Cryptocurrencies have become all the craze lately after several investors made fortunes trading these digital assets. This has attracted individuals and institutions alike, all looking to make a profit in these markets. However, trading cryptocurrencies is a highly risky venture.
To prosper in it, you need to come up with the right strategy, which can only be achieved by learning the markets. The more you know about a coin, the better you can trade it. To that end, crypto traders will often conduct two analysis types on the coins they are trading – fundamental and technical analysis.
Fundamental vs. technical analysis in crypto
Technical analysis banks on the simple fact that history repeats itself. Traders using this analytical method will often study historical price charts, all in a bid to identify repetitive patterns that are likely to recur. Usually, they assume that price movements in these markets are seldom random. There are always identifiable markers of market trends that can point out whether the market is bullish, bearish, or even range-bound.
Usually, supply and demand are the biggest moving forces behind crypto prices. Technical analysts will typically look at the balance of supply and demand when trying to predict price movements. If a coin has been bullish for a while, more people will try to sell at a high price, shifting supply to overpower demand. This will cause a downshift in prices, which analysts bet on.
Fundamental analysis, on the other hand, takes a big picture approach to predict price moves. It looks at an asset’s intrinsic value by examining all the quantitative and qualitative factors of a particular coin. If a coin has more real-life utility than its value would suggest, the coin is likely undervalued and could rally in the future. Similarly, if a coin is overvalued, then you could short the coin and wait to profit when it plummets. Let’s look at some of the indicators fundamental analysts make use of in their endeavors.
1. Bitcoin dominance
Bitcoin is the largest cryptocurrency by market cap. Being the first cryptocurrency, all other cryptos that came after it is collectively called altcoins. Bitcoin dominance is a metric that compares the market cap of Bitcoin, and that of all altcoins combined and expresses it as a ratio. In the beginning, when BTC was the largest crypto amongst a few competitors, its dominance index was much closer to 100%. Nowadays, with the increased adoption of cryptocurrencies as a whole, this number has greatly reduced.
There are different ways traders utilize this metric. For instance, if the value of BTC rises while its dominance rises, it shows that BTC is bullish, thus prompting them to buy the coin. If Bitcoin’s price falls as its dominance rises, it points to a bear market for altcoins. If its price rises while its dominance falls, it points to a bullish setup for altcoins. Lastly, if both BTC’s price and its dominance fall, it points to a bear market across the board.
2. Correlation to Bitcoin
This is yet another metric that involves the top cryptocurrency. It refers to the correlation between an altcoin’s price and that of BTC. Correlation is a mathematical principle that measures the statistical relationship between two variables. This metric ranges from -1 to 1.
A Bitcoin correlation value close to -1 suggests that the price of the altcoin in question is inversely related to BTC’s price. This means the prices of these two coins tend to move in opposite directions. If the correlation value is close to 1, it means the altcoin’s price moves in lockstep with that of Bitcoin. On the other hand, if the correlation value is 0 or anywhere close to zero, it suggests that the altcoin and Bitcoin’s price movements have little to no relationship. In order to reduce risk while trading, it is always advisable to have assets with low correlations in your portfolio. This way, poor performance by any one coin does not gravely affect your holdings.
3. Ownership distribution
This metric evaluates the distribution of a crypto token’s total supply in circulation. It does this by classifying crypto holders into three groups: Whales, investors, and retail traders. Whales own more than 1% of the total circulating supply, investors own anywhere between 0.1% and 1%, while retail traders hold less than 0.1% of its supply.
This metric can be used to gauge how decentralized a cryptocurrency actually is. If most of a coin’s supply is owned by just a few whales or investors, then it would be easy for them to sell their holdings and crash the token’s price. Therefore, you’ll typically want to invest in a coin whose majority supply is concentrated among retail traders.
4. Ownership concentration – Whales
As we’ve highlighted, whales are those addresses that hold more than 1% of a coin’s total circulating supply. Depending on the coin in question, wallets may need to hold different dollar amounts of different coins to qualify into this classification. Whales are further classified into low activity and high activity addresses. The latter refers to crypto owners who average more than 300 transactions a year, while their low activity counterparts average less than 300 transactions annually.
5. Ownership concentration – Investors
These are addresses that hold anywhere between 0.1% to 1% of a cryptocurrency’s total circulating supply. Investors are also classified into high activity and low activity, depending on the transactions they undertake per year on average. If it is above 300, they are termed as high activity investors. If below, they are called low activity investors.
In the crypto trade, success is heavily dependent on the trading strategy that is utilized. To obtain a working strategy, a deep understanding of the market is necessary. To that end, analysts and traders perform extensive technical and fundamental analysis when creating their trading strategies. We have discussed the most popular fundamental indicators, but keep in mind that the best strategy combines both technical and fundamental analysis.