Lesson 7: Technical and Fundamental Analysis
Welcome to the seventh lesson in Kriptomat Academy’s guide to fundamental concepts in crypto investing. In this lesson, we’ll show how technical and fundamental analysis can make you a smarter investor.
The more you know about the assets you’re considering, the higher your chances of making an informed investment that delivers a good return.
- That’s the theory behind asset analysis, the discipline of studying potential investments before buying.
- Economists divide asset analysis into two categories: technical analysis and fundamental analysis.
- A successful investment strategy includes both.
Technical analysis is based on a cryptocurrency’s price history. It was invented by Charles Dow in the 1890s.
- You may recognize Dow’s name. America’s Dow Jones Industrial Average is based on a set of 30 stocks he selected for monitoring in 1896.
- Dow also lends his name to Dow Theory, a form of investment analysis based on price history.
- Dow’s research revealed that stock market prices went through predictable cycles. He created a way of tracking and analyzing those cycles to predict values.
- He shared these insights with investors in the newspaper he edited, the Wall Street Journal.
The theory beyond technical analysis is that prices travel repeatedly through predictable cycles.
- With perfect information about past cycles, Dow believed, an investor could make reliable estimates of the length and duration of bull and bear trends in current markets.
- To buy low and sell high, Dow believed, it was merely necessary to know which part of the price cycle the asset was currently traveling through.
- An assumption of technical analysis is that what has happened before will tend to happen again.
Fundamental analysis doesn’t rely on price charts. It’s a method of evaluating investments based on the effects of social and political events, economic trends, the competencies and experience of corporate management, the overall prospects for particular market niches, and other factors.
- Fundamental analysis is most useful for long-term investment based on the long-term prospects of a token or project.
- With fundamental analysis, you look beyond price charts to see the crypto as part of the world.
- Your goal is to predict whether a particular cryptocurrency is likely to grow in value over time.
- For most cryptos, that means evaluating the viability of the particular dApp, game, or other market niche app the crypto was created to support.
Fundamental analysis is complicated in the crypto world because cryptos and decentralized apps aren’t regulated in the same way as stock offerings.
- When a stock is offered for sale to the public, the company behind it must publish a prospectus that outlines lots of relevant facts, including details about the founders, market research, risk factors, and key technologies.
- None of that information is routinely available for blockchain-based assets. So performing fundamental analysis can require some time and effort.
Economists say fundamental analysis has three parts
- With economic analysis, you evaluate the state of the market: inflation rate, unemployment, interest rates, price trends, and so on.
- In industrial analysis, you evaluate the prospects of a particular market segment. Maybe cryptos in the medical field are poised for growth, or in game development.
- Third is company analysis. In the crypto world, this means evaluating the app that is associated with the cryptocurrency. Is it up against established competitors? Is it from a new and untested team? Has it already saturated the market, with little opportunity to grow through building market share?
Let’s consider an example.
- Cardano is an up-and-coming blockchain platform that aims to do everything Ethereum does but cheaper and faster.
- The Cardano blockchain processes up to 250 transactions per second, compared to Ethereum’s 30. A “Hydra” upgrade is expected to boost Cardano’s effective transaction rate to 1 million tps.
- Cardano’s average cost per transaction is about 0.40 euros, while Ethereum’s is 0.67 euros, according to its website. In real-world transactions, Ethereum gas fees can drive the transaction price much higher.
- If you are convinced that blockchain-based applications are the wave of the future, especially once Web3 and the metaverse take shape, then you might give Solana high marks as a potential investment. It trails Ethereum in the market, but it has some competitive advantages.
- Further investigation could lead you to additional Ethereum competitors, cryptocurrencies like Solana, Polkadot, Avalanche, NEAR Protocol, Algorand, Cosmos, Fantom, and TRON.
- If you believe the dApp market is poised for growth, it’s worth studying these cryptos and adding two or three of them, plus or minus Ethereum, to your diversified portfolio.
Experts say both kinds of analysis are important
- Technical analysis is based on the idea that future prices can be estimated reliably based on cycles and trends found in price history charts.
- Technical analysis has helped investors in conventional investment markets achieve profitable futures for more than a century.
- Fundamental analysis complements technical analysis by taking real-world events and trends into account.
So – what have we learned?
- Technical analysis and fundamental analysis are two approaches to learning about potential investments.
- Technical analysis is based on finding trends and patterns in an investment’s price history.
- Fundamental analysis is based on understanding the purpose of the crypto and the many factors that could influence its success.
That’s the end of this lesson! Test your understanding and earn points toward a Kriptomat Academy certificate of achievement by taking the test!
What is the basic theory underlying technical analysis?
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What is fundamental analysis in investing?
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Which of the following is a crypto market segment?
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Where can investors find the most reliable research related to growth in different market segments?
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Which of the following is NOT a type of fundamental analysis?
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