Fundamental Analysis vs Technical Analysis; Which is better?
March 17, 2023
There are two main techniques to use when analyzing and evaluating cryptocurrency. The techniques have existed for generations and have successfully been implemented for traditional financial assets. These are the Fundamental Analysis (FA) and Technical Analysis (TA).
Fundamental Analysis (or FA)
FA is the technique of a trader determining an asset’s value by considering both economic and financial factors affecting the asset. You can determine through FA whether an asset is overvalued or undervalued at the current valuation. If you can answer that query, you can choose whether to invest, when to do so, and how long you plan to hold the investment.
Fundamental analysis for cryptocurrency involves evaluating two important factors – on-chain and off-chain metrics. On-chain metrics include network hash rate, wallet addresses (active and dormant), network applications, token/coin issuance rate (inflation/deflation), network fees, and transactions.
Fortunately, with cryptocurrencies, the majority of networks, like Bitcoin and Ethereum, are open to the public, making access to these on-chain factors simple. You can use Bitinfocharts.com to track both Bitcoin and Ethereum on-chain metrics. This website is very user-friendly and contains a ton of information about cryptocurrencies.
Off-chain metrics basically include community engagement, exchange listings, government regulations, etc.
Technical Analysis (or TA)
Technical analysis is a trading strategy based on the notion that by analyzing an asset’s historical price action, a trader can forecast how its price will move in the future. To do this, technical analysis (TA) employs a wide range of technical indicators, such as trade volume, moving averages, trend lines, candlesticks, chart patterns, and more. A trader should have identified trading opportunities and a potential entry point at the conclusion of a technical analysis.
Technical analysis for cryptocurrencies can be applied to all types of trading, including day trading, scalping, and long-term investments.
Now lets answer our question,
FA vs. TA – which is better?
It entirely depends on the trader profile. Do you want to be the kind of trader that prefers to get in and out of trading positions multiple times a day (i.e., day trader)? Then crypto technical analysis will be your best friend. Instead, do you prefer to research and make informed bets every time (i.e., swing trader)? Then – a mix of both is the way to go.
For instance, you may use FA to determine that an asset is worth investing in. What you may not uncover with FA, however, is the right time to invest. For this, you will have to rely on technical analysis. Conversely, if you are using TA to work out future price movements for a given asset, you can use FA to confirm whether or not the price trend you are witnessing is poised to continue.
Therefore, there are advantages to using either technique over the other at various moments in your research, but to have a more complete picture, use both.