How to predict cryptocurrency price using fundamental analysis

How to predict cryptocurrency price using fundamental analysis – Photo: Shutterstock

With cryptocurrencies, one thing is clear: new investors are entering the space en-masse with the total market capitalisation of all crypto assets surpassing $2tn
for the first time in September this year– a tenfold increase since early 2020.

CoinMarketCap data currently lists over 15,000 cryptocurrencies. The industry is expected to reach a global market capitalisation of $4.94bn by 2030, growing at
a compound annual growth rate (CAGR) of 12.8% from 2021 to 2030.

Beyond the numbers, crypto is also attracting a younger crowd. A study published by the University of Chicago’s National Opinion Research Center (NORC)
shows that most cryptocurrency traders are below the age of forty.

Another report by BTC Markets showed that there was a 24% increase in the number of 18-24 year olds investing in cryptocurrency during the 2020-2021
financial year. The same study found that the rate of new female users registering for the BTC Markets cryptocurrency exchange grew by 172% in the 2020-2021
financial year, compared with a 79% growth rate for men.

However, an intriguing insight from the NORC study is that 62% of people claim they do not understand crypto, while 31% cited this knowledge gap as a reason
why they don't invest.

Analysis is crucial for forecasting. So, how can investors predict cryptocurrency prices? The common assumption that crypto prices are linear is an
oversimplification of the factors affecting a coin’s value. Cryptocurrencies can often experience sharp price rises and falls.

You might be wondering what type of analysis you need to use and how microeconomic and macroeconomic conditions affect cryptocurrency markets, or there
might be questions about how variables determine value.

In this article, we detail the end-to-end process of fundamental analysis through a forecasting lens in order to help you learn how to predict top gainers in
cryptocurrencies.

How to predict cryptocurrency prices

• Technical analysis is the study of statistical trends based on indicators such as historical price movements, patterns and price charts.

• Fundamental analysis involves the evaluation of all aspects of the market, including domestic and global factors, as well as political and economic
conditions.

• Quantitative analysis looks at the market’s historical performance. It’s used in conjunction with fundamental and technical analysis. Investors can perform
quantitative analysis through financial ratio calculations such as earnings per share (EPS) or discounted cash flow (DCF)

Fundamental analysis is especially useful for those seeking to predict if a crypto could rise or fall, because it draws inferences from future projections rather than
past events represented as price charts.

Fundamental analysis can potentially aid long-term investment decision making by helping traders to determine the value of a cryptocurrency based on a broad
range of available information.

What is fundamental analysis?

By assessing the intrinsic value of a cryptocurrency, you can determine whether the price is overvalued or undervalued. This can be done by analysing qualitative
factors such as the state of the economy, cryptocurrency market conditions, the crypto company’s management or market capitalisation.

If you’ve ever found yourself directly or indirectly examining the fundamentals of a cryptocurrency project, from its market capitalisation to the utility of its native
token, then you have conducted fundamental analysis.

The key differentiator between fundamental analysis and technical analysis is that the former doesn’t consist of factors that are immediately apparent, in the
sense that they’re less tangible and more qualitative than statistical trends, like historical market data or price charts.

Fundamental analysis looks at the larger picture, considering as many factors as possible, while technical analysis is centred around price action and historical
trading volume in order to help investors identify short-term trading opportunities.

While the purpose of technical analysis is to identify trend changes that precede the fundamental trend, fundamental analysis enthusiasts subscribe to the notion
that there must be a cause and effect between fundamental factors and price changes.

The benefit of fundamental analysis is that it’s focused on external factors and how these can affect the performance of cryptocurrencies relative to the relevant
microeconomic and macroeconomic conditions that could have an effect on the markets.

The mechanics of fundamental analysis

The first is a top-down approach – used more widely than the second bottom-up approach. It prioritises macroeconomic, national or market-level factors such as
the economy, interest rates, inflation, employment and gross domestic product (GDP).

A bottom-up approach de-emphasises macroeconomic and market cycles and instead focuses on microeconomic factors such as financial earnings or a company’s
revenue.

Cryptocurrency fundamental analysis follows similar principles to other financial markets that contain more traditional assets like stocks. There is less emphasis
on a company’s financial statements, balance sheets or historical financial performance.

Investors seeking to learn how to predict crypto market trends can consider the following parameters instead:

• The coin’s market capitalisation

• Circulating supply and total supply of tokens

• Token utility and use cases

• Community size – a significant metric for achieving wider adoption of cryptocurrencies

• The crypto project’s leadership team

• The token’s trading volume

• Listings on big crypto exchanges

• Partnerships with trusted institutions

• The latest news surrounding the coin

• Government regulation

When performing fundamental analysis, it is key to note that no single metric can give you a full picture of a cryptocurrency investment. By examining the full
scope of the aforementioned information, you can develop a more comprehensive outlook on a given project and possible changes in cryptocurrency prices. You
can also use a company’s whitepaper to build a broader picture.

What’s more, you can examine blockchain metrics, which reveal crucial aspects of a cryptocurrency’s underlying technology and processes.
For example, a hash rate is the total combined computational power used to mine and process transactions on a blockchain. For instance, bitcoin uses a Proof-of-
Work algorithm based on cryptographic hashing and lower hash rates have been known to indicate a loss of mining interest on the part of investors.

When conducting fundamental analysis for the purpose of predicting cryptocurrency movement, other factors you can use include user adoption rates and media
coverage.

Crypto-specific news can provide useful information about a cryptocurrency’s public perception, as well as any company plans and partnerships, which could
boost cryptocurrency growth or fall. Overall, any relevant news about the cryptocurrency project’s development or the wider economy can help to reshape
fundamental analysis-based estimates.

“When predicting the price of a cryptocurrency, you need to take scarcity, mainstream adoption and government regulation into account,” said Milko Trajcevski, a
financial analyst at Invezz.

“I look at historical price performance to see what caused respective spikes or drops in value. Some cryptocurrencies can even rise in value through social media
hype while others are limited by the technological concerns of blockchain such as scalability,” Trajcevski told Capital.com.

“You can also examine a crypto’s all-time-high value to see how far it's risen each month and then build a realistic image for yourself on how far you think the
price will climb.”

FAQs
What influences cryptocurrency prices?

Cryptocurrency prices are determined by variables that span past, current and future trends, including domestic and global factors, as well as political and
economic conditions. However, forecasts for future trends shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before
investing. And never invest or trade money you cannot afford to lose.

How to predict cryptocurrency spikes?

Traders and investors can use fundamental analysis and follow the cryptocurrency project’s news to forecast the price. Cryptocurrency is a nascent industry. You
should do your own research, evaluate the level of risk you are prepared to accept before investing. And never invest money you cannot afford to lose.

What are common cryptocurrency price prediction mistakes?

When performing fundamental analysis, it is key to note that no single metric can give you a full picture of a cryptocurrency investment, however by examining
the full scope of a cryptocurrency project, you can develop a more comprehensive outlook.

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