How to Conduct Fundamental Analysis before Buying Bitcoin
June 14, 2021
How to Conduct Fundamental Analysis before Buying Bitcoin
Crypto analysts and traders use different techniques to evaluate and forecast the price of bitcoin. Fundamental analysis is one of the key methods used to figure out the value of bitcoin. Another important analysis is the technical analysis. These analyses are crucial tools for both experts and newbies who would like to buy bitcoin.
What is fundamental analysis?
Fundamental analysis is the thorough investigation or evaluation of major variables that influence the value of an asset. It’s important to state clearly that there’s a clear-cut difference between fundamental analysis and technical analysis. Fundamental analysis examines the economic and financial factors to make better and positive trading decisions.
In contrast, technical analysis, on the other hand, predicts the price of an asset based on its movements on the chart. Many factors need to be analyzed or evaluated before the real value of a cryptocurrency can be predicted.
There are 2 different approaches to fundamental analysis. To get the perfect time to buy bitcoin is not always easy because there’s nothing like the perfect time. However, moves can be taken to ensure that you analyze the primary variables that influence bitcoin price. Here are the 2 approaches to fundamental analysis;
1. The top-down approach
This fundamental analysis looks into the large variables (economic variables) before looking at the smaller ones. Bitcoin price is considered to be influenced by factors, like; world economy, international news, foreign exchange market, stock, international trades, and several other factors. The top-down approach pays attention to every detail in the international market. Some of the major questions to be asked when using the top-down approach to buy bitcoin include:
- What is the current situation of things across the entire globe?
- What’s happening with the top influencers in the crypto space? In this case, the top influencers are the institutional investors, the top investors, and those that drive the price of Bitcoin.
- What is the potential of bitcoin when you buy it at a particular time?
- What is the situation of the global economy? This means you need to consider factors like unions across different continents.
- What is the status of global health? Is the world currently suffering from a global pandemic? When Covid-19 started, people had the perception that the price or value of BTC would fall. However, Covid-19 resulted in the rise of electronic transactions because people needed to make cross-border payments. This led to an increase in the value of Bitcoin because BTC transactions were easier and faster.
2. The bottom-up approach
This approach is the opposite of the first approach explained above. In this situation, the small economic factors are considered before the large ones. This means that economic factors affecting a particular location and most especially top countries like the United States and China would be considered. These countries being the places where most institutional investors are and where most bitcoin transactions are happening.
- Consider the Government’s regulations in the state
- Consider the global economic situation
Getting the basics for bitcoin analysis
It is essential to evaluate the different factors that can influence the price of bitcoin. However, getting the numbers is not easy for bitcoin because it’s not like the stock market where the company’s value can be evaluated. This is why there’s a need to derive a whole new set of metrics that will help buyers make the right decisions on when and how to buy bitcoin.
We won’t shy away from the fact that most people see bitcoin as a new asset class, but at the same time, you need to understand that fiat currencies are significant and they play a key role in cryptocurrencies’ price. This is why it is best advised that demand and supply forces should be key factors in your fundamental analysis.
- What is the role of demand?
The demand for bitcoin covers the volume of activities taking place on the blockchain network and the number of new adopters of crypto. All these must be analyzed to determine how valuable bitcoin will be in the long run. Once enough data can be gotten, it can be used as indicators to predict what the next bitcoin move would look like.
If Bitcoin restrictions in top countries become more stringent, the demand for cryptocurrency will most likely be reduced, which would translate into a reduction in the price of the leading cryptocurrency. This is because just like stocks and the currency market, bitcoin and altcoins are driven by forces of demand and supply. The higher the demand of BTC, the higher the price of the coin, while the lower the demand, the lower the price of the coin.
- The basic role of supply
The concept of bitcoin supply is also easy and straightforward. Bitcoin supply looks at the total number of bitcoin in circulation. It covers the value gotten on every bitcoin transaction.
Knowing how to carry out fundamental analysis is very good leverage. It helps crypto traders and investors know the best value for what they’re getting. Whenever you want to buy bitcoin, it is best is to use both fundamental and technical analysis in making your decision.
Raphael Orji is a freelance writer, professional blogger and a content marketing consultant. I work with small businesses, startups and entrepreneurs in building their brand image with high quality blogging and content marketing strategy.
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