A
beginner's guide to buy and sell digital currencies
Fundamental analysis
So,
how do we determine the potential of a particular crypto asset beyond or
preceding its behavior in the trading market?
Whereas
technical analysis involves studying market data in order to determine one’s
trading strategy, fundamental analysis is the study of the underlying industry,
technology, or assets that comprise a particular market. In the case of
cryptocurrencies, a trading portfolio will likely consist of Bitcoin and
altcoins.
How
does one determine if an asset is based on sound fundamentals rather than hype,
exaggerated technology, or worse — nothing at all? For fundamental analysis of
new assets, several factors should be considered:
Developers
Before
investing in a cryptocurrency asset, it is imperative to assess the integrity
and capability of the builders behind it. What is their track record? What
software ventures have they brought to market in the past? How active are they
in developing the underlying protocol of the token? Since many projects are
open-source, it is possible to directly see this activity through collaborative
code repository platforms like GitHub.
Community
Community
is critical to cryptocurrency trading projects. The combination of users,
tokenholders and enthusiasts generates much of the driving force of these
assets and their underlying technologies. After all, there is always a social
element to any new technology. However, since there is a lot of money at stake
— and with the frequent presence of non-professional retail investors — the
space is often subject to toxicity and warring factions. Hence, a healthy,
transparent discourse within the community is welcome.
Technical specifications
Not
to be confused with market technical analysis, the core technical
specifications for a crypto asset include the network’s choice of algorithm
(how it maintains security, uptime and consensus) and issuance/emission
features like block times, the maximum token supply and the distribution plan.
By diligently assessing the protocol stack of a cryptocurrency network along
with the monetary policy enforced by the protocol, a trader can determine if
such features support a potential investment.
Innovation
While
Bitcoin’s intended use case upon its launch was electronic money, developers
and entrepreneurs have not only discovered new use cases for the Bitcoin
blockchain but have also designed entirely new protocols to accommodate a wider
range of applications.
Liquidity (and whales)
Liquidity
is critical for a healthy market. Are there reputable exchanges that support a
particular crypto asset? If so, what trading pairs exist? Is there a healthy
trading/transaction volume? Are large stakeholders present in the market, and
if so, what is the impact of their trading patterns?
However,
generating liquidity takes time, as a new innovative protocol may be live but
may not have instant access to liquidity. Such investments are risky. If
volumes are low and there are little to no trading pairs available, you are
essentially betting that a healthy market will eventually form around the
project.
Branding and marketing
Most
cryptocurrency networks do not have a central figure or company facilitating
the branding and marketing around their technology, resulting in branding that
may lack a cohesive plan or direction.
This
is not to discount the branding and marketing that does emerge from a protocol
over time. In fact, a comparative analysis of the marketing efforts of core
developers, corporations, foundations and community members can provide a
detailed overview of how certain players communicate value propositions to the
masses.
Infrastructure
This
quality of a crypto trade can be seen as the manifestation of a project’s
technical specifications. Despite what is written in white papers or presented
at conferences, what is the actual physical manifestation of the protocol in
question?
It’s
worth mapping out the stakeholders: the developers, block validators,
merchants/companies and users. Additionally, it is crucial to understand who
the stewards of the network are, their role in securing the network (mining,
validation), and how power is distributed among these stakeholders.
On-chain analysis
Given
that all cryptocurrencies operate on blockchain technology at a base level, a
new type of analysis that relies on data from blockchains has emerged —
on-chain analysis.
By
looking at supply and demand trends, transaction frequency, transaction costs
and the rate at which investors are holding and selling a cryptocurrency,
analysts are able to make precise qualitative and quantitative observations
about the strength of a cryptocurrency’s blockchain network, and its price
dynamics in a variety of markets.
On-chain
data also provides valuable insight into investor psychology because analysts
are able to align various macro and microeconomic events with the actions of
investors which are immutably recorded on the blockchain.
Analysts
look for crypto trading signals, patterns and anomalies in buying, selling and
holding behavior in correlation to market rallies, sell-offs, regulatory events
and other network-oriented events. This is to make forecasts of potential
future price movements and investor reactions to upcoming events like network
upgrades, coin supply halving’s and actions taking place in traditional
financial markets.
Trading crypto is risky
Risk
management is also a significant aspect of trading. Prior to entering a trade,
it is important to know how much you are willing to lose on that crypto trade
if it goes against you. This can be based on a number of factors, such as your
trading capital. For example, a person might wish to only risk losing 1% of
their overall trading capital either in total or per trade.
Trading
is simply a risky endeavor in and of itself. It’s almost impossible to predict
any future market activity with certainty. At the end of the day, it’s
important to make your own decisions, using available information and your own
judgement, as well as to make sure you are properly educated.
If you want to learn more about Cryptocurrency Trading,
feel free to leave your valuable comments. We are happy to assist you. All the
best for your future.
(All the material in this article
are only the views of the author, and couldn’t be taken as “Financial Advice”)
The End.
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