Chainalysis – a commonly used blockchain data company – recently invested in an unspecified amount of Bitcoin. The investment comes as Bitcoin's price creeps ever closer to all-time highs and surpasses its market cap record from May. Chainalysis Plans to HODL The data provider announced its latest investment in a blog post today and simultaneously confirmed a new partnership with NYDIG. NYDIG is a Fintech service provider for banks, corporations, and institutions. The financial company has allowed Chainalysis to add…
When it comes to trading, fundamental trading and technical trading are the primary schools of thought before approaching any market. Although both methods are at opposite ends of the spectrum, they are still used to forecast and research future cryptocurrency prices. They also have their advocates and adversaries, just like any investment strategy. Let’s have a more in-depth look at the two.
Fundamental trading is a method that involves evaluating the economic well-being of a country, and by extension, the currency. It trades on a detailed examination of a crypto’s intrinsic value by looking at the underlying factors influencing the economy, company, and industry. Some of these factors include growth prospects for the economy, revenues, expenses, income, the company’s competitive factors, and the expected return on equity or assets in the industry.
The main idea is to create a quantitative value for the cryptocurrency that would feature the above factors. Fundamental trading does not rely on trading swings and short term pricing, but it’s a long term investment approach because it may take time to realize the intrinsic value. As this approach looks at future expectations, it builds a valuation based on backward and forward information.
Fundamental trading can also help a trader predict the future value of the cryptocurrency and determine if it is overvalued or undervalued. Fundamentalists can discover investment opportunities not yet recognized by the market as a whole and can produce a profitable investment for a trader.
Technical trading evaluates investments and identifies trading opportunities by analyzing statistical movements gathered from trading activity. Tools used in technical trading focus on scrutinizing the ways supply and demand for a cryptocurrency will affect changes in price, volume, and implied volatility. Technical trading creates short-term trading signals from various charting tools. This approach also helps improve the evaluation of a crypto’s strength or weakness relative to the broader market or one of its sectors, which can help a trader improve their overall valuation estimate.
This type of trading attempts to forecast the price movements of literally any cryptocurrency that is generally subject to supply and demand forces. A trader can then capitalize on pricing opportunities and trends identified in the market activity around each share. However, this approach reflects on being a backward-looking methodology since it is purely based on historical market activity.
Fundamental Trading VS Technical Trading: Key Differences
Fundamental trading examines a cryptocurrency by identifying its intrinsic value for the long term investment. On the other hand, technical trading involves evaluating and forecasting the price of a cryptocurrency in the future, depending on the price movement and volume of transactions. It works best with short-term investments since it uses price charts in the market.
Technical trading uses shorter periods to analyze cryptocurrencies than fundamental trading, employing more extended periods since investors want to invest in a cryptocurrency whose value will increase in several years.
Technical analysis is concerned with trading, while fundamental analysis focuses on investment. Traders use technical analysis to make short term trades as it gives the best time to enter or exit the market., Most investors use fundamentals to buy or hold cryptocurrencies since it focuses on ascertaining the cryptocurrency’s actual intrinsic value.
Technical trading involves making decisions based on prices and market trends, whereas fundamental trading consists of making decisions based on the availability and statistically evaluated information. Therefore, fundamental trading considers both past and present data, while technical trading only reviews past data.
Fundamental trading uses financial statements like income statement, balance sheet, cash flow statement, etc. these data calculate ratios and metrics that reflect the crypto’s performance and growth rates. On the other hand, technical trading relies on chart patterns, price actions, and technical indicators like moving averages and oscillators calculated from cryptocurrency prices to analyze the future price trends.
Relationship Between Fundamental Trading and Technical Trading
Whether fundamentals drive technicals and vice versa or strong technical patterns can cause strong fundamentals among the many dilemmas traders face. Even when fundamental trading is at turning points, technical trading can continue to follow a strong or weak pattern, which might cause them to be out of sync. Besides, a cryptocurrency shock can also make technical trading out of sync with fundamental trading, either positive or negative.
Technical trading is best for cryptocurrencies in the short run unless there is an unforeseen shock. For example, technical traders can respond to a clash in real-time and don’t have to wait for the next reporting date. Using the charts will result in higher profits—Crypto chart and pattern form using the buying and selling activities which reflect the real-time cryptocurrency behavior.
Also, fundamental trading may lead to long-run profits when the market charts fail initially after a shock by taking advantage of short-term mispricing when the surprise causes the markets to overreact. It may be wise to follow fundamental trading after a collapse because news is temporary and may be positive or negative to a shock’s fundamentals. On the flip side, technical trading may provide the opportunity to take advantage of a correction after the news is delivered. So, both trading approaches should be in sync in the long run.
Technical trading is a tactical, short-term decision-making method that enables traders to build a vision of the market and make the right move at the right time. Fundamental trading should be applied strategically over more extended periods to help a trader obtain information about the overall state of the market and attractiveness of a specific cryptocurrency.
An investor can get confused in choosing between fundamental and technical trading as an investment strategy, but considering combining both approaches may provide the best opportunity to draw a complete investment picture with the most profits. Both trading approaches can create a confluence of information that should give a better investment than either used alone.