereum and stablecoin.
We must always remember one of the most important maxims in the investment world:

“The bull goes up with the stairs, but the bear goes down with the elevator.”

In fact, coins that make x10 in one week could lose some or even all of the gains made in a single day in the following week.

Fundamental analysis: understanding the potential of a project

We have seen how fundamental analysis is the indispensable tool for setting medium- and long-term strategies.

In this type of investment, patience and perseverance should not be lacking. After all, we are about to start on a years-long path and we need to be aware of it.

Currently, the capital invested in the entire crypto sector is less than that of Apple Stocks alone.
This should make us realize how early this sector is in its run-there is no reason to be furious or to want to aspire to buy coins of insulting projects with sky-high returns but little chance of actually happening.

The cryptocurrency train is still stopped at the station, we should not be afraid of missing it: let’s pack our bags, study the route, get our tickets, get on and make ourselves comfortable.