Cryptocurrency Fundamental Analysis for Newbies

22 Oct 2020
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Fundamental analysis is a methodology used by investors in which in the “real world” the value of an investment is estimated and then compared to the more speculative price it is traded at in financial markets in order to estimate the potential for future profit or loss. It is based on the assumption that in the short term, the price may differ greatly from the base value, due to the specifics of financial markets, but over a longer period of time, they usually converge. Therefore, investors can profit by using this methodology to assess whether the rate will be lower or higher, and then buy or sell, respectively.

The use of fundamental analysis is closely related to the stock markets. Stock traders check company accounts by looking at a range of data, including income, expenses, profits, assets and liabilities. To a lesser extent, this method is also used in foreign exchange. In this case, the investor will analyze financial data related to the country’s economy, including things like GDP, unemployment rate, interest rates, government debt, industrial production and consumer spending research, political events, and so on. One of the main differences between stocks and currencies is that companies whose stocks have objective values ​​based on a static set of fundamental values ​​at a given point in time, while in foreign exchange markets it does make sense to consider the relative values ​​of individual pairs based on dynamically changing their basis.

Fundamental analysis for cryptocurrency: how does it work?

The nature of the blockchain is based on digital currencies like bitcoin. This means that it is quite amenable to fundamental analysis. This is because the range and reliability of underlying economic data for analytics is used more in many areas for bitcoin than for conventional currency.

In most traditional fiat money economies, much of the economic activity from fundamental data comes from cash, which is completely anonymous and cannot be studied directly. This means that indirect data can be used. For example, the revenues of large retail chains can be used as a proxy for assessing consumer spending. Even digital payments that are tracked and transferred using a proprietary system are available for analysis by investors.

Bitcoin Economy: A Guide to Data

There are no specific indicators regarding bitcoin inflation, as it is used in most countries of the world, so there is no single set of prices. It is theoretically possible to calculate inflation by region, then the average can be found using some measures of adoption in each country, such as the national fiat mailing volume.

We have a good metric for the change in money supply in terms of the number of new coins created per day. When people talk about inflation and deflation in relation to BTC, they almost certainly mean monetary inflation. This supply inflation starts at a very high level in the early days of the web and will decrease exponentially until it eventually drops to zero with a maximum supply of 21 million coins. This decline occurs in a discrete leap with a reward block that determines the average number of coins generated per hour. This happens approximately every four years. The number of coins that are currently being created per day can be viewed through the Block Explorer.

Blockchain.info launches Block Explorer which has some interesting stats from the last 24 hours: https://blockchain.info/stats

There will always be some level of loss due to lost or abandoned wallets. In fact, the inflation money supply is in practical terms lower than the rate at which new coins are generated, and the decline occurs when no new coins are created.

It is often useful to assume that monetary supply inflation represents the amount of new investment that must be made in the bitcoin economy in order for the price per coin to remain the same. For example, if 3000 coins are created and the exchange rate is $ 230 per coin, then 3000 * 230 = $ 690,000 new investment required to maintain a stable price.

In a traditional economy, an increase in the money supply does not necessarily lead to a corresponding rate of inflation, because new money entering the system can stimulate economic activity in order to increase supply. This is also true, although the mechanics are somewhat different.

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