On the contrary to technical analysis, the fundamental analysis method is to use changes in supply and demand to predict future market price changes to determine buying and selling strategies. Generally speaking, when the supply exceeds demand, the market is bearish; otherwise, the market is bullish.
The fundamental analysis method mainly analyzes various factors that affect currency prices. The factors affecting currency prices are mainly market supply and demand factors, as well as policy factors, economic fluctuation cycle factors, political factors, speculative factors, psychological factors and so on. These factors ultimately affect crypto asset prices through supply and demand.
1. Market supply and demand factors
Currency supply, demand and price are mutually influenced and restricted. In the short term, the supply and demand of currencies in the market determine the price, and in the long term, the price determines the supply and demand of currencies in the market.
(1) Supply side
The supply side mainly refers to the market capitalization and its changes. The current supply of currency is mainly determined by the previous inventory, current production and later production.
a. Upfront inventory
The upfront inventory refers to the amount of coins that can be traded and accumulated in the previous mining or unlocked and released, and it is an important part of the total supply. Depending on the identity of the inventory holder, it can be divided into miner's inventory, trader's inventory and project-side inventory. The amount of inventory in the early stage reflects the limitation of supply.
A shortage of supply will cause prices to rise, while abundant supply will cause prices to fall. Therefore, for products such as currencies that can be held and stored, it is very important to study the amount of inventory in the early stage.
b. Current production
The current production refers to the current currency production and is the main body of the currency supply. Different from the previous inventory, the current output may be affected by various factors, such as mining difficulty and computing power, so the current output is a variable.
We must pay attention to analyze and study the changes in mining difficulty, computing power and market circulation (partial unlocking of locked positions), changes in production conditions (costs of electricity for mining machines in various regions), and government policies. To better grasp the changes in the digital currency market and the rules of currency price changes.
c. Future production
Future production is a supplement to the current inventory, which usually changes as the market supply and demand balance changes. For example, if the proportion of bitcoin used in the total amount of commodity transactions is greater, indicating that the market is highly dependent on bitcoin, the later the change in output will have a greater impact on its supply and prices. The currency output and market application requirements should be understood.
The demand for the digital currency market is very simple, mainly for ICO activities, international transactions, node voting, and settlement currency.
2. Policy factors
Policy factors include economic policy factors and monetary policy factors. The more frequently these two policies are used, the greater the impact on the crypto currency prices. In order to safeguard their own political and economic interests, countries often formulate and modify certain policies and measures.
Some policies and measures will have varying degrees of impact on crypto currency prices, such as the "9.4 Incident" in China. In addition to the changes in China policy measures, changes in international and organizational policies also have an impact on the price of the crypto currency market, such as the approval of Bitcoin ETFs.
3. Periodic factors of economic fluctuations
The quality of the economic situation is closely related to the overall supply and demand of society and the relationship between the supply and demand of crypto currencies because the crypto currency market is an open market closely connected with the international market. Therefore, the fluctuation of crypto currency prices is not only affected by the domestic economic fluctuation cycle, but also by the world economic prosperity. The economic cycle generally consists of four stages, namely crisis, depression, recovery, and prosperity.
In the crisis stage, due to shrinking demand, supply greatly exceeded demand, and increased inventories led to a sharp decline in prices; during the depression stage, price decline stopped, but this stage of social purchasing power is still very low, so prices are still low.
Entering the recovery stage, the recovery and development of production and the increase in demand have caused the price to gradually rise; while in the prosperous stage, due to the increasing demand for currencies, but the supply cannot meet the growing demand, stimulating prices to rise rapidly to a higher level.
4. Political factors
Politics and economy have always been inseparable. The political situation in a region, a country, and the world has a great impact on the economy. The crypto currency market is extremely sensitive to changes in the political climate, and the occurrence of various political times often affects prices to varying degrees. When the political situation is turbulent, the economy as a whole is affected, the crypto currency market is also affected, and its prices will also be violently volatile.
Factors such as a country’s civil war, general elections, and international wars, conflicts, and economic sanctions will all cause the price of crypto currencies to fluctuate. For example, the Greek economic crisis in 2015 led to a surge in Greek traders’ interest in Bitcoin. A similar effect occurred when the Great Britain decided to leave the European Union and the United States elected Donald Trump as President.
5. Psychological factors
Psychological factors refer to the confidence of speculators in the market, which can also be understood as market sentiment. The psychological factors of speculators also have an impact on market price fluctuations. People are full of confidence in the market, even if there is no special favorable factor to stimulate, it can also promote the price growth due to the psychological factors of speculators; conversely, when people lack confidence in the market, the price may also fall.
Psychological factors are an important factor that affects the prices. When analyzing the psychological factors, we focus on the analysis of the market participants rather than a small number of large speculators. This is an important reference indicator for measuring market fluctuations, because public psychology often reflects the market participation more significantly.