Fundamental analysis for new traders
If you are getting started with digital currencies, it is always a good idea to perform due diligence before you get down to investing. The high volatile nature of cryptocurrencies makes them one of the most profitable as well as the riskiest investment instruments that traders have today.
You will come across a number of concepts to help you identify potentially profitable projects, and one of them is the fundamental analysis.
Well, here’s a rundown for XTRgate trading experts of everything new investors can expect in this regard to make the most of their crypto trading.
Fundamental analysis is an approach used by investors to measure the intrinsic value of a tradable asset like a digital currency. It is an evaluation, which is performed based on the factors that are more likely to affect the asset’s value in the long term. Analysts take into consideration the economic, as well as the most qualitative and quantitative indicators to get a general picture of the asset value.
This method is ideal for traders that are typically into investments for long term gains. It will help the potential investors to pick the right assets and hold them as they wait for the value and price to appreciate.
Quantitative and Qualitative Fundamental Analysis
The quantitative aspect of fundamental analysis deals with factors or metrics that can be measured or expressed in numeric terms. Some of these factors include price and coin supply.
Qualitative analysis, on the other hand, involves making an assessment based on somewhat intangible factors that can influence the value of assets. It’s a more subjective judgment form of analysis. Examples include reputation, research & development, management expertise, and community engagement.
The two strategies are utilized together to provide insights that can help investors to compare and make informed decisions on the targeted project operations.
Please note that there’s no one fit approach to conducting the quantitative and qualitative fundamental analysis of crypto projects. However, there are some key features and elements to pay more attention to during the analysis.
For quantitative analysis, here are some of the most important variables to take into account:
The first thing a trader should take a look at when carrying out a quantitative analysis is, without a doubt, the market cap of the currency. It gives you an idea of the cash value of the coins in circulation, which is an important step to determining how much room there is for growth.
If a digital currency has a high market cap, then it simply shows a greater value in its use. There’s a common trend seen in the trading industry, where new investors often ditch the lower-priced coins for the higher priced ones.
The truth is — what usually matters is the number of circulating coins. A good example of a low-cost currency with a large market capitalization is XRP, which is currently ranked as the third-largest cryptocurrency.
If the price is low but the market price is high, experts consider this a good indicator of future growth.
This is another important element in the game. When there is low supply and high demand, the price of a coin tends to increase. The law works in reverse as well. That’s why the existing and projected supply of coins matters a great deal.
Most top cryptos to trade you will find on the market today have limited emissions, meaning mining or staking will stop once they reach a certain point. When there’s unlimited emission, the demand for any digital currency might decrease significantly.
The number of digital assets traded during a specific period is a fundamental part of the analysis. Low volume indicates a low demand for the coin or token. This is quite risky, as you might end up with a dying coin that might never be rid of. You can take advantage of sites like CoinMarketCap to see how the currency you’re interested in performs.
Key variables in qualitative analysis
The founders or developers are always going to be relevant to your investment projects. Their decisions can have a significant effect on the chances of your project succeeding. Ensure they have professional experience and resources to manage what they’re offering. By experience, we mean the team has at least been part of a verifiable successful project.
Besides that, they should have a solid roadmap for their digital assets in a whitepaper, on their website, or on social media platforms. Make sure the team indeed follows the stipulated plans and doesn’t miss the objectives.
For a cryptocurrency to remain functional, it must effectively engage with users and investors. Developing a positive relationship with the community can be the difference between failing and succeeding. Active online community forums can give new traders a better understanding of the digital asset and the general sentiments around it.
Intrinsic value, also known as a fundamental value, is simply the estimated value of an asset or investment based on both qualitative and quantitative factors. By determining the intrinsic value, analysts and investors can gauge whether the asset is under or overvalued in the current market.
An example of Fundamental Analysis
Smith is interested in a certain coin or token, but he has heard how volatile cryptocurrencies are. Instead of relying on the market hype to make an investment decision, he decides to carry out in-depth research to determine if the project could be profitable.
He has access to several sources of information for conducting fundamental analysis, such as project websites, white paper, press, and community channels. Smith chooses to start with Coin’s White Paper. After going through it, he finds most of the parts highly technical and somewhat difficult to understand. So he visits the project websites dedicated to the analysis of the asset, and which link to the white paper and community channels.
After utilizing all the possible materials, he realizes that the coin has a very weak use case in the industry. It’s actually not solving any problem of public interest. It just collects money from susceptible and less experienced investors.
Smith takes time to analyze another asset and, luckily, the new one looks more promising. First off, the technology behind the project is unique and there are more partnerships with reputable institutions. Also, he discovers that the digital coin has seen a significant rise in value over recent years. He decides to put his hard-earned money into this project, which he thinks will be very interesting for traders and investors in the future.
While the result of fundamental analysis is only an estimate of the future price, it can help increase the chances of making the right investment decision.
Keep in mind what we’ve discussed above is just the most essential but not the complete list of factors to follow when performing the analysis. for more information visit our Trading academy
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