Trading: An Inside Look. Module 13:Fundamental Analysis
1. Terminology.
2. What is fundamental analysis?
3. Why is fundamental analysis needed?
4. How to conduct analysis?
5. Market cycles.
6. Market capitalization.
7. Dominance.
8. Technical analysis.
9. Useful resources.
1. Terminology
• Fundamental analysis — a type of analysis that studies internal and external factors that affect an asset both at the current moment and in the future.
• Investing — making a profit by helping projects in the early stages when they have not yet entered the market.
• Medium-term/long-term speculation — making a profit by buying assets after the launch of the project.
• Market capitalization of a project — is the circulating supply of an asset * the current price of the asset.
• FDV (Fully Diluted Market Cap) — market capitalization at the current price with the full release of tokens to the market.
• Maximum (total) supply of tokens — the number of tokens when fully unlocked.
• Circulating (current) supply of tokens — the number of tokens mined to date.
• Total market capitalization — is the sum of all market capitalizations of projects.
• Dominance — an index that shows the ratio of the market capitalization of an asset to the total market capitalization.
2. What is fundamental analysis?
Fundamental analysis is a type of analysis that studies internal and external factors that affect an asset both at the current moment and in the future.
This type of analysis is used for medium-term and long-term speculation in assets. Together with technical analysis (Smart Money), it allows you to achieve good results.
It is worth separating investment and medium-term/long-term speculation.
• Investing is making a profit by helping projects in the early stages when they have not yet entered the market. The funds received are used to support the life of the project.
Fundamental analysis is also used in investing, but without the use of technical analysis (Smart Money), which we study in this course.
• Medium-term/long-term speculation is making a profit by buying assets after the launch of the project. You buy assets from investors and no longer bring much benefit to the project itself.
In this case, assets can be bought both at the time of listing on the exchange (if you believe in the success of the project), and at any time (to buy Bitcoin at a good price, you also need to conduct an analysis).
3. Why is fundamental analysis needed?
As you understand, the best professionals and specialists are always well versed in their field. This is due to knowledge and experience. It is experience that allows you to squeeze the most out of your knowledge. However, even an experienced and intelligent specialist can become irrelevant. He can be as competent as possible in the studied methods, but the methods themselves can evolve and go far ahead.
This is where such a thing as a well-trained eye comes in. You need to stay in trend, follow new products and try to understand them. The strongest specialists are those who use all three parameters.
Why is this explained here? This is because for fundamental analysis you need to be as broadly developed as possible. We work in the field of cryptocurrencies, therefore we must have a basic understanding of all areas, the assets of which we are going to speculate. To get started, you can read our articles.
There is such a thing as the Gaussian normal distribution — one of the many elements of probability theory. This pattern indicates that the more chaotic parameters enter the system, the less likely the event will occur.
If, with short-term investment, the data provided by the chart may be sufficient due to the narrow time range, then with medium-term/long-term investment this is not enough. There are many different parameters that reduce the likelihood of our forecast.
We need to translate as many unknown parameters as possible into known ones in order to “ground” and increase the probability of a positive result.
4. How to conduct fundamental analysis?
Fundamental analysis is a rather creative business, in which a large number of different tools can be used, which everyone chooses for themselves. This analysis can be compared to the work of a detective, so let’s search.
Let’s immediately note that you need to maintain a balance between skepticism and active work. With a deep study of projects, you can understand that they are quite raw and do not have a clear plan for implementing the stated ideas. But always remember that the market is irrational, if everything came down to numbers and charts, then robots would rule here. Trends and hype introduce randomness into the market, a good speculator should not give slack and rely only on pure calculations.
5. Market cycles
Any market moves from a growth phase to a decline phase. This is in its nature. The conditions that cause the growth phase lead to excessive greed of market participants.
Less greedy people invest part of their savings, more greedy people invest all their savings, and the most greedy people invest borrowed or credit funds. This leads to a powerful growth impulse that is not balanced by corrections. Problems and imbalances accumulate.
Demand begins to fall as there are no new market participants. The profit that active growth gave disappears.
People who borrowed money begin to understand that they cannot repay the debt and sell their assets. Supply begins to prevail over demand. Next, those who have invested all their savings in the market begin to sell, and then the rest.
If short-term trading allows you to work even during a fall, then to find a medium-term and long-term position, it is worth saving your capital until the culmination of sales. This is where the best place to buy is with the best Risk/Reward ratio.
During a bear market, you need to actively look for projects that would be interesting for the following medium-term and long-term investments, as well as an implementation plan — where you are going to buy and when to sell. Let’s emphasize — when to exit the market! This is even more important than entry.
6. Market Capitalization
We will consider the total market capitalization and the market capitalization of a single project.
Let’s start with the market capitalization of the project, since the total market capitalization is built from it.
The market capitalization of a project is the circulating supply of assets multiplied by the current price of the asset.
Let’s take an example from the classic financial market. The project has a certain number of shares that allow you to receive dividends and own part of the company. The market evaluates the project and gives its assessment of the value of the share. If we multiply the share price by the total number of shares, we get the market capitalization of this project. Let there be no classic mechanism for owning a project in crypto, but tokens also have their own value, both speculative and technical. Many token projects are useful for the crypto market and are used for practical purposes.
Both parameters are dynamic. The number of tokens can increase or decrease. The current price of an asset depends on the balance of supply and demand and can also increase/decrease. An increase in this parameter indicates interest in the project and vice versa.
All the necessary information about the number of tokens, the current price can be found on aggregator sites such as Coinmarketcap, Coingecko, Dropstab and others.
1. Current token price.
2. Market capitalization.
3. FDV (Fully Diluted Market Cap) — market capitalization at the current price, provided that the tokens are fully issued.
4. Circulating (current) supply of tokens.
5. Maximum (total) and circulating (current) supply of tokens.
• Maximum (total) supply of tokens — the number of tokens when fully unlocked.
• Circulating (current) supply of tokens — the number of tokens mined to date.
For example, Bitcoin has a limited supply of 21,000,000 tokens. They can be obtained by mining, this is a reward for the work of the blockchain.
Over time, the number of rewards decreases (this is called halving). Currently, 19,132,662 tokens are circulating. 91% of tokens have been mined from the total supply.
• The market capitalization of a project is the circulating supply.
• The FDV of a project is calculated based on the maximum supply.
Total market capitalization is the sum of all market capitalizations of projects.
This parameter is used to assess the current state of the market. The chart can be analyzed. There are constant debates about whether Smart Money can be used to work with total capitalization, because it is still not a single asset. With an error, but it is possible.
Most of the total capitalization is made up of several dozen projects that are listed on major exchanges and most likely have the same market maker.
Bitcoin and Ethereum have more weight. As you may have noticed, the market moves in sync with BTC. Therefore, it can be assumed that the total market capitalization chart reflects the overall market manipulation.
Looks a lot like Bitcoin movements, doesn’t it?
7. Dominance
Dominance is an index that shows the ratio of the market capitalization of an asset to the total market capitalization.
The BTC.D index is mainly used — Bitcoin dominance, since it has the largest capitalization among cryptocurrencies and is an indicator of the state of the market.
As it was said about the general manipulation on the total market capitalization chart, on the BTC.D chart, the price does not react so strongly to zones of interest, but works well with liquidity pools.
The second cryptocurrency is Ethereum, it is also a serious project, which is an indicator of the altcoin market.
The importance of Ethereum is enormous, because it is the first project that allowed the use of blockchain as a large computer on which programs can be run. Most successful, reliable and large projects run on Ethereum. It currently uses the Proof-of-Stake algorithm. This further strengthened its influence on the alternative cryptocurrency market. Perhaps in the future, Ethereum will lead the top cryptocurrencies in terms of market capitalization, but for now this is not the case.
Information about the current dominance of Bitcoin and Ethereum can be found using Coinmarketcap.
In TradingView, you can find these charts by tickers — BTC.D and ETH.D.
If we analyze the above information, we can come to the disappointing conclusion that dominance shows the overflow of funds from one market segment to another.
- If BTC.D falls, it means that funds are flowing from BTC to another place.
• If BTC.D is growing, then funds are withdrawn from the market and flow into BTC.
As mentioned above, Ethereum shows the state of altcoins at the moment. Bitcoin is the main indicator of the market. By comparing these indicators, we can get the strength/weakness of altcoins at the moment. To do this, we use the ratio of the market capitalizations of Ethereum and Bitcoin, using the TradingView function — comparing tickers. In the search bar, enter ETHBTC and press Enter. Do not pay attention to the fact that such a pair does not exist, TradingView will pull up the data and show us a chart.
With the help of this chart, you can monitor the strength of altcoins and make trading decisions.
You may have heard of such a thing as altseason. This is a period when a combination of circumstances causes a strong growth of most altcoins. The most powerful altseasons occur when the bull market ends.
The price and dominance of Bitcoin are at their peak, and then there is a break in the market structure, the market reads this, BTC.D begins to decline. Decrease in BTC.D = redistribution of funds to other segments, that is, to altcoins. The growth of BTC on a declining BTC.D gives a powerful impetus to ETH.
The vast majority of funds go to Ethereum, but it is a heavyweight, and it takes a lot of money to move it. The rest of the altcoins do not need so much, a small amount of funds is enough for them. This is where the money is made.
There are many interesting correlations.
These data are very approximate, because more and more projects with large capitalizations are appearing. They blur the weight of BTC.D and make the indicator weaker.
8. Technical Analysis
By technical analysis, I certainly mean Smart Money. For medium-term and long-term analysis, you will need a 4H+ timeframe.
Fans of fast movements will have to understand that movements of this magnitude can take months.
The same tools are used, only without confirmation on younger timeframes. It makes no sense to look there for such time frames, because while your structure breaks several times on 15M, it will be the same candle on a three-day chart.
You should highlight the areas where you expect the price. We never know where the final culmination of sales will be, but we can assume in which zones the price will visit before that.
It is necessary to highlight these zones and wait for the price to come there. If you are aggressive in your trading, you can place limit orders. If you are conservative and calm, you can wait for reactions, get a break and enter on corrections.
Particular attention should be paid to the areas where you are going to fix profits. Pulling the asset to the very highs, while not fixing in parts, is a so-so idea.
Very often people get frustrated, they told you this in a psychology lesson. The moment the price reaches the previous peak, where you promised yourself to sell, the potential of the deal makes you drunk and you do not close a profitable trade. As with short-term speculation, a plan is important here. Without a plan, you will lose money. With medium-term and long-term trading, you need to plan even more, because there is no room for error. You can lose a lot, you may not enter where you wanted because of greed. Plan your actions!
9. Useful Resources
• Coinmarketcap is an aggregator resource where you can find a lot of useful statistical information about an asset. There is an opportunity to keep a portfolio.
• Dropstab is an aggregator resource, which, like Coinmarketcap, has a lot of useful information, but it is done much more conveniently. User-friendly portfolio creation interface with flexible settings.