How to predict cryptocurrency price using fundamental analysis
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 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.
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.
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
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.
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.
“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.”
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.