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Technical vs. Fundamental Analysis - Understanding the Key Differences

February 11, 2022


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After describing the nature of technical and fundamental analysis in our previous articles, it is time to compare the two trading systems and determine which one is better. While we recommend combining both for the best results, investors should naturally limit themselves to only one if they do not plan to invest all of their time into cryptocurrency analysis.

Before we continue, it is important to point out that TA and FA cater to different groups. While technical analysis is suitable for long-term and short-term traders who play with leveraged positions or futures markets, fundamental analysis is more appropriate for long-term investors who are interested in holding onto an asset for several years.

Moreover, the differences between FA and TA are even more prominent in the world of cryptocurrencies than in the stock market. Market participants who employ the HODL strategy prefer conducting FA and nothing else, while those interested in becoming day-traders spend days and nights studying TA.

Is there a clear winner? Both systems have their advantages and disadvantages, so let us put them to a test by comparing TA with FA and find out which is superior. First, we will describe the pros and cons of each strategy.

Pros and Cons of Technical Analysis

The benefit of technical analysis is that, once you have sufficient knowledge of it, it is possible to analyze an asset’s chart and determine its direction in the span of minutes. Keeping in mind that new crypto services make it possible to automate TA, we end up with a process that is even faster.

The leading advantage is that TA helps traders with clearly defining valuable information such as price targets, support levels, resistance levels, and so on. This empirical data provides us with enough context to know how to respond and act depending on a token’s activity.

Proficient experts, who are rare, can also profit more with technical analysis than their FA peers. Those utilizing leverage capitalize on significant price changes and earn in a month what an investor makes in a year. However, being profitable at such a scale requires years of practice and experience. It goes without mentioning that the risk is equally increased as well.

However, not all is perfect. There are a number of drawbacks included within the scope of TA. For example, not all strategies can be backtested and empirically defined. Chart data, such as candle formations and pattern trading, depends on your personal judgment and logic, which can oftentimes be subjective. Not to mention, certain traders consider TA to be ambiguous since two analysts can reach different conclusions while viewing the same data and charts.

Another notable disadvantage is that it leaves traders with the so-called analysis paralysis effect. Users can spend days inspecting different timeframes or different combinations of indicators on an asset. This is a challenge since too much data can prevent someone from not only making the right choice, but making one at all.

Pros and Cons of Fundamental Analysis

When analyzing a project and not its price movement, one is provided with a clearer picture of the cryptocurrency’s fair value. By focusing on teams, funding rounds, development updates, the competing environment, and other factors, it is possible to determine if a project is overvalued or undervalued - thus having an overview of each asset's position on the cryptocurrency leaderboard.

The benefit of fundamental analysis is that it provides an impression of how valuable a cryptocurrency is without any speculation. Once a bubble pops it can blow projects out of the water, but if the chosen project is backed by real value, it will survive temporary market volatility and come back stronger than ever.

The biggest drawback to FA is that it demands enormous amounts of time. Apart from investing their money, crypto enthusiasts need to invest their time as well. A time-consuming task like FA is not for everyone, which prevents the average investor from being properly informed about the market’s diverse list of assets.

It is also worth noting that fundamental analysis provides no information regarding an asset’s short-term price movement. Despite the fact that an asset can very well reach the top within five years, that does not mean that it will provide a positive ROE within a year’s time. Projects whose value is determined by FA can be incredibly volatile in the short term, which means that users should expect profitability within reasonable timeframes.

Technical Analysis vs. Fundamental Analysis: Which is Better?

Time and time again we have mentioned that TA and FA cater to different groups of investors. A famous quote from Albert Einstein may be enough to show you the inherent differences between the two systems:

“Everybody is a genius. But if you judge a fish by its ability to climb a tree, it will live its whole life believing that it is stupid.”

Investing in cryptocurrencies is much like running in a race. The question is, are you running a 100-meter sprint or are you taking part in a marathon?

Technical analysis bears familiarity to sprints. Both the outlook and prediction are limited to short-term market movement. And because new market data arrives each day, even long-term predictions can be heavily modified. That is why traders rely exclusively on TA. Analyzing a chart is enough to form an opinion on whether to open a long or short position. Because the position will likely be closed in the span of a few days, there is no need to care for long-term activity - unless one uses directional trading.

Fundamental analysis is the polar opposite of TA. If we want to hyperbolically compare it to races again, we can define FA as the marathons of investing. Endurance is everything needed to win a marathon and the same can be said for crypto investing. If you invest in a project today, will it keep its position five years from now or will it disappear? Will the project beat its competition and if so, how relevant will the use case be in the future?

Considering that each method targets different goals and timeframes, claiming that one is better than the other is pointless. We advise selecting a system of analysis depending on your personal mentality, skills, objectives, and values. Better yet, use both to your advantage - if you have the time.

About The Author:  
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.

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