Investing is based on predictions. Whether you’re buying stocks and bonds, real estate, or cryptocurrencies, you’re hoping to buy at a low price so someday you can sell at a higher price, earning a profit in the bargain.
Technical analysis and fundamental analysis are two techniques for making predictions about whether prices will go up or down.
In technical analysis, you examine past price performance to identify patterns and cyclical changes, then use that historical data to predict future price changes.
A Dutch diamond merchant named Joseph de la Vega pioneered the use of technical analysis in 17th financial markets. His historical study of the Amsterdam stock exchange, Confusion of Confusions, was published in 1688.
A 19th-century American financial journalist named Charles Dow analyzed historical data from the American stock market, identifying patterns and cycles in stock prices. He shared his conclusions with investors in a series of 255 editorials he wrote for the newspaper he founded, the Wall Street Journal. Dow’s ideas are now known as Dow Theory, and they have served as the basis of financial strategies for generations of investors, who use them to create technical analyses of stock trends.
Technical analysis is valuable in crypto investing even without long decades of historical price data. For example, with Bitcoin, technical analysis shows that dramatic price drops and periods of high volatility have been followed by consistent rises to new highs.
In fundamental analysis, you examine economic, financial, political, and social factors that influence prices. Your price forecasts are based on those factors.
Investors using fundamental analysis track interest rates, gross domestic product, manufacturing data, and unemployment rates to make informed predictions about stock prices.
In addition to its utility as an investing method, fundamental analysis has been applied to assessment of a business’s health, business valuation, creditworthiness, and management.
Fundamental analysis supports an investment strategy based upon identifying stocks, commodities, or cryptocurrencies that seem to be undervalued. Investors purchase them in anticipation that prices will be corrected.
Fundamental analysis can also help investors identify solid businesses that are likely to appreciate in value in the long run despite fluctuations in day-to-day prices.
Fundamental vs. Technical Analysis
Fundamental analysis helps investors determine what a commodity should be worth. They can then compare that value with prices and make investing decisions accordingly.
Investors who use technical analysis aren’t concerned with the commodity’s inherent value. They say a commodity is worth what the market will pay for it, and they make their investment decisions based on historical market data.
Both techniques can help the prudent investor make a more informed choice about buying or selling cryptocurrencies.