Fundamental analysis in crypto trading helps traders see beyond the hype, focusing on a project's tech, team, and real-world use cases. It enables them to choose tokens with long-term potential, not just mere speculation.
In this article, we will discuss how traders can use fundamental analysis to trade crypto.
The role of fundamental analysis in crypto trading
Fundamental analysis involves evaluating the intrinsic value of a digital coin by examining various qualitative and quantitative factors. It digs deeper than short-term price swings and examines the tech behind the coin, the team's experience, and its real-world potential.
The analysis enables investors/traders to identify cryptocurrencies with long-term potential and make informed decisions about purchasing, holding, or shorting cryptocurrencies.
Top fundamental indicators used for crypto trading
Token utility
Token utility refers to the specific purpose and functionality a cryptocurrency serves within its blockchain ecosystem. A strong token utility indicates the cryptocurrency has a real-world use case beyond just speculation, providing traders a bullish outlook for the same.
For instance, Ethereum's token (ETH) is used to pay transaction fees and power decentralized applications built on the Ethereum blockchain.
Adoption rate
The adoption rate measures how widely used a cryptocurrency is in real-world transactions. A high adoption rate suggests the cryptocurrency is gaining mainstream acceptance and has the potential for future growth, suggesting a bullish trend for the same and vice versa.
For example, Bitcoin's (BTC) increasing adoption by major corporations and payment processors indicates growing confidence in its use as a digital asset.
Decentralized Finance (DeFi) protocols
DeFi protocols are applications built on top of blockchains that enable a broad range of financial services traditionally offered by banks, such as lending, borrowing, and trading.
Cryptocurrencies that play a central role within DeFi ecosystems tend to be viewed favorably by investors due to their potential utility and integration with this growing financial landscape. This suggests a bullish outlook for the cryptocurrency and indicates traders to enter long positions for gains.
Supply and demand dynamics
The price of a cryptocurrency is influenced by the basic principles of supply and demand. Scarcer cryptocurrencies with a limited total supply and high demand from investors tend to have a higher value. Bitcoin, for example, has a capped supply of 21 million coins, which contributes to its incremental value, signaling traders to enter more trades and catch the uptrend.
Whitepaper analysis
A whitepaper is a technical document that outlines the core details of a cryptocurrency project, including its goals, the technology behind it, and its tokenomics. Carefully analyzing a whitepaper can help traders understand the potential of a project, its development roadmap, and the team's vision. Once a trader analyzes the whitepaper for a crypto, they can decide if they want to enter the trade for that crypto or not.
Tokenomics
Tokenmics refers to the economic model of a cryptocurrency, including the distribution of tokens, the inflation rate (if any), and potential use cases for the token within the project's ecosystem.
A well-designed tokenomic model can help ensure the long-term sustainability of a cryptocurrency project by balancing supply and demand for the token, signaling traders a bullish outlook for the crypto and vice versa.
Staking and yield farming analysis
Staking and yield farming are two methods for earning rewards with cryptocurrencies. Staking involves locking up one’s crypto holdings to support the security and operation of a blockchain network.
Yield farming involves using DeFi protocols to generate returns on one’s crypto holdings by strategically lending or borrowing them. The availability of staking and yield farming options can influence crypto investors seeking additional returns on their holdings and the absence of the same might turn the traders away from the particular crypto.
Step-wise guide to using fundamental analysis for crypto trading
Define investment goals
Fundamental analysis helps medium to long-term crypto investors. It helps them spot projects with staying power by examining their tech, team, and real-world use cases. This filters out hype and equips traders to make informed decisions about trading crypto.
With realistic expectations based on the project's timeline, traders can build conviction and avoid impulsive trades based on short-term noise. While not ideal for quick gains, fundamental analysis helps build a long-term crypto portfolio.
Research and identify promising projects
Next, traders should explore project listings, filtering by categories like DeFi, smart contracts, or specific use cases that interest them. This also includes reading the whitepapers of the project and looking for clear problem statements and solutions.
Evaluate token utility and adoption
Evaluate tokens with the help of fundamental analysis that lets traders assess a token's true worth by examining its utility. A project with businesses or developers using its token suggests higher future demand which traders can enter.
Analyze market conditions and regulations
Consider overall market sentiment and identify potential catalysts that could drive up the price of the chosen cryptocurrency. Traders must also be updated on regulatory developments in key markets that could impact the project or the broader crypto space.
Develop an investment thesis
Once a trader has identified the crypto they want to trade, they must summarize their findings. Compile the research on the project's technology, team, tokenomics, and market potential.
Define entry and exit points
Set clear price targets based on the analysis and risk tolerance. Since the crypto market is highly volatile, traders must also be prepared to adjust their strategy as needed and keep track of project developments, news, and market trends in the crypto space.
Top 3 fundamental analysis tips for crypto trading
- Study tokenomics & supply dynamics: Traders should not just purchase a token because it is popular, but understand the economics behind its popularity. A well-designed tokenomic model with a limited supply can signal potential value growth.
- Research development team & community: Research the crypto team's experience and expertise in blockchain technology and relevant fields. Look for credible individuals with a proven track record. Additionally, a strong and active community around the project suggests user interest and potential for long-term gains.
- Analyze crypto partnerships: Analyze the project's partnerships with established companies or other prominent players in the crypto space. Strategic partnerships can drive adoption and fuel future growth for the project and its token.
Using fundamental analysis as a part of crypto trading
Fundamental analysis provides traders with informed details about a cryptocurrency by delving deeper into the project's true value (team, tech, utility). This enables informed crypto decisions, but for a complete picture, traders should combine it with technical analysis (price charts). Fundamental analysis combined with technical analysis for crypto leads to better decisions in the emerging crypto landscape.
Disclaimer:
- All material published on our website is intended for informational purposes only and should not be considered personal advice or recommendation. As margin FX/CFDs are highly leveraged products, your gains and losses are magnified, and you could lose substantially more than your initial deposit. Investing in margin FX/CFDs does not give you any entitlements or rights to the underlying assets (e.g. the right to receive dividend payments). CFDs carry a high risk of investment loss.
