A Guide to Fundamental Analysis and Technical Analysis in Crypto

OVIDIU POPESCU

21 September 20227 min read

Properly investing in crypto means doing your own careful research. Sure, it can be time-consuming to read through the many sources of information when it comes to crypto investing, but it’s a necessary first step.

Once you’ve managed the basics, though, you’ll want to expand your coverage by examining things such as tokenomics to ascertain the many factors that impact a token’s use and value. Crucially, this step typically involves what is known as fundamental analysis and technical analysis.

But if you’re relatively new to crypto (or indeed investing), you might not know what they mean, even though you’ll have come across these terms. Just what is meant by fundamental analysis and technical analysis? When investing in crypto, is fundamental analysis better than technical analysis (and vice-versa)? Can you combine fundamental analysis and technical analysis in crypto investing?

In the following guide, we’ll introduce you to the basics of fundamental analysis and technical analysis in crypto, offering a clear overview of their benefits and drawbacks, key tools and indicators, and how to use them to your advantage.

What is Fundamental Analysis?

Fundamental analysis measures the intrinsic value of a crypto asset to evaluate and determine its price and feasibility as a potential investment. It encompasses every qualitative data about a cryptocurrency, ranging from industry conditions, the performance of individual projects, financial strength, and the overall economy. The project's financial status as well as market demand and supply metrics are also part of fundamental analysis.

To establish a token's intrinsic value, you should approach the market from a broad outlook and progressively narrow it down to the most important metrics. The three major components in the crypto fundamental analysis include project metrics, fiscal metrics, and on-chain metrics. Let’s have a brief look at each one below.

Project Metrics

The project metrics include things such as the whitepaper and tokenomics. Generally, the whitepaper should include an iIntroduction, description of the market and the problem, description of the product and how it’s going to solve the problem, token description (e.g., how many, why, etc.), how the raised funds are going to be used, and a description of the team. Tokenomics provides an in-depth view of the token's consensus mechanism, token distribution, and token utility. An undefined use case for a coin is a red flag. Finally, the team behind the project plays a pivotal role in instilling trust among investors. It’s generally good practice to invest in coins whose team has the relevant academic background(s) and practical expertise.

Fiscal metrics

The two core fiscal metrics are the crypto's liquidity and market capitalization. Liquidity measures how easily a coin can be converted into fiat currency, but it can also be used to measure market sentiments and overall public trust in a digital asset. On the other hand, market cap equals the total number of coins circulating multiplied by the price.

On-chain metrics

A crypto's on-chain metrics include its hash rate, the status of active addresses, transaction value, transaction count, and transaction fee. The transaction value is the total monetary value of all the transactions that occurred within a specific time frame, while transaction count is a measure of the volume of the trading activities associated with a coin. The higher the transaction count, the higher the chances of growth for that particular token. Finally, its transaction fee indicates the demand being generated for a coin. Higher fees show the willingness on the part of investors to pay more to miners to get their transactions validated quicker.

Benefits and Drawbacks of Fundamental Analysis

Performing detailed fundamental analysis requires a significant amount of time and effort, but it can pay dividends. Below are some of the key advantages of fundamental analysis as well as a few things to bear in mind.

Benefits of Fundamental Analysis

  • Not only does fundamental analysis help you to identify short opportunities, but it also highlights a coin's value as a long-term investment. By doing so, you won’t have to stay glued to charts all day.

  • With solid fundamental analysis, you can spot coins whose prices have been undervalued or overvalued.

  • Over time, fundamental analysis allows you to build a thorough understanding of how coins operate and what drives their value.

Drawbacks of Fundamental Analysis

  • Fundamental analysis could take some time to pay off and may therefore be best-suited for longer-term traders and investors.

  • No two coins are the same, meaning that each crypto will require a different approach. As a trader, you’ll have to do your homework for each crypto.

What is Technical Analysis?

Technical analysis involves evaluating investments by analyzing historical price action and using technical indicators to predict future price movement. As such, it has three basic tenets.

Firstly, the market discounts itself, meaning that the price of cryptocurrency reflects everything that could possibly impact it in the market. One can learn everything there is to know about a crypto asset from its price. To predict the price movements of a crypto asset, an investor doesn't need to consider the fundamental variables that influence it. Secondly, market price moves in trends and not at random, which is why it is assumed that the past trend will continue. Regardless of the timeframe, price action will always exhibit a trend. And thirdly, past price trends are likely to repeat themselves in the future. The repetitious structure of the cryptocurrency market makes it possible to predict future market movements by looking at historical patterns.

Technical Analysis Tools

There are thousands of technical tools, but we can broadly categorize them as trend indicators, volume indicators, magnitude indicators, and chart analysis.

Trend Indicators

As the name suggests, these indicators only show the direction of the price action, whether uptrend, downtrend, or a non-trending market. They analyze the current trend in the market, determining if there is a sideways phase or a well-established bullish or bearish trend. Popular trend indicators include moving average convergence/divergence (MACD), relative strength index (RSI), Bollinger Bands, and moving averages (MA), among others.

Momentum Indicators

Momentum indicators show the strength of the current market trend, which is to say whether the asset is overbought or oversold. The RSI and the MACD are the most popular momentum indicators (note that MACD is a trend-following momentum indicator).

Volume Indicators

In the crypto market, few things are a better marker of market sentiment than volume traded. Volume simply indicates the level of activity in the market. The assumption that volume runs ahead of prices is the basis of volume analysis. In an uptrend, the volume should increase with rising prices and decrease in the case of falling prices. In a downward trend, volume is expected to increase with falling prices and decrease in phases with rising prices. Popular volume indicators include the money flow index (MFI) and on-balance volume (OBV).

Chart Analysis

Chart analysis involves studying candlestick and chart patterns on different timeframes. With chart analysis, you can use various charting tools to determine support and resistance levels.

Benefits and Drawbacks of Technical Analysis

You need more specialized knowledge for technical analysis than you do with fundamental analysis, but it’s worth investing the time and energy into understanding indicators. Think of it this way. If manually trading crypto is like flying blind, then technical analysis is akin to flying a plane according to charts and precise coordinates. Let’s have a look at some of the advantages and disadvantages of technical analysis in crypto.

Benefits Technical Analysis

  • The markets have already factored in all of the information and research into any given coin’s price. A trader using technical analysis can profit from studying the charts and data, spending less time on unnecessary information and more time learning about price fluctuations within the crypto market.

  • A trader has access to charting tools and indicators, hundreds of which are made available for free by crypto exchanges and trading platforms.

  • TA is convenient for short- and long-term traders. Once you've selected your preferred technical indicator, simply adjust the time frame to suit your trading style.

Drawbacks of Technical Analysis

  • Technical analysis may break down in the long term since the crypto market is notoriously driven by market sentiment and therefore notoriously volatile and difficult to predict.

  • Technical indicators can be laggy, increasing the chances of inaccurate entry and exit signals.

  • Many technical indicators can give conflicting signals.

Differences Between Fundamental Analysis and Technical Analysis


Technical analysis

Fundamental analysis

Relevant for 

Short-term investments

Long-term investments

Purpose

Short-term trading 

Long-term investing

Focuses on

Only past data

Both present and past data

Type of trader

Short-term or swing trader

Long-term position trader

Forms of data

Price action analysis

Project's metrics, fiscal metrics, and on-chain metrics

Objective

Establish the optimal entry and exit positions

To identify the intrinsic value of a coin

Fundamental Analysis vs. Technical Analysis: Which is Better?

Whether one chooses fundamental or technical analysis will depend entirely on one’s trading style and objectives. Technical analysis is suitable for short-term traders, while fundamental analysis is suitable for long-term investors and traders. However, it’s also important to remember that it’s not a zero-sum game, as fundamental analysis and technical analysis can be combined. Long-term traders, for example, can also incorporate technical indicators to inform their trading decisions.

Final Thoughts

Crypto trading strategies can be based on technical analysis, fundamental analysis, or both.

Technical analysis involves crypto chart patterns and using technical indicators to determine the trend and momentum of a particular crypto in order to identify the optimal entry and exit points. Fundamental analysis involves analyzing a given crypto project's metrics, fiscal metrics, and on-chain metrics. Ultimately, your choice will depend on your trading style.

However, it’s crucial to bear in mind that the most profitable crypto traders will be adept at both fundamental and technical analysis. Otherwise, you’re just flying blindly through the crypto trade winds. In fact, there’s a word for it: gambling.

It’s far better to take a systematic approach to crypto investing by developing, testing, and implementing an automated algorithmic trading strategy that incorporates insights from technical and fundamental analysis. Doing so will allow you to remove your emotions from the equation, execute trades quicker, more reliably, more precisely, and therefore more profitably.