Roll your Own Fundamental Analysis (or How to Stop Being a Shorn Sheep)

in cryptocurrency •  6 months ago

Why You Can't Just Rely Upon Technical Analysis for Crypto Currencies

I know that technical analysts (TA) have a large audience on Steemit. Within the last few months, it might appear that the only people who have been making bank from these charts and interpretations are the folks who provide them.

TA has a place, and this isn't meant to totally discredit that. Obviously, investing carries risks. Only you are responsible for your own choices. That's why I'd like to urge more of you to take responsibility for your investments by learning something about fundamental analysis. It's just that looking at rising or falling lines without knowing anything about the reasons these events happened is useless and silly.

Using TA in a vacuum is like shouting HODL and watching sheep respond with, "BAHHHHHH!"

While you should certainly notice collected data about past performance, there are two main problems with relying upon TA that were clearly described in Seeking Alpha:

  • Data mining bias: You can find definitions for just about 100 indicators that are supposed to suggest the direction of charts. If you examine almost any charts, you will probably find just about as many indicators that suggest the line will rise, fall, or remain flat.
  • Subjective bias: On a blockchain-based website like this, you have to wonder if analysts are free from bias. You hear about patterns like head & shoulders, channels, triangles, ascending this, or descending that. You should know that the patterns can change, depending upon the selected data. Also, there isn't any scientific definition of these patterns, so even finding them requires subjective interpretations.

By the way, if you're curious about seeing examples of chart patterns, this page has a nice graphic: https://medium.com/stockswipe-trade-ideas/chart-patterns-f0a7ceb2bcca

Assume Responsibility With Fundamental Analysis

You've certainly seen a disclaimer like this before: "Past performance is no guarantee of future performance. " What this means is that even the best interpretation of historical data in the universe won't guarantee that any crypto currency, or even any investment, will perform the same way that it has in the past.

The market might fall upon some bad news that really doesn't turn out to be so bad or is merely temporary; conversely, it could rise because of hype. If you don't understand what happened, you don't have enough information to make a decision.

First, ask yourself a couple of questions:

  • Wouldn't you be better served by understanding the factors that may determine the value of an investment?
  • Wouldn't this be particularly true with something with as large of a subjective value as most digital currencies?

Alright, now you're going to have to do a bit more work. Don't worry because this still isn't rocket science. However, once you've done a bit of research, you can satisfy yourself that you're making a smart decision by choosing digital currency or some other investment. You can also more confidently discuss your choices with other people and not just with four-legged, woolly creatures.

These are some obvious things you should learn about in order to analyze fundamentals:

  • Supply: WIth crypto, you might consider the number of transactions performed per day, trends in the number of transactions, the ability of the system to scale, growth or reduction in supply, signs of dumping or hoarding, and anything else that might impact supply.
  • Demand: Supply and demand go together like peanut butter and jelly. With demand, you might also consider things that might increase demand in the future, like places the currency is accepted as payment or for trading. Will institutions, lone investors, or even consumers want to own these coins?
  • News, regulations, and other new developments: Yes, legal stuff still matters. Are authorities talking about or enacting laws that are either friendly or unfriendly to your digital coins? Are there good uses for the digital currency and the underlying blockchain technology that will support it?

You can use the list up above to create your own checklist for digital currencies. As an example, you might refer to this article on the highs and lows of Bitcoin because it offers some pretty good fundamentals: https://www.vccircle.com/tracing-the-volatile-highs-and-lows-of-cryptocurrency/

Sources to educate yourself with:

https://seekingalpha.com/article/4077970-technical-analysis-work?page=2
https://medium.com/stockswipe-trade-ideas/chart-patterns-f0a7ceb2bcca
https://www.vccircle.com/tracing-the-volatile-highs-and-lows-of-cryptocurrency/

With Bitcoin, Steem, or any Digital Currency Rise or Fall Soon?

I have no idea what will happen. If I wanted to make a case one way or the other, I'd look at past history. I'd also look at the reasons that the price rose or fell and not just the charts. It's try to find out if one digital currency or blockchain had a competitive advantage over other solutions.

What do you think? I almost always vote upon RELEVANT comments. Thanks for stopping by. If you found this post at all useful, you know, you could give me a vote.

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TA is like the weather: very easy to say why something happened AFTER the fact; almost impossible to predict the future reliably.

I do use it, but it can be very ambiguous and is extremely open to interpretation. The more short-term you look, the more inaccurate it is (it's pretty good over the long-run i.e. more than a year).

Too many people follow TA religiously. If you see someone tell you that "Wave 5 will hit support at $6324.55" then run - they believe TA too much!

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Right, if somebody tells me something is because of this or that pattern, I'd want to know what caused the pattern. If they can't say, I'd be very leery of trusting them as a good analyst.

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Good point, it's a mix of the two. Understanding fundamentals helps to interpret TA.

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