Knowing how to research cryptocurrency is one of the most important traits of successful investors. And how wouldn’t it? Being in its early stages of adoption, the crypto market is an industry where marketing gimmicks, referral bonuses, and herd mentality are at an all-time high.
So, how can a relatively new investor learn how to research cryptocurrency? And what does this mean for your portfolio?
We answer both these questions in this guide. In the following chapters, we introduce the 3 most popular research methods that will help you discover money-making opportunities and improve your investment decisions.
- How to research cryptocurrency – The 3 pillars
- Research Method #1 – Fundamental Analysis
- Research Method #2 – Sentiment Analysis
- Research Method #3 – Technical Analysis
- Frequently Asked Questions
How to research cryptocurrency – The 3 pillars
There are three distinct methods to analyze cryptocurrencies. These act as the foundation to all your subsequent efforts:
- Fundamental Analysis – Exploring a coin’s intrinsic value
- Sentiment Analysis – Exploring the demand for a coin
- Technical Analysis – Analysing historic price action to make predictions
In the following chapters, we will show you how to perform each analysis method separately.
Research Method #1 – Fundamental Analysis
Fundamental Analysis (FA) is a process that helps investors and traders understand the inherent value and of a cryptocurrency. This is done by looking into a number of different factors, including the project’s team, their whitepaper, the roadmap, and more.
The goal of fundamental analysis is to clarify whether the current value of a coin reflects the price that it should have based on its fundamentals. Then, based on the results, one can make more accurate long-term predictions.
It is important to remember that FA doesn’t use past performance as an indicator of future price action. Instead, it focuses on (external) micro and macroeconomic factors that may have an influence on the success of a project.
For example, you could explore the background of the team behind a particular cryptocurrency to better understand the project’s potential. Do the founders have a lot of experience in the industry they attempt to innovate in? Do they have any prior leading positions and successful exits?
Research Method #1 – Fundamental Analysis
In bullish market conditions, the primary factor that leads to a coin’s price appreciation is its hype. And, in most cases, when the market goes up, most coins go along with it.
This is not true with bear markets. In negative market conditions, most “weak hands” sell-off rather quickly, leaving only a number of holders that believe in a coin’s fundamentals. These are the long-term investors that will ultimately help a cryptocurrency maintain its value and hopefully assist its recovery in the future.
And this is exactly why you should know how to perform fundamental analysis. This research method is important for the following reasons:
- It helps you make better mid-term trading decisions in bearish market conditions.
- It creates a strong sense of confidence when buying and holding onto cryptocurrencies for longer timeframes (long-term investments).
- Helps you discover which projects are actually innovating in the space, and which are simply a copy or a scam. This is especially true when looking to invest in IEOs.
How to perform a Fundamental Analysis
In this chapter, we will show you a simple but effective step-by-step process to learn more about a coin’s fundamentals. You can follow this approach when doing a bitcoin fundamental analysis or when looking in any other coin that sparks your interest.
Step 1: Find a coin that interests you
Visit CoinMarketCap, find the coin you are interested in, and click on it to see more information. For this example, we will be using Stellar (XLM).
Step 2: Check the project’s website and whitepaper
At this point, you will have two options. Either visit the official website of the project to learn more (1), or read Stellar’s technical documentation, which in this case stands for the whitepaper or lite paper (2).
Ideally, you’d want to take enough time to explore both in detail. While this process may be time-consuming, it will help us discover useful information with regards to the project’s fundamentals.
Step 3: Discover the information that is most useful to you
It is now time to construct a list with the most important questions you are looking to answer. Here are some questions you could start with:
Q: Does the team have enough industry-relevant experience to make this project a success?
To answer this question, you would need to find the team’s details in the whitepaper and perform some follow-up research by using Linkedin, Medium, or Youtube. In this case, you will see that one of the co-founders of Stellar is Jed McCaleb, the ex CTO of Ripple and creator of Mt.Gox. This is a good sign of industry-related experience.
Q: How does the roadmap look for the next few years?
Newer projects will have very detailed roadmaps that expand at least 4 years into the future. If the project has been around for a while already (e.g. Stellar), try to cross-check with existing information to see if the team managed to achieve its past goals. If possible, try to also find details regarding the team’s budget per department over longer timeframes, and make sure that the core team does not hold more than 20% of the token supply.
Q: What is the main problem that the project is trying to resolve? Is this a real problem? If so, are any other projects already trying to resolve this?
Place a strong emphasis on projects that are innovating in their space, by trying to solve real problems with little to no competition. This is especially true in 2020 when the industry is seeing explosive growth.
Q: What are the number of circulating and total coins?
By knowing the number of coins in circulation, you can make very rough price estimations based on market cap growth. If there is a big difference between circulating and total supply, try to understand the reasoning behind it.
Q: In what exchanges can users find the project’s official token?
While this may not be directly related to the coin’s fundamentals, it does say a lot about the market that it operates in. When a cryptocurrency is placed in top-tier exchanges, you can rest assured that there will be high liquidity, trust from powerful market players, and a significant budget to support such decisions.
Research Method #2 – Sentiment Analysis
Sentiment analysis is a research method that looks into the demand of investors for a specific cryptocurrency. In other words, you explore the “hype” surrounding a coin, and how this can affect its future price.
While sentiment analysis can help you understand and predict the dynamic of market cycles, keep in mind that a positive sentiment does not always relate to positive market conditions. An extremely bullish sentiment like the one we experienced in December of 2017 may actually indicate the initial stages of a bear market.
Why is Sentiment Analysis (SA) important
By performing sentiment analysis, you can improve your investment choices and trading skills. More specifically, this research method helps you:
- Predict mid-term price-performance – e.g. if the public interest for a cryptocurrency is very high, you might decide that it’s time to sell, as it could be approaching a (local) high.
- Make decisions based on logic instead of emotions – e.g. you will be able to see through FOMO or FUD and justify your decisions based on data.
- Capitalize on trends – understand when a money-making opportunity arises by looking at upcoming events or historic tendencies in price performance.
- Make long-term bets – Explore how the fundamentals of a coin translate into market demand to understand if a project is currently undervalued and predict a potential growth in value.
How to perform a Sentiment Analysis
A sentiment analysis gathers all the perspectives, opinions, and thoughts of investors with regard to a particular cryptocurrency. As the researcher, you will need to analyze this data based on your existing knowledge of the market to gain useful insights.
To start, check out all the popular channels where cryptocurrency investors discuss your coin of interest. There are many different Social Media platforms, communication channels, and forums that may be useful at this stage. Read through the conversations and, if possible, engage in discussion. Try to understand the general “attitude” of the audience when talking about your coin.
To give an example, if you are analyzing the current market sentiment of Stellar (XLM), you may want to explore the latest Stellar-related topics on BitcoinTalk, or read through tweets with XLM-related hashtags (or $ tags, e.g. $XLM).
And these platforms are just the beginning. There are many more ways to understand the sentiment of the market:
- Use LunarCrush to track social mentions in bulk
- Read through industry-related media portals, like CoinDesk or CoinTelegraph
- Check upcoming events and highlights on CoinMarketCal
- Check the Fear & Greed Index when exploring larger cryptocurrencies
- Check the “Social” tab of your favorite coin on CoinMarketCap to see all the latest discussions and social media mentions in one page:
Once you look into many different channels and analyze the data, you will understand the level of demand and public interest. Based on this information, you will be able to make better investment decisions.
Research Method #3 – Technical Analysis
Technical analysis (TA) aims to predict future market behavior by using several indicators and charting patterns. This type of analysis is often seen in the stock markets but has also become the go-to method for successful day trading in the crypto markets.
In contrast to FA and SA, Technical Analysis focuses solely on historic price performance and volume data. It takes the “human” element out of the equation and helps investors discover price trends and short-term opportunities.
Why is Technical Analysis (TA) important
While FA helps investors make long-term predictions and SA is used for mid-term targets, Technical Analysis (TA) is mainly focused on short-term opportunities. This makes it important for (day) traders, for the following reasons:
- The crypto markets have a tendency to repeat historic price patterns.
- Since a large number of investors use technical analysis when trading, you can predict small upcoming price movements based on charting patterns (e.g. Elliot Waves).
- It helps traders understand when a cryptocurrency is oversold or undersold based on a number of different indicators. Based on this information, they can choose to sell their coins at the right time.
How to perform a Technical Analysis
The following video gives a complete overview of all the different price indicators and charting patterns you can use when trading cryptocurrency. Make sure to watch the whole video as it also delves into the history of technical analysis.
To apply the lessons above in the context of cryptocurrency, make sure to also check out the following resources:
Price Action vs Technical Analysis – What is the difference?
Many beginners that want to learn how to research cryptocurrency tend to confuse the two terms.
- Price action refers to the direction of a coin’s price (up or down) when observed over a specific period of time.
- Technical analysis is a projection method that uses different indicators and chart patterns to analyze the price action.
After reading this guide, you should know how to research cryptocurrency and make better investment decisions. In short, here is what we learned:
- Fundamental analysis (FA) looks at the intrinsic value of a coin by exploring non-price-related factors. It is best utilized by long-term “HODLers”.
- Sentiment analysis (SA) explores the demand of the market for a particular cryptocurrency. It is best used by mid-term investors (position traders).
- Technical analysis (TA) analyses past price action to estimate the short-term price action of a cryptocurrency. It is best used by day traders.
While this guide is meant to introduce the three different types of analysis, you should certainly not stop here. Consider exploring each method in further depth in order to learn how to research cryptocurrency in the most effective way possible.
Frequently Asked Questions
If you wish to learn more about the research process that is required when investing in cryptocurrencies, make sure you check the questions below as well.
What is the key difference between fundamental analysis and technical analysis?
The key difference lies in one’s ability to maintain an unshaken conviction in a certain thesis – something which is often seen as a weakness among traders. Fundamental analysis does not take short-term price action into consideration as it believes markets can act against a project’s fundamentals, especially in a sector like crypto which has a low barrier of entry. On the contrary, technical analysis does not take a project’s purpose, technological foundation, and community into consideration. It only looks at short-term price action and how it reflects historical price patterns. This is done by looking at candle charts and several price indicators.
What are some great crypto research sites?
If you wish to delve deeper into the research process (in terms of fundamentals), we recommend taking a premium subscription at Messari, Chainalysis, and Delphi Digital. These websites are by far the most reliable and cost-effective option to stay one step ahead of the crowd. When it comes to sentiment analysis, on the other hand, we believe that Lunarcrush should be enough to get strong data points.
Are Cryptocred technical analysis lessons for beginners?
Not all of Crypto Cred’s lessons are aimed towards beginners. However, they are a great resource even if you are still at the early stages of your learning journey. If you are looking for some more “beginner-friendly” information, make sure to check out Binance Academy.