Many traders in traditional markets (equities, commodities, etc.) find success using a fundamental analysis (FA) approach. There are many different fundamentals that drive price in traditional markets, including dividends and earnings to name just two. But considering that the cryptocurrency space is a new and emerging market, is fundamental analysis really effective in trading crypto?
Why does fundamental analysis work in traditional markets?
Professional fund manager Sean Hannon states that “by understanding a business and its competitive factors, we have a rational basis upon which to assess performance at a later date”.
Traditional markets have a significant amount of data to base trades upon. For example, stocks often see related price action based on when earnings for the company are released, and what the earnings turn out to be. There are numerous other factors that correlate to a stock’s price, based on the decisions of the company, etc.
The Crypto Difficulty
There are several reasons why fundamental analysis is difficult in crypto:
- Buying an altcoin does not give ownership to any part of the crypto project, so the coin/token value does not necessarily correlate with how well the project does.
- One cannot calculate aspects such as Price to Earnings Ratio, Projected Earnings Growth, and Return on Equity.
Perhaps the most difficult aspect of applying FA to crypto is that the cryptocurrency market is almost entirely speculative. Few projects currently have a successful working product. In addition, it is almost impossible to give crypto companies any type of valuation because the entire market is new.
No one knows how valuable any of these projects will be in the future, because there is no historical benchmark. Also, many projects’ coins/tokens are often not even used for their intended purposes and are simply traded instead.
Crypto FA Application
There are ways in which FA seems to have an impact in the crypto space. Buy the rumor sell the news seems to be an effective method in crypto. As the notable Crypto Bobby stated on Twitter (referencing EOS); “buy the testnet, sell the mainnet”?
There are many instances of this being effective. Correlated price action in anticipation of BTC futures, and the BTC price leading up to the Bitcoin Gold fork are two great examples.
It can also be effective if a trader has a great “feel” for market sentiment. Since cryptocurrency markets are currently almost entirely speculative, some people are good at trading based on market sentiment, and different market atmospheres. This is essentially trading as a whole anyway.
Regardless, the cryptocurrency space shows significant promise for the future. Fundamental aspects will likely develop as the market continues to develop.
Disclaimer: These are the writer’s opinions and should not be considered investment or financial advice. Readers should do their own research.