How To Do Fundamental Analysis for Cryptocurrency?

The cryptocurrency market is blessed with thousands of coins, and new projects are popping up regularly. Finding profitable trading/investment opportunities can be a massive task for traders, but with good analytical skills, you can carefully track coins and effectively predict their price movement. This article provides the best methods of conducting fundamental analysis and details the different aspects of this process.

Fundamental Analysis in Cryptocurrency Trading

Fundamental analysis looks at the non-chart factors that drive the prices and biases in trading. It involves analyzing the underlying reasons the cost of a coin is falling or rising and the potential extent of its movements. Like other financial trading instruments, cryptocurrencies respond to the effects of demand and supply and to the rate of adoption for real-life use, regulations, and economic conditions.

This is why MetaTrader 5 and other top trading platforms provide traders with various features to track and analyze fundamental data when trading. Here are the main factors to consider for crypto fundamental analysis.

On-Chain and Off-Chain Metrics

The crypto market is broadly divided into Bitcoin and other altcoins. Altcoins are all other cryptocurrencies besides Bitcoin, the first and ‘alpha’ coin.

The price of Bitcoin is known to affect the market, driving investors’ decisions on other coins. When Bitcoin is on a sustained bearish or bullish trend, altcoins may experience similar trends in the same period. This is why fundamental analysts track market news to gauge investors’ bias on Bitcoin.

On-chain metrics refer to data such as market cap, transaction volume, and miner rewards, which generally influence a coin’s price. Off-chain data (data stored off blockchains) are also essential factors that traders watch for. You can find on-chain metrics on data aggregation platforms and a specific blockchain’s website/block scanner, such as Bitcoin, Solana, or Ethereum.

How do you use on-chain metrics? An increase in the supply and demand of a coin and the on-chain transactions signals increased investor interest. You can also check the order books across centralized exchanges to see how traders enter buy positions. Use this information to determine the market direction and trade accordingly.

Regulations and Legal Procedures

Even though the cryptocurrency market has existed for more than ten years, there are concerns regarding the regulatory environment in different countries and regions.

While places like El Salvador and New York have shown support for cryptocurrencies to some extent, others enforce rules and hefty taxes on transactions and investments. The regulatory landscape of cryptocurrencies in economies such as the United States, the United Kingdom, and the Eurozone significantly influences crypto prices.

It's wise to stay updated on news related to regulations, governmental policies, and statements made by figures within the industry. For example, when the U.S. Securities and Exchange Commission (SEC) greenlit a Bitcoin spot ETF, it led to a 1% surge in Bitcoin’s price. Conversely, we've seen instances like Ripple, where legal issues with Ripple’s parent company resulted in a drop in XRP prices after announcements from the SEC.

For traders, focusing on fundamentals and assessing how similar news has impacted markets previously can guide their decision-making processes regarding trading strategies.

Hype and FOMO

Market hype and FOMO (fear of missing out) are typical in cryptocurrency trading. Most projects depend on initial hype to generate interest and build a solid foundation. A popular example is how the price of so-called "meme coins" like Dogecoin and Shiba Inu increases when popular social media users like Elon Musk tweet or talk about the coin or even use a dog emoji.

Investors understand that hype and FOMO don’t last long, but they could be profitable in the short term if they catch hype trends early. As a fundamental trader, you should follow the social media profiles of "important" people who can influence the crypto market with a single post. This will help you find opportunities early and manage your trades accordingly.

Economic Conditions

Bitcoin has gradually emerged as an alternative investment for hedging against inflation; it outperformed the S&P 500 and Gold every year between 2011 and 2021, making it a safer investment. This is why economic conditions present an opportunity for fundamental traders, especially when the economy is uncertain.

Advanced Fundamental Analysis

You can also dive deeper into fundamental analysis, especially for long-term investments. This entails reviewing the coin and underlying project to understand its potential. Follow these four steps:

1. Always read the white paper before you enter any project. White papers explain the ideas and direction of crypto projects.
2. Find out how the team works, the members, and their reputation. Only invest in projects with reputable teams.
3. Explore the community, as projects with solid communities have more chances of success.
4. Understand the underlying technology, tokenomics, and plans.

Remember to diversify your trading portfolio and never invest your capital in a single coin.

How To Stay Updated on Relevant Crypto News With MT5

How do you track dozens of news and events influencing crypto prices? Start by limiting your scope if you rely on news sources or social media. The best way is to combine high-quality news sources and social media analysis and read the biases of other traders. Here’s how to follow news on the MT5 platform:

• Use the "Calendar" feature to find upcoming events such as news, project updates, regulations, and general economic news. You can set alerts for updates when they are delivered on the app.
• You can also use the "News" feature to find current news.
• The MT5 app also has a "Trading Community" feature where traders connect and exchange ideas. This social hub is a great place to see investors' biases.

Trade Effectively With Fundamental Analysis

Fundamental analysis helps you identify the factors driving the crypto market and complements technical analysis. Knowing where and what to look at will increase your winning rates and profitability when trading. Ensure you understand how negative and positive news impacts the demand for crypto, and pick your entries. Finally, remember to leverage MT5's tools for fundamental analysis.

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