CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
US English

How to predict cryptocurrency price using fundamental analysis

By Mohadesa Najumi

Edited by Jekaterina Drozdovica

13:14, 22 December 2021

Business man working with trader graphics concept.
How to predict cryptocurrency price using fundamental analysis – Photo: Shutterstock

With cryptocurrencies, one thing is clear: new investors are entering the space en-masse with the total market capitalisation of all crypto assets surpassing $2tn for the first time in September this year– a tenfold increase since early 2020. 

CoinMarketCap data currently lists over 15,000 cryptocurrencies. The industry is expected to reach a global market capitalisation of $4.94bn by 2030, growing at a compound annual growth rate (CAGR) of 12.8% from 2021 to 2030. 

Beyond the numbers, crypto is also attracting a younger crowd. A study published by the University of Chicago’s National Opinion Research Center (NORC) shows that most cryptocurrency traders are below the age of forty. 

Another report by BTC Markets showed that there was a 24% increase in the number of 18-24 year olds investing in cryptocurrency during the 2020-2021 financial year. The same study found that the rate of new female users registering for the BTC Markets cryptocurrency exchange grew by 172% in the 2020-2021 financial year, compared with a 79% growth rate for men.  

However, an intriguing insight from the NORC study is that 62% of people claim they do not understand crypto, while 31% cited this knowledge gap as a reason why they don't invest. 

Analysis is crucial for forecasting. So, how can investors predict cryptocurrency prices? The common assumption that crypto prices are linear is an oversimplification of the factors affecting a coin’s value. Cryptocurrencies can often experience sharp price rises and falls. 

You might be wondering what type of analysis you need to use and how microeconomic and macroeconomic conditions affect cryptocurrency markets, or there might be questions about how variables determine value.

In this article, we detail the end-to-end process of fundamental analysis through a forecasting lens in order to help you learn how to predict top gainers in cryptocurrencies.

HOW TO PREDICT CRYPTOCURRENCY PRICE

How to predict cryptocurrency prices

There are three main types of analysis that have long been considered staples of the financial world. The earliest form of financial analysis dates back to the 18th century when merchants developed the first candlestick charts to interpret and predict rice prices in Japan. 

The three central forms of financial analysis are:

  • Technical analysis is the study of statistical trends based on indicators such as historical price movements, patterns and price charts. 

  • Fundamental analysis involves the evaluation of all aspects of the market, including domestic and global factors, as well as political and economic conditions. 

  • Quantitative analysis looks at the market’s historical performance. It’s used in conjunction with fundamental and technical analysis. Investors can perform quantitative analysis through financial ratio calculations such as earnings per share (EPS) or discounted cash flow (DCF)

Fundamental analysis is especially useful for those seeking to predict if a crypto could rise or fall, because it draws inferences from future projections rather than past events represented as price charts. 

Fundamental analysis can potentially aid long-term investment decision making by helping traders to determine the value of a cryptocurrency based on a broad range of available information.

Three types of financial analyses that could help in price forecasting:

What is fundamental analysis?

Fundamental analysis is a method used by investors in financial markets to evaluate and study the variables that affect value. 

By assessing the intrinsic value of a cryptocurrency, you can determine whether the price is overvalued or undervalued. This can be done by analysing qualitative factors such as the state of the economy, cryptocurrency market conditions, the crypto company’s management or market capitalisation. 

If you’ve ever found yourself directly or indirectly examining the fundamentals of a cryptocurrency project, from its market capitalisation to the utility of its native token, then you have conducted fundamental analysis. 

The key differentiator between fundamental analysis and technical analysis is that the former doesn’t consist of factors that are immediately apparent, in the sense that they’re less tangible and more qualitative than statistical trends, like historical market data or price charts. 

XRP/USD

0.59 Price
+2.430% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

BTC/USD

66,743.35 Price
+4.520% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

Gold

2,401.36 Price
-1.830% 1D Chg, %
Long position overnight fee -0.0198%
Short position overnight fee 0.0116%
Overnight fee time 21:00 (UTC)
Spread 1.20

ETH/USD

3,501.52 Price
+2.470% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 6.00

Fundamental analysis looks at the larger picture, considering as many factors as possible, while technical analysis is centred around price action and historical trading volume in order to help investors identify short-term trading opportunities. 

While the purpose of technical analysis is to identify trend changes that precede the fundamental trend, fundamental analysis enthusiasts subscribe to the notion that there must be a cause and effect between fundamental factors and price changes.

The benefit of fundamental analysis is that it’s focused on external factors and how these can affect the performance of cryptocurrencies relative to the relevant microeconomic and macroeconomic conditions that could have an effect on the markets.  

The mechanics of fundamental analysis 

To learn how to predict cryptocurrency trends you’ll need to become accustomed with two different approaches in fundamental analysis.

The first is a top-down approach – used more widely than the second bottom-up approach. It prioritises macroeconomic, national or market-level factors such as the economy, interest rates, inflation, employment and gross domestic product (GDP).

A bottom-up approach de-emphasises macroeconomic and market cycles and instead focuses on microeconomic factors such as financial earnings or a company’s revenue. 

Cryptocurrency fundamental analysis follows similar principles to other financial markets that contain more traditional assets like stocks. There is less emphasis on a company’s financial statements, balance sheets or historical financial performance. 

Investors seeking to learn how to predict crypto market trends can consider the following parameters instead:

  • The coin’s market capitalisation

  • Circulating supply and total supply of tokens

  • Token utility and use cases

  • Community size – a significant metric for achieving wider adoption of cryptocurrencies 

  • The crypto project’s leadership team

  • The token’s trading volume

  • Listings on big crypto exchanges

  • Partnerships with trusted institutions

  • The latest news surrounding the coin

  • Government regulation

When performing fundamental analysis, it is key to note that no single metric can give you a full picture of a cryptocurrency investment.  By examining the full scope of the aforementioned information, you can develop a more comprehensive outlook on a given project and possible changes in cryptocurrency prices. You can also use a company’s whitepaper to build a broader picture.

What’s more, you can examine blockchain metrics, which reveal crucial aspects of a cryptocurrency’s underlying technology and processes. 

Factors to consider when forecasting cryptocurrency price:

For example, a hash rate is the total combined computational power used to mine and process transactions on a blockchain. For instance, bitcoin uses a Proof-of-Work algorithm based on cryptographic hashing and lower hash rates have been known to indicate a loss of mining interest on the part of investors. 

When conducting fundamental analysis for the purpose of predicting cryptocurrency movement, other factors you can use include user adoption rates and media coverage.

Crypto-specific news can provide useful information about a cryptocurrency’s public perception, as well as any company plans and partnerships, which could boost cryptocurrency growth or fall. Overall, any relevant news about the cryptocurrency project’s development or the wider economy can help to reshape fundamental analysis-based estimates. 

“When predicting the price of a cryptocurrency, you need to take scarcity, mainstream adoption and government regulation into account,” said Milko Trajcevski, a financial analyst at Invezz.

“I look at historical price performance to see what caused respective spikes or drops in value. Some cryptocurrencies can even rise in value through social media hype while others are limited by the technological concerns of blockchain such as scalability,” Trajcevski told Capital.com.

“You can also examine a crypto’s all-time-high value to see how far it's risen each month and then build a realistic image for yourself on how far you think the price will climb.”

FAQs

What influences cryptocurrency prices?

Cryptocurrency prices are determined by variables that span past, current and future trends, including domestic and global factors, as well as political and economic conditions. However, forecasts for future trends shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before investing. And never invest or trade money you cannot afford to lose.

How to predict cryptocurrency spikes?

Traders and investors can use fundamental analysis and follow the cryptocurrency project’s news to forecast the price. Cryptocurrency is a nascent industry. You should do your own research, evaluate the level of risk you are prepared to accept before investing. And never invest money you cannot afford to lose.

What are common cryptocurrency price prediction mistakes?

When performing fundamental analysis, it is key to note that no single metric can give you a full picture of a cryptocurrency investment, however by examining the full scope of a cryptocurrency project, you can develop a more comprehensive outlook.

Read more: What is Decentraland and how does it work?

Related topics

Rate this article

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided in this article is for information purposes only and should not be understood as investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents and has not been prepared in accordance with the legal requirements designed to promote investment research independence. While the information in this communication, or on which this communication is based, has been obtained from sources that Capital.com believes to be reliable and accurate, it has not undergone independent verification. No representation or warranty, whether expressed or implied, is made as to the accuracy or completeness of any information obtained from third parties. If you rely on the information on this page, then you do so entirely at your own risk.

Still looking for a broker you can trust?

Join the 630,000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading