Technical analysis looks at patterns in market data to identify trends and predict how markets might move in the future. Fundamental analysis is a “big picture” approach that examines financials, user community, and future real-world utility. There are a lot of methods you can use to research an asset you’re interested in trading. But two of the major strategies investors use are called technical analysis and fundamental analysis. Technical analysis focuses on an asset’s historical market performance: by examining price over time and trading volume over time, you can get a sense of how the market sees the asset. Is it rising or falling? Are people putting money in or taking it out? Is it traded widely and in large quantities? Those are the kinds of questions that technical analysis asks.
Fundamental analysis, on the other hand, involves looking at an asset’s “fundamentals” — it’s more of a big-picture approach. It incorporates information like a cryptocurrency’s financials, user community, and potential real-world applications. Both are valuable ways of understanding an investment, and can be applied to everything from stocks and bonds to, of course, cryptocurrency. And they can both help you build a trading strategy and identify when you want to buy or sell a particular asset.
With fundamental analysis you can decide if an asset is overpriced or underpriced based on how you see its intrinsic value — as in, will it be more useful in the future? Take, for instance, Ethereum. Most decentralized-finance (or DeFi) applications run on its blockchain. If you assume DeFi will grow, you might guess that Ethereum’s value will increase in the future.
Unless you have access to high-level models and tools that pro traders use, using both strategies together can provide a fuller view of your trades. While fundamental analysis looks at the more objective indicators for an asset's potential long-term value – things like network activity, use case, business model, and roadmap — technical analysis focuses specifically on an asset’s market performance. Professional traders, on the other hand, might rely much more on one or other. (Large, mature markets tend to have lots of traders of both types.) A trader might, for instance, perform technical analysis using computer models that deeply examine changes in price and volume – including regressions, the relative strength index, and stock-market data. If a given asset tends to go through fairly regular boom-and-bust cycles, technical analysis can give investors insight into the rhythm of these cycles, helping them see opportunities to capitalize on these short-term cycles.