Cryptocurrency prices are quite volatile. Therefore, every trader or investor needs to have adequate knowledge if they want to find money in it.
Just like any other asset, understanding crypto assets requires knowledge of technical and fundamental analysis. You cannot choose one, but must combine the two to determine the right strategy. For example, determining the right time to enter and exit the market to projecting future cryptocurrency price trends.
Indeed, you cannot understand both analyzes overnight. However, your knowledge will increase with experience. Well, to start understanding it, you can read an explanation of the fundamental and technical analysis of cryptocurrencies below.
Cryptocurrency Fundamental Analysis
Fundamental analysis is the approach taken by market participants to determine the intrinsic value of an asset.
They usually collect this information to determine whether an asset is overvalued or undervalued. After that, they can then estimate when the right time to exit or enter the market.
To understand the fundamental aspects of an asset, Buddy Cuan can take the example of stocks. Stock prices can fluctuate depending on changes in the factors driving demand and supply, such as financial performance or economic growth figures. From there, investors can perform fundamental analysis, for example the ratio of shares to book value (Price-to-Book Ratio) to determine whether the stock is worth buying or not.
Unfortunately, similar fundamental analysis techniques cannot be applied to cryptocurrencies. Because cryptocurrency is not a financial asset. Thus, a different approach is needed to understand the fundamental analysis of crypto assets.
So far, cryptocurrency experts use three main approaches in fundamental analysis: the on-chain approach, the project approach, and the financial approach.
The on-chain approach is an analysis based on the data contained in the blockchain. For example, data on changes in the number of transactions, transaction values, changes in active addresses (aka blockchain addresses), and the difficulty level of mining crypto assets (hash rate). Usually, if all of that data grows, it means that there is a strong demand for cryptocurrencies.
This approach is more qualitative than the on-chain approach. In this case, market participants skin information such as the figure of the blockchain and cryptocurrency developer, the initial blockchain document (whitepaper), and the roadmap for the development of the blockchain technology going forward.
Market participants believe that the demand for cryptocurrencies will skyrocket if a blockchain technology is developed by a credible person and has a clear future value.
Through this approach, market participants try to analyze the demand and supply of crypto assets through basic indicators prevailing in the financial world. For example, changes in the value of market capitalization, trading volume, and the amount of supply of the cryptocurrency.
Cryptocurrency Technical Analysis
In contrast to fundamental analysis, technical analysis is useful for estimating future cryptocurrency trends based on data that has happened in the past. From there, market participants can determine the right time to take advantage of the opportunity or even have to leave the market.
Technical analysis uses the assumption that trends or patterns in the past always repeat and will return in the future. Well, to estimate whether the trend or pattern will really happen again, market participants will test it using technical analysis indicators.
For crypto asset market players, there are two very basic technical analysis indicators that become “weapons” when measuring the direction of cryptocurrency prices. These two indicators form the foundation for a variety of more complex technical analysis. What are the two indicators in question?
Trend lines are useful indicators for crypto asset market participants. Because, this line shows the direction of the cryptocurrency price trend in the future.
An uptrend is indicated by increasing highs over time. On the other hand, a weakening trend is indicated by the decreasing of the lowest point over time. By understanding trend lines, crypto asset market participants don’t need to panic about short price volatility.
However, reading trends can be quite tricky. Sometimes, a trend can last in the long, medium, or short term. Or, there are times when the price of cryptocurrency does not show significant movement, or commonly called sideways.
2. Support and Resistance Levels
Support and resistance levels are the two main keys in looking at the demand and supply of coins.
Support is a price level at which the downward price trend will stop temporarily. Because, at that time, traders were collecting assets while the price was cheap. As a result, the price will bounce back and the trend will move up again.
That support point will be a crucial zone in determining whether the upward trend will really continue. If the asset price even drops past the support line, then there is a possibility that the asset price will continue the weakening trend.
Meanwhile, resistance is a price level at which the uptrend suddenly stops. At that time, traders were taking profit taking considering the price of the asset was moving. The price trend will then slop back.
Just like support, resistance will be an important point to assess whether the downward trend will continue. If the price of the cryptocurrency breaks through the resistance level, traders can expect that the price of the asset will continue to soar.
How to use the indicator? Sobat Cuan can see an example by paying attention to the following ETH price chart:
Conclusion of Fundamental and Technical Analysis
Fundamental and technical analysis complement each other. However, the share of both in determining the cryptocurrency strategy is not always balanced.
Those who are fond of trading will definitely tend to use technical analysis to look for cash gaps. Meanwhile, those who want to invest long-term are of course more inclined to stick to fundamental analysis.
But novice investors must be confused about choosing between investing in long-term crypto (aka HODL) or trading when setting foot in the cryptocurrency realm. So, what is the most appropriate money-making activity from cryptocurrency?
Which One Should You Choose? HODL or Cryptocurrency Trading?
It all comes back to your respective risk profiles. Keep in mind the concept that high return will come with equal risk.
By trading, you can indeed get cash instantly if the cryptocurrency price is lucky. However, this activity will be suitable if you have a very aggressive risk profile, dare to bear losses, and have qualified technical analysis knowledge.
So, this activity is not recommended for those who are still new to the ins and outs of cryptocurrencies. Even if you want to try trading, make sure you don’t risk all your money in it. Plus, diligently monitor the price movements of crypto assets at all times.
Meanwhile, funds from HODL may not be instant like trading. But at least, this activity is low risk. Moreover, all you need to do is store your crypto assets in the hope that their value will grow in the future.
Now, you too can HODL while growing the number of pieces of your crypto asset. You can do it in Pluang Cuan! At Pluang Cuan, you only have to save Bitcoin and Ether (ETH) to get a maximum yield of 3.5% per year.
You can get these returns in the form of additional Bitcoin or ETH chips. For example, if you save 1 Bitcoin, then your Bitcoin portfolio next year can be a maximum of 1,035 Bitcoins! Come on, HODL at Pluang Cuan now!