Fundamental Analysis for Cryptocurrency Traders

While there are many different methods for evaluating the price of a bitcoin, fundamental analysis is probably the most complete way to find out its true value.

Fundamental analysis is an evaluation of economic, financial and other key variables, known as fundamentals, to safely determine their true value. It differs from technical analysis (a companion to fundamental analysis) in that the first one that is more interesting to look at is the safe movement of prices to make more informed and informed decisions.

However, when evaluating the value of bitcoin, investors are enthusiastic about evaluating key aspects of the underlying cryptographic technology, for example, how its scaling challenges can affect the value of the digital currency.

However, if digital currency transactions develop to become more expensive and time-consuming due to block size limitations, this could have an impact on demand, which in turn will lower the price of Bitcoin.

Basic Understanding

While investors use fundamental analysis to evaluate different asset classes, such as equities and fiat currencies, some analysts also state that using this approach they can evaluate bitcoin in a complex way.

For example, an investor can evaluate a company's stock by looking at certain items on the balance sheet, but bitcoin does not generate product earnings or revenue figures.

Jacob Eliosoff, a cryptocurrency fund manager, spoke of the situation: “It's hard to get a precise bitcoin valuation of future cash flows”, as you can with other assets like General Motors stock.

As a result, traders interested in performing fundamental analysis on bitcoin have developed a “new set of metrics,” according to Charles Hayter, founder and CEO of CryptoCompare.

However, although bitcoin has been described as a new asset class, the same rules that apply to fiat currencies will also apply to cryptocurrencies, said Tim Enneking, chairman of Crypto Asset Management. “All the laws of the economy apply – in full – to cryptocurrencies,” he said.

As a result, he emphasized that the starting point for all fundamental analysis is the supply and demand that drives a price.

Request Key Role

Several variables affect the demand for bitcoin, including adoption by users, transaction and trading activity.

Many of the analysts noted the importance of user adoption, which is critical to the long-term viability of the cryptocurrency. As for what drives user adoption, analysts say that money can have many uses. At the most basic level, money is a store of value, a medium of exchange and a unit of account.

Beyond this to a lesser extent, bitcoin has never really been used as a unit of account, Enneking said.

But bitcoin has managed to provide significant traction as a medium of exchange. Hundreds of companies – including eBay and PayPal – have agreed to accept this digital currency which was founded in 2009.

In addition, the number of confirmed transactions per day generally experiences a steady upward trend, according to data from Blockchain. Transactions began to surge in early 2012, increasing to more than 7,000 transactions per day in early April 2012 to more than 300,000 per day until now.

Despite this informative data, Eliosoff asserts that this is not the best indicator, because of the large number of transactions on the blockchain it is “generated by automated systems and does not represent economic activity, especially on scalable chains with low fees.”

Instead, merchants have to figure out for themselves which transactions the sender actually made or received from someone else.

Enneking concludes, because bitcoin is gaining so much adoption and retailers broadly do not see an increase in sales through bitcoin, there has been a major shift in the focus of cryptocurrencies as a medium of exchange and store of value.

Arthur Hayes, co-founder and CEO of leveraged bitcoin trading exchange platform BitMEX, said similarly, that so far bitcoin is considered a store of value which is the main driver of the digital currency's price hike.

The Key Role Of Supply

The bitcoin protocol limits the number of its supply units to 21 million, and 16.3 million bitcoins are currently in circulation. Furthermore, the new supply levels will also continue to be determined by the bitcoin protocol. This is in stark contrast to the traditional monetary system, where central banks have the ability to print money whenever they want.

However, there are some who object to the change in bitcoin supply.

Satoshi Nakamoto, the pseudonymous creator of bitcoin, is said to hold roughly 1.1 million bitcoins that have not moved at all since they were first mined. And many people in the bitcoin community think they can never, seeing these coins as “dead bitcoins.” Forget that for a moment, it's impossible for us to know how many “dead/silent bitcoins” actually exist, says Enneking.

Therefore for the first few years bitcoin appeared, this digital currency unit did not have a high monetary value. And when the price started to move up, stories of people holding/holding bitcoins started to become very common and many.

Big Show

Analysts also note the important role that major events play in determining the price of bitcoin. These incidents are sometimes directly related to bitcoin, such as hacks of major exchanges, or the diminishing public urge to solve network-scale dilemmas.

“Events that impact the price of bitcoin are non-bitcoin events like Cyprus and Greece.”

Hayes from BitMEX also spoke about the importance of macroeconomic events, emphasizing that volatility will be the fuel that usually strengthens alternative assets like bitcoin.

According to Chris Burniske of ARK Invest. During these times of economic turmoil, bitcoin can act as a “hedging tool,” he said.

Key Considerations

By leveraging fundamental analysis, bitcoin traders can derive the true value of the cryptocurrency and gain a better sense of whether it is a good time to buy or sell.

However, some analysts also criticize fundamental analysis, relying too much on fundamental analysis, without resorting to technical analysis, can cause traders to buy or sell at less than ideal times, they said.

To manage this risk, bitcoin traders can combine fundamental analysis with technical analysis. For example, a fundamental analyst might look at several demand indicators, conclude that bitcoin is underbought, and then leverage technical analysis by reading charts to find the best entry points.

Alternatively, a trader might use technical analysis to determine that it is a good time to sell, and then use fundamental analysis to confirm this view by looking at the main drivers of demand.

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