Fundamental and technical market analysis

To select a suitable investment, two methods of financial asset analysis are used: fundamental and technical. These methods allow one to determine an adequate current price and predict how the price may change in the future, minimizing the risk of financial loss.

Fundamental analysis tools work to assess the intrinsic value of an asset. Technical analysis involves selecting a suitable asset by studying price trends.

Let's take a closer look at both methods.

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Fundamental analysis (FA)

This is a method for forecasting the market value of companies or assets, which analyzes all factors that could influence the asset's price. These factors range from macroeconomic factors, such as the overall economic environment and the state of the chosen niche in particular, to microeconomic factors, such as the reputation of the company's management. The goal of FA is to establish a fair price for the asset and determine whether the company or asset is being overvalued or undervalued.

FA begins with the understanding that the future potential of an asset or company is influenced by both its past performance and the various microeconomic and macroeconomic conditions currently influencing the market.

Fundamental analysis is traditionally used to evaluate stocks, but it can be applied to almost all types of assets, including cryptocurrencies.

Fundamental analysis of cryptocurrencies involves studying public blockchain data, known as on-chain metrics. These metrics include market-to-market ratios, market capitalization, realized market capitalization, return on spent output ratio, transaction analysis, and many others.

It's worth noting that fundamental analysis is not yet well suited to cryptocurrencies. This is a relatively new asset class, and a standardized basis for determining their market value has not yet been developed. Moreover, part of the market operates under the influence of speculation and narratives, which reduces the possibility of conducting adequate analysis. In the future, as the market develops, more accurate methods for valuing crypto assets may be developed.

Technical analysis (TA)

This is a set of tools for forecasting possible price changes based on previous price changes in similar circumstances.

Technical analysts don't attempt to determine the fair price of an asset based on fundamental analysis. They study the history of price movements and, based on this, determine future opportunities. TA determines market sentiment and its relationship with price fluctuations, and makes forecasts based on this. These forecasts allow for the assessment of potential risks, making trades more reliable and secure.

The foundation for TA was the work of Charles Dow. He published a series of articles reviewing his theories, which have been adopted by modern analysts.

TA is based on three assumptions:

1. All factors that could influence the asset's value have already been taken into account and factored into the price. All that remains is to analyze the price dynamics.
2. Price trends follow a certain pattern, and an asset's price is more likely to follow this pattern than to move randomly. Most technical trading strategies are based on this assumption.
3. History tends to repeat itself. This is true for prices, too. This tendency to repeat itself is linked to the relatively predictable psychology of the market, driven by emotions of fear and desire. Experts analyze the connection between people's emotional states and market movements and predict future trends. Some forms of technical analysis have been used for over 100 years, but remain relevant today because they reveal regularly repeating patterns in price movements.

TA can be applied to any financial assets, including cryptocurrency.

FA vs TA?

When choosing an analysis method, it is always determined by the objective for which the analysis is being conducted. It's also worth remembering that the best results are always achieved with an integrated approach. This approach is also called fusion. Traders who practice fusion combine several strategies, selecting the most suitable tools from each method.

Resume

• Fundamental analysis allows you to determine the fair value of an asset.
• If the actual value exceeds the stated price, the asset is considered undervalued and is recommended for purchase.
• Technical analysis ignores fundamental principles and focuses on past price trends and asset purchase volumes.

Both methods are used to research and predict future trends in asset prices, each method has its supporters and opponents, but the most effective is an integrated approach.

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