The difference between fundamental, technical and on-chain analysis

If you want to become a better investor, one of the most impactful steps you can take is to first become a better analyst. Properly researching what you want to invest in beforehand can make the world of difference when it comes to your overall success — and whether or not you make a profit or a loss. But which analytical method should you use?

Fundamental, technical, and on-chain analysis are three of the most popular, and all of them can be used for cryptocurrency investors. In this AAG Academy guide, we’ll explain how each one works, and outline some examples that will help you better understand them.

What is fundamental analysis?

Fundamental analysis (FA) is the process of measuring a security’s intrinsic value by looking at related economic and financial factors. Rather than deciding a security’s worth based simply on its current price, which can be swayed by market sentiment and other things, FA looks at macroeconomic and microeconomic factors to determine a “fair market” value.

These things typically include the state of the economy, the strength of related industries, and other events that may have an impact on the security’s price. FA also examines an issuing company’s financial situation, its performance, and the effectiveness of its leadership team. The company’s goals or roadmap, its credit rating, and other factors are also considered.

Using FA, analysts can establish whether a security is undervalued or overvalued by others. Many investors, particularly those who are experienced, recognize that a security’s market value can often be misleading, and may not accurately reflect the value of a company when compared with publicly available financial information or other fundamental data.

FA factors can be broken down into two categories, which are:

Quantitative
Quantitative information is anything that can be quantified or shown in numbers, such as figures, percentages, or ratios. This includes balance sheets, cash flow statements, and income statements.

Qualitative
When certain fundamentals cannot be quantified, analysts instead look at their quality or standards, which is where qualitative information comes into play. This includes things like business models, the strength of the management team, and competitive advantage.

Example of fundamental analysis

Let’s look at an example of fundamental analysis to better understand how it is carried out. We’ll use Apple in this example, simply because it is currently the world’s most valuable company with a market capitalization that exceeds $2.3 trillion. That’s more than Alphabet (Google) and Amazon combined, and more than six times the value of Samsung.

To begin with, an analyst would typically examine the current economy using a wide range of published metrics, which would include things like the consumer price index, gross domestic product (GDP) growth, and interest rates. They would then look at the industry in which Apple operates as a whole using statistics and reports from competing companies.

When it comes to looking at Apple specifically, an analyst will examine reports published by Apple itself or those filed with the Securities and Exchange Commission (SEC) to determine its current financial status. They may also use data gathered by independent companies that usually includes things like revenue, profits, growth, and available cash.

Analysts will also consider recent announcements or product releases made by Apple, and indeed its product roadmap. Those who follow the company closely have a good idea of when certain products, such as a new iPhone or iPad, are expected to hit the market. They will also know that these launches typically provide sizable boosts to revenue and profits.

Furthermore, when looking at a company like Apple, its brand should also be taken into account. Apple’s logo and its products are widely recognized worldwide, and for many years now, it has been a leader in the consumer electronics industry. These things can contribute to a company’s success and longevity, and therefore play a part in determining its value.

By taking all of this information into consideration, an analyst can determine whether Apple stock is currently undervalued or overvalued. They will then estimate what they believe the intrinsic value of the stock price should be. Different analysts don’t always agree on this, so investors will often consider an average of all available estimates. 

What is technical analysis?

Technical analysis is very different from functional analysis in that instead of examining information outside of market value, it looks at past trading activity and price fluctuations in an effort to predict how a security’s value might change in the future. Specialized tools are used to evaluate the ways in which supply and demand for a security may affect it going forward.

This method of analysis can be applied to any security or cryptocurrency with historical trading data that can be used to establish trends and patterns in market activity or trading behavior. Technical analysis looks at prices most commonly, but can also include trading volume or open interest figures.

One of the key aspects of technical analysis is that it assumes that all necessary and known fundamentals are factored into a security’s price — that the market has already made up its mind on a security’s true value — and therefore there is no need to consider anything else. Those who use this method also believe that history has a tendency to repeat itself.

Technical analysis was first introduced by Charles Dow, who published the Dow Theory in the late 1800s. Although it has evolved since then thanks to contributions from others, Dow’s original theory remains the foundation of this particular research method.

Example of technical analysis

Continuing with Apple for our example, a researcher or investor using technical analysis would first look at the company’s current stock price using a price chart. They would then use the same chart to establish how that price has fluctuated over recent weeks, months, and even years. By viewing historical data, investors can pick out patterns in those price changes.

These patterns can help determine whether a security’s price is set to increase, decrease, or remain steady. If, for instance, Apple’s stock price typically falls following the announcement of a new iPhone or iPad lineup, investors can be confident that the same scenario is likely the next time the company introduces its latest batch of new products.

Researchers and investors may also use certain tools to predict price changes. For instance, moving averages are an indicator that can be overlaid on a price chart to show the average price of a security over a certain time period. This can help establish levels of support or resistance, as well as whether a trend or pattern is emerging.

What is on-chain analysis?

While both fundamental and technical analysis can apply to cryptocurrencies and a range of other securities, on-chain analysis is exclusive to cryptocurrencies. That’s because this method involves using blockchain data, which is open and available to anyone when it comes to decentralized projects, to make more informed trading decisions.

Open blockchains provide us with a wealth of information about our favorite cryptocurrencies. That not only includes a record of every transaction every processed, but also how tokens are distributed (which wallets are holding them and how many tokens they contain), open interest in the futures trading market, and how difficult the cryptocurrency is to mine, where applicable.

When all of this information is taken into account and combined with other data — like the current price of a cryptocurrency and its market capitalization — it can help investors predict how a cryptocurrency’s price might fluctuate going forward. It can also give us some insight into whether or not a cryptocurrency project has a future at all.

Example of on-chain analysis

Before investing in a new cryptocurrency project, one of the things experienced investors will look at is trading activity — particularly whether the cryptocurrency is being traded at all, and if so, in what kind of volume. They will also be interested in the circulating supply of tokens and whether or not it is controlled by a handful of large holders, often referred to as “whales.”

Whales can be bad news for any cryptocurrency since they can have a lot of impact on its value. For instance, when whales are buying into a project, they tend to make big investments that cause the cryptocurrency’s value to rise sharply. Conversely, when those whales then sell large numbers of tokens, they can cause the cryptocurrency’s value to drop in an instant.

Only on-chain analysis can provide us with this information, so it is an incredibly important part of the analytical process for investors who are keen to avoid putting money into projects that can be too easily impacted by a small number of people. They will also avoid investing in projects that see little trading volume, which suggests interest in the project is low.

References

• Fundamental Analysis : Principles, types and how to use it
• Technical analysis : What it is and how to use it in investing
• Technical-analysis : Definition, tools & examples
• What is crypto on chain analysis and how do you use it
• 7 best on chain analysis tools