The Difference Between Fundamental, Technical & On-Chain Analysis

July 21, 2021
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Before spending a significant amount of money on crypto trading, you need to understand the basics of fundamental, technical, and on-chain analysis. These three analysis methods are necessary so that your trading decisions are made based on solid groundings of research and predictions of future prices. What are the differences between these three analytical methods? Read more in this article.

What is Fundamental Analysis?

Fundamental analysis is an analysis that aims at understanding an asset by considering several aspects, such as the basis for the use of the crypto asset, the number of people who use it, and also the team behind the creation of the assets.

Conducting a fundamental analysis is important to determine whether the price of an asset is overvalued or undervalued, and it is also necessary to know that the future potential of an asset should not only be assessed from its performance in the previous period. But also by taking into account microeconomic and macroeconomic conditions.

If you want to know more about how to do fundamental analysis, here is an example of what you can do before considering buying bitcoin.

Example: Bitcoin has a limited supply with only 21 million coins that can be mined. Meanwhile, the number of bitcoins in circulation has reached around 18.7 million. This means only a limited number of bitcoins left that can be mined or possessed. As we know, the less an item is, the more expensive it will be.

As we know, the more limited an item is, the more expensive it will be. In addition, Bitcoin’s blockchain technology makes it a “permissionless” asset or does not require an intermediary (such as a bank or other institution) to use it. This asset is censorship-resistant, or no one can prohibit its use. This is why more and more people and institutions, both from retail investors to large institutions, including the government, are adopting bitcoin.

These aspects are part of the fundamental analysis that you can consider before deciding to buy bitcoin. Taking into account the limited number of coins that can be mined, and Bitcoin technology is part of the fundamental analysis you can consider before deciding whether bitcoin is worth enough for you to buy as an asset.

In addition to the example above, understanding the reasons behind the high price of a meme coin like Dogecoin, for example, by finding out how many users it has, how many people talk about it on social media or search it on Google, is also a part of fundamental analysis.

So, make sure you pay attention to the aspects mentioned above as a first step before deciding to buy a crypto asset.

What is Technical Analysis?

Technical analysis means analyzing assets based on data in the previous period to predict market performance in the future. The following is an example of technical analysis that can be applied when trying to predict the value of bitcoin before buying it.

Example: In Bitcoin, there is a process called halving, which is a process to ensure that there will only be 21 million bitcoins in circulation. Every four years or so, bitcoins that are newly minted and gifted to miners as a reward for mining bitcoin transactions are cut in half.

When Bitcoin was launched in 2009, miners earned 50 BTC every time they validated a transaction or created a new block. To date, bitcoin has gone through 3 halvings with the last occurring in May 2020, which reduced the miner’s reward to 6.25 BTC/block. Based on the cycle between the halving processes, we can study the bitcoin price trend and use it as a reference for what will happen to the market in the future.

One thing to consider when conducting technical analysis is the relationship between bitcoin and other coins or altcoins. As an investor, it is important to know that cryptocurrencies, while different in many ways, are still highly dependent on each other. When one crypto asset goes up or down in this case, for example, bitcoin, the other crypto assets will almost certainly follow. You also need to pay attention to this before begin trading.

What is On-chain Analysis?

An on-chain analysis is the usual analytical method carried out by professional traders, and this is what distinguishes the analysis carried out for examining the stock market and the crypto market. This analysis analyzes the collection of information regarding the transactions of an asset. Here is an example.

Example: Through a paid portal such as Glassnode, you can see the activities carried out by bitcoin holders, whether they are depositing their assets to an exchange, or took them out of the exchange. If there is an inflow of assets to exchange, it means they are going to sell their bitcoins. This means the price will likely go down.

Conversely, when there is a bitcoin exchange outflow or bitcoin is issued from the exchange, it means that the bitcoin purchased from the exchange will likely be stored in a cold wallet. Thus, it can be predicted that the price of bitcoin will increase.

An on-chain analysis is usually carried out by professional traders because information such as inflow and outflow volume can only be accessed through paid portals.

After understanding the differences between the three analytical methods above, if you are interested in crypto trading, you can download Pintu that has been registered at BAPPEBTI. With Pintu, you can start to invest in crypto from as little as IDR 11,000 and invest equal sums of assets at regular intervals with Dollar Cost Averaging (DCA) feature. Simply download Pintu and click the “DCA” feature that you can find on the app’s home page.

Author
Nadya Rahmaesya

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