Investing in Bitcoin (BTC) or other cryptocurrencies is not a matter of chance, prophecy, or fanaticism. As with any financial operation, it is necessary for those who participate in the crypto assets market to have the necessary tools to determine which is the best investment opportunity. Kimberly Rosales, an expert in the world of cryptocurrencies, explains the relevance of Fundamental Analysis (FA) when wanting to enter this space.
In order to recognize which cryptocurrency is the best to make an investment in the medium or long term, it is necessary to analyze the market in-depth and have knowledge of the variables that can affect the value of an asset such as BTC, Ether, or others. It is under this vision that takes relevance the FA, a methodology that allows investors to estimate the real value of a financial instrument. In other words, it allows them to orient themselves in terms of their trading positions and decide whether or not they want to take a risk with a certain market.
“FA is a method used to calculate the real valuation of a financial asset,” explains Rosales. “This type of analysis makes it possible to determine whether such an asset is undervalued and has the capabilities to continue growing in price, or if it is rather overvalued and may depreciate sooner or later.”
FA experts manage to calculate the “real” price of these assets by studying a number of financial values and macroeconomic conditions that affect the behavior of cryptocurrencies and other instruments such as stocks and bonds. Because of this, they research and immerse themselves in all the available information that exists about the asset they want to invest in.
The goal is to determine whether the investment they plan to make is actually valuable, or rather whether there are other market opportunities with greater growth potential. In other words, this information can be used to enter or exit positions strategically, generating higher profits or avoiding long-term losses.
“Although FA is a widely used practice in the financial system, with the entry of cryptocurrencies, the study of the variables that affect the value of an asset became more complex,” Rosales asserts. “Investors who decide to try their luck in this market cannot use efficiency tools such as the profits generated by a stock per year, since the value of a crypto asset is nourished by diverse origins and is affected by different elements.”
Due to this reality, when a FA is to be carried out to a cryptocurrency such as BTC, not only financial aspects are taken into account, but also data from public networks are evaluated. Aspects such as the ideology of the project, its group of developers, the community that supports the coin, and additional information such as the White Paper are also taken into account.
In a nutshell, the FA is a tool that assesses the financial risk an investor is exposed to when allocating capital to a particular asset. This is because, if an asset is undervalued at a given time, it can be assumed that it will increase in price over months or years. An investment in an undervalued market can generate long-term gains. Conversely, if the asset is overvalued by demand, then it will eventually decline in value as participants lose interest. In other words, it would translate into losses for the investor.
“FA offers the potential to analyze the external and internal elements that affect the price of cryptocurrencies,” suggests Rosales. “This is very useful, especially if we take into account that this market can be affected by different factors, such as buying and selling, adoption, technological development, and even the engagement of its community.”
Gathering all kinds of information affecting markets such as BTC, Ether, or Monero, allows investors to have a clearer view of the real value of the asset and its long-term behavior. They can also learn to forecast how the value of a currency will react to different events.
Conducting FA every time they invest in a new cryptocurrency helps people have a better understanding of how the value of financial instruments is shaped. In this sense, they will have a better command of the asset they are operating with and can differentiate it from other cryptocurrencies that are more financially risky.