Investing in cryptocurrencies is risky, especially when you are not familiar with this kind of transaction. One way to trade in cryptocurrencies more safely is to learn about them. The best way to learn everything about a specific cryptocurrency is to analyse it.
When you analyse crypto, you will understand its value and its trend in price fluctuation. This information is essential to time your transactions well, ensuring you are more likely to make gains.
To start with, we will guide you through the two main types of analysis.
Two Types of Cryptocurrency Analysis
You can analyse currencies while using either quantitative or qualitative factors. When it comes to cryptocurrencies, you can also divide the main two analyses based on this.
On one hand, technical analysis uses only quantitative factors. Meanwhile, the Fundamental analysis mainly deals with qualitative factors, save for a few formulas.
Let us dive deeper into these analyses.
1. Fundamental Analysis
Crypto fundamental analysis is a way of finding out whether an asset has a proper valuation. This is a concept that originates from the 1930s, at the time when stock markets performed extremely poorly.
Generally, you use the result of this analysis to determine whether you should buy a cryptocurrency. If the cryptocurrency is undervalued, you may purchase it and experience future gains when you resell it. Undervaluation can happen due to low enthusiasm or as part of its price fluctuation.
Meanwhile, if you buy it while it is overvalued, then you are likely to make a loss when you resell it. Overvaluation can happen if the cryptocurrency has an enthusiastic community.
Some cryptocurrencies can manufacture this positive sentiment. In such cases, you should be wary since it could be a sign of a scam or future problems. For instance, reports demonstrate how celebrities such as Tom Brady are facing legal action due to their endorsements of FTX.
Furthermore, a fundamental analysis crypto takes into account the following indicators:
- Project team expertise
- Token distribution
- Number and quality of partnerships
- Practical use of the cryptocurrency
- Safety of the cryptocurrency
- Market capitalization
2. Technical Analysis
A technical analysis of cryptocurrency uses past data to estimate changes in prices and trading volumes. However, there is no certainty that trends will repeat themselves and many things, such as the development of disruptive technology. This is true even of long-term cryptocurrencies. To minimise the disruptive factors, the data you should use is up to 200 days in the past.
One way to conduct this analysis is to plot closing and opening prices on a candle wick chart. By looking at the changes in prices, you can spot patterns that will help you identify high points when you may sell your cryptocurrency and receive high gains. In turn, the trend of low prices will guide you on when to buy cryptocurrencies.
Another method you can use is the Simple Moving Average. This graph indicates the average price over 50, 100, or 200 days. When the chart shows a value above 1, the price is on an upward trend and vice versa.
Likewise, the Relative Strength Index calculates average price. With this index, you can calculate when cryptocurrencies are overbought or sold, allowing you to time your transactions to optimise your portfolio.
How to Analyse Crypto
To achieve the most accurate results, you should apply the fundamental and technical analyses. The following steps will guide you as you consider the major factors that affect a cryptocurrency’s value.
1. Read the White Paper
To analyse crypto, you will need to begin by reading the White Paper. This is a document that details the following factors of a cryptocurrency:
- Utility
- Goals
- Road map
- Underlying technology
- Governance
This document should explain the above in detail using industry terms. If you find anything that does not make sense, you can disregard this particular cryptocurrency.
2. Look into the Tokenomics
Now that you have read the White Paper, you should look into the cryptocurrency’s tokenomics. This is a plan to organise the cryptocurrency’s tokens and its availability and distribution.
Furthermore, its regulation may include changes in mining incentives and fees. You will also need to determine who has this cryptocurrency’s tokens.
3. Check the Community
Once you have looked into the tokenomics of the cryptocurrency, you should observe its community.
While analyzing the cryptocurrency, you should determine their level of enthusiasm. If there is low enthusiasm, the cryptocurrency may not have lasting power and so it may be a poor investment.
4. Research the Team
When you have checked the community’s level of enthusiasm, you should research the team, their leadership, and partners. They should all have the required background, experience, and reputation.
Note: Celebrity endorsements are not the same as partnerships.
5. Review the Data
Finally, you should review data on this cryptocurrency. In particular, you will need to look at the cryptocurrency’s market capitalization, trading volume, and supply. Then, you can use the following fundamental analysis formulas:
Network Value to Transaction Ratio = Market Capitalization / Daily Transaction Volume
Market Value to Realised Value Ratio = Market Capitalization / Realised Capitalization
You can analyse a crypto’s valuation with either formula. If your results are high, the cryptocurrency is overvalued and vice versa.
Explore the Best Crypto Market Data Analysis with CryptoCracker
Although you can calculate a cryptocurrency’s value by hand, this is a slow process that will not keep up with the rapid fluctuation of cryptocurrencies.
If you seek precision and speed in your market evaluations, we recommend using the analysis features provided by CryptoCracker.
Through our crypto platform, you can use our trend indicator to track different cryptocurrencies and make better investment choices.
Summary
Now you can analyse crypto using this guide, which includes fundamental or technical factors. These qualitative and quantitative measurements give you the information to estimate a cryptocurrency’s past and future value. Then, you can use this information to decide whether a cryptocurrency is undervalued and if it is time to buy it or not.
To simply and quickly assess the market, you can also use trend indicators such as CryptoCracker. Use our easy-to-follow analysis to quickly make decisions and make gains!
Disclosure: This content is only for educational purposes and is not legal advice.
Frequently Asked Questions
How to know if crypto is going up?
You can know that crypto is going up if it has a high demand and low supply. Its value goes up because there is scarcity. Therefore, buyers are willing to pay more for this cryptocurrency.
How to predict the crypto market?
There is no 100% accurate way to predict the crypto market. Nonetheless, you can use trend indicators to predict future changes. Alternatively, you can analyse the major cryptocurrencies.
What affects crypto the most?
Supply and demand affect crypto the most. The availability of a cryptocurrency for transactions can also affect its value. Meanwhile, external factors include competing cryptocurrencies and investors’ belief in that currency.