Fundamental analysis constitutes another of the usual aspects in the form of studying cryptocurrency markets. This approach, unlike technical analysis, tries to detect the authentic and objective value of a cryptocurrency or token, regardless of the market price. Knowing its value, you will be able to understand if a cryptocurrency is undervalued and represents an investment opportunity, or vice versa.
El fundamental analysis It is a tool used by traders to evaluate and study the variables that affect a value. This tool is focused on studying the external factors, facts or influences that affect the price of an asset. The first mentions of fundamental analysis began in the year of 1934. At that time, Benjamin Graham y David Dodd, they introduced this concept in their book SecurityAnalysis.
Since its creation, fundamental analysis has been a very useful tool to analyze the market together with technical analysis. This is because fundamental analysis focuses on how external factors affect the value of a security. Unlike technical analysis, which focuses on studying the charts of a market to predict how value will act.
In the analysis, the most common analysis tools are:
- Periodic financial statements.
- Financial ratios analysis
- Valuation techniques for assets or companies.
- Economic forecasts: analysis of the environment.
- General economic information.
- Any type of additional information that affects the value of a title.
Types of fundamental analysis approach
In fundamental analysis, there are two types of approaches that seek to offer the best response to the investor. These approaches are thought of analyze micro and macroeconomic variables in one way or another. In this way we are left with the following types of approaches:
Top-Down Approach
In this type of fundamental analysis macroeconomic variables are studied first and then microeconomic variables. This means that decisions are made taking into account global information first, until the most detailed and specific values and variables are addressed. An example of this approach would be a tiered analysis as follows:
- Study of the world economic situation
- Study of the most attractive countries to invest in
- Within each of these countries, the sectors with the most potential are chosen.
- Within the sectors with the most potential, they are analyzed to be the most interesting to invest.
Bottom-Up Approach
This approach focuses first on the microeconomic variables and later on the macroeconomic ones.. In this case, contrary to the Top-Down approach, we start from a more specific vision until we go to a more global vision. For example:
- Companies with growth potential are chosen.
- Then an analysis of the sector or sectors in which those companies operate is carried out.
- The economic situation of the country or countries in which they operate is studied.
- Finally, the global economic situation is analyzed.
Advantages and disadvantages of fundamental analysis
Like all tools, fundamental analysis has advantages and disadvantages in its use. In the following we will explore some of them in order to learn about them.
Advantages
Among the advantages of fundamental analysis we can mention:
- It allows investors to collect and analyze information external to the internal reality of the markets. This allows the investor to have a clearer vision of the reality of the market. Since the new information will let you know how the values react to different events.
- It offers a more comprehensive understanding of the value of an asset. In this way, investors can more accurately extrapolate the future value of said asset. This offers certainty when making an investment.
- It allows greater freedom of action compared to technical analysis. This is because fundamental analysis leads us to make decisions in the medium and long term. In comparison, technical analyzes lead us to act more repeatedly in the markets in order to adjust our decisions to the information provided by this type of analysis.
Disadvantages
However, like any tool, fundamental analysis also has disadvantages, and some of these are:
- The need for extensive knowledge and experience to carry out a good analysis. For a good fundamental analysis it is necessary to have knowledge in accounting, business and more specifically in the sector in question where the asset of our interest is located. This knowledge must also be accompanied by experience. This will finally be the one that will allow us to make better decisions according to the information analyzed. Simply put, applying fundamental analysis is more complex than technical analysis.
- Investment terms with a fundamental analysis are longer. This is so because a fundamental analysis requires more time and study than a technical analysis. This leads the investor to wait for certain market levels to know whether to sell or buy.
- While fundamental analysis offers a much broader view of markets, it can be outweighed by chance factors. ORna flood or drought that affects the price of cereals, or a war that affects the price of oil and other commodities. Fortuitous factors are one of the most serious problems in fundamental analysis because they cannot be fully anticipated. To this we can add negative legislative, political and economic changes that surprise the markets.
The fundamental analysis in crypto markets
In the case of crypto markets, fundamental analysis offers the potential to analyze the external reality that affects them. This is extremely important, because the crypto market due to its irregular situation in the world tends to react quickly to external factors. For example, regulatory pressures from countries such as the United States, the European Union or China, have a significant impact on the price of cryptocurrencies. Completely understandable question and that precisely this tool can help us understand.
Given these events, fundamental analysis takes on greater importance to recognize the fair value of crypto assets. Crypto market investors tend to use technology to carry them out quickly. It is not uncommon, for example, to see data on markets and external factors available at Slack, Telegram o Reddit. In the midst of an increasingly interconnected world, the use of technology to carry out these analyzes becomes more valuable.
Furthermore, among the main factors observed by the fundamental analysis in cryptocurrencies, the following can be mentioned:
- Usability and adoption. This point is intended to examine the level of usability and adoption of a cryptocurrency. The simpler the use and the greater the adoption of the cryptocurrency, the greater its real value.
- Government position and regulations. This point is aimed at studying how governments see a certain cryptocurrency and whether or not it complies with regulations. A favorable regulatory framework will obviously increase the potential of the cryptocurrency or if it is unfavorable it will limit its potential.
- Project development and media coverage. Find out how the development of the cryptocurrency project is progressing. Cryptocurrency development activity, its software, its community, and increased media coverage will indicate that the cryptocurrency has potential for greater value.