What is fundamental analysis in crypto assets (virtual currency)? Explaining the advantages and disadvantages and the difference from technical analysis

Fundamental analysis is an analysis method used in investing and trading stocks, FX, crypto assets (virtual currencies), etc.

Fundamental analysis is effective when predicting the price of an investment target, but some people who have just started investing may not know what kind of analysis it is.

Therefore, this time, we will provide a thorough explanation of the fundamental analysis of crypto assets. We will thoroughly explain the basic information of fundamental analysis, its advantages and disadvantages, and the differences from “technical analysis” with which it is often compared.

Learn fundamental analysis and use it for future investments.

What is fundamental analysis in crypto assets (virtual currency)?

There are two types of analysis methods in the investment world: fundamental analysis and technical analysis.

Fundamental analysis is a method of predicting future prices based on economic trends, financial conditions, etc.

For example, when performing fundamental analysis on stock investments, we analyze the financial status and performance of the investee company to determine whether the current market price is undervalued or overvalued.

The theory is that if you conclude that the market price is undervalued, you buy the stock, and then sell it when the stock price reaches a reasonable price (when it rises to its original value).

Fundamental analysis of crypto assets, similar to stocks, analyzes the growth potential and soundness of the currency developer as an organization based on its financial status and activities and predicts the future price of the currency based on that.

Check your financial status and activities online

The financial status of the developer of crypto assets is generally collected on the official website, and information on activities is generally collected using SNS such as Twitter, Facebook, Telegram, and chat tools such as Discord.

Activities can often be viewed on the official website, but many currencies announce their latest activities through SNS, so if you want to get the latest information, please use SNS.

An example of a currency whose financial status is published on its official website is Lisk/LSK. Risk’s official website provides an overview of the project as well as its financial status from August 2019.

However, be careful as not all currencies disclose their financial status as well as their risks.

The economy and economic policy can also be used as analysis materials.

When performing fundamental analysis on crypto assets, it is necessary to check not only internal factors such as the issuer’s financial situation and activities but also external factors such as the economy and economic policy.

For example, during the global financial crisis “Lehman Shock” that occurred in 2008, financial products such as stocks, foreign exchange, and bonds plummeted across the board. Similarly, crypto assets also have the characteristic that their prices fluctuate due to the influence of political and economic news.

For example, in 2017, when the Chinese government asked all cryptocurrency exchanges in the country to suspend operations, the price of Bitcoin fell by nearly 15% in one day.

Differences from technical analysis

In the investment world, there is a method called “technical analysis” that is often compared to fundamental analysis.

Technical analysis is an analysis method that reads patterns from past price movements on charts and predicts future prices.

Technical analysis, which predicts prices by looking only at chart movements, has the advantage that it can be used without any knowledge of the economy or market prices. However, on the other hand, it also has the disadvantage of not being able to respond to price fluctuations caused by current issues, such as changes in the world situation or shifts in economic policy.

Technical analysis has a variety of techniques and can be classified into multiple systems. Technical analysis of crypto assets can be roughly divided into three types: “trend analysis,” “oscillator analysis,” and “formation analysis.”

Benefits of fundamental analysis

Fundamental analysis has the following main benefits:

I will explain each of the contents one by one.

Understand why prices fluctuate

Fundamental analysis has the advantage of being able to understand the causes of price fluctuations by examining news related to crypto assets and the world economic situation.

For example, when the Chinese government imposed regulations on cryptocurrency exchanges as mentioned above, if we had only done a technical analysis, we might not have been able to understand why Bitcoin prices plummeted.

When the price of a crypto asset moves significantly, fundamental analysis increases the possibility of understanding the cause of the price fluctuation.

Helps avoid opportunity loss

The operator may disseminate information on the official website or social media that is likely to lead to price increases before the official announcement, such as “There will be an important announcement regarding currency updates shortly.”

In such cases, if you perform fundamental analysis and gather information daily, you will be able to purchase the currency before the price rises and make a profit.

Helps avoid risks

Similarly, fundamental analysis can also help you avoid risk.

For example, when negative news that is likely to lead to a price drop, such as government regulation of crypto assets, is released, the damage from the price drop can be minimized by catching the information as soon as possible and selling the currencies you own. can do.

Effective for medium- to long-term price forecasting

Fundamental analysis, which refers to the financial status and activities of currency issuers, is suitable for medium- to long-term price predictions.

It is natural that if you know the issuer’s financial situation and the development status of the currency, it will be easier to predict how the price of that currency will move in the future.

Disadvantages of fundamental analysis

As mentioned earlier, fundamental analysis has various benefits.

However, fundamental analysis is never a panacea. This is because there are many cases in which price fluctuations in crypto assets cannot be grasped through fundamental analysis or technical analysis.

For example, if a large investor needs cash for some reason and sells a large amount of his currency, other investors will not know why the price has fallen. In this way, fundamental analysis does not work when price fluctuations occur due to causes that do not appear publicly in the form of news or the like.

Important words to remember before doing fundamental analysis

There are several points to keep in mind when performing fundamental analysis on crypto assets. In this section, we will introduce three words that serve as unique analysis materials for crypto assets.

half-life

Halving refers to the timing when the mining reward for crypto assets is halved. Bitcoin halving occurs approximately once every four years, and the third and most recent halving occurred in May 2020.

Bitcoin prices tend to fluctuate significantly before and after a halving. For example, during the second halving in July 2016, the price rose from 40,000 yen in May to 70,000 yen on the day of the halving.

Also, during the third halving in May 2020, the price soared from around 700,000 yen in April to around 1 million yen in May.

Fundamental analysis is based on collecting information that is likely to lead to price movements. Since Bitcoin’s price tends to fluctuate significantly before and after the halving, the halving can be said to be an essential element in the fundamental analysis of crypto assets.

Burn

Burning, which means “burning” in English, refers to the act of reducing the number of crypto assets that have already been issued and are in circulation in the market. The purpose is to increase the scarcity value and increase the price by reducing the supply of currency.

Most recently, in November 2019, Stellar Lumens (XLM) announced that it had burned 55 billion tokens, about half of its total supply, and the price soared by about 20% accordingly.

Like halvings, burns are also an important factor in the fundamental analysis of crypto assets, as they are likely to affect the price of a currency.

FUD

When collecting information on crypto assets, I often come across the word “FUD”. FUD is a coined word that stands for Fear, Uncertainty, and Doubt and is used not only in crypto assets but also in the marketing industry.

Simply put, FUD is used to mean “disinformation” or “negative campaign.”

In the world of crypto assets, people who want to make prices move according to their wishes sometimes try to manipulate prices by spreading false information. This falsehood is called FUD, and is mainly used to warn people such as “That information is FUD” or “Please be careful about FUD.”

When performing fundamental analysis on crypto assets, it is important to find reliable sources of information to avoid being fooled by such FUD.

Information collection method

As mentioned above, when performing fundamental analysis on crypto assets, it is important to find a reliable source of information to avoid being fooled by FUD (misinformation) and fake news.

Here are four reliable sources of information.

Government/Administrative Agency

Crypto-asset-related information released by governments and administrative agencies is essential analytical material for fundamental analysis. In the case of Japan, these include the Financial Services Agency and the Ministry of Economy, Trade and Industry.

Furthermore, since crypto assets are financial products that are traded around the world, it is necessary to pay attention not only to domestic but also to information released by foreign governments. In particular, information released by economic powers such as the United States and China often has a big impact on the market, so be sure to check it as much as possible.

Crypto asset exchange

Information released by crypto-asset exchanges also has a significant impact on the market. In particular, be sure to check information regarding new listings and delistings, as this is likely to have a significant impact on price fluctuations.

Crypto asset development and operation team

Official information released by crypto asset development and operation teams is essential for fundamental analysis.

In particular, information about currency technical updates and partnerships with major companies is the most important information that can easily lead to price increases. Follow the official account on SNS such as Twitter, Facebook, Telegram, etc. to get information from the management team as soon as possible.

news media

Media outlets such as newspapers and news sites are also valuable sources of information. In particular, web media that distributes news related to crypto assets is recommended as it allows you to obtain highly fresh information.

There are limits to gathering information on your own, but by making good use of these media, you can efficiently collect the information you are interested in.

Frequently asked questions about fundamental analysis

We will introduce frequently asked questions regarding fundamental analysis in a Q&A format.

Q: Is fundamental analysis effective for crypto assets?

Fundamental analysis can also be considered effective for crypto assets.

Crypto asset trading has a strong aspect of information warfare. To make a profit, it is important to be able to obtain information faster than other investors and utilize it in your trading.

The basis of fundamental analysis is information gathering. By checking currency information and economic news daily, it will be easier to predict future prices.

Q: Which is recommended: fundamental analysis or technical analysis?

Both analysis methods have advantages and disadvantages, so it is impossible to say which one is better.

Technical analysis, which predicts future prices from past chart movements, is suitable for short-term price forecasting. On the other hand, fundamental analysis, which makes predictions based on economic trends and financial conditions, is suitable for medium- to long-term price forecasting.

We recommend that you memorize both analysis methods and use them on a case-by-case basis.

Planned operations using fundamental analysis

Fundamental analysis has benefits such as avoiding risks and opportunity losses and helping predict medium- to long-term prices.

However, it is important to note that fundamental analysis does not always lead to accurate predictions. When trading, do not overdo it, and keep in mind a planned operation.