INTRODUCTION
Many people who invested in Bitcoin early one did it for the fundamental reasons. They saw the potential of the technology to revolutionize the way we send and receive value over the internet, or liked the deflationary model of the currency. However many of the early investors in Bitcoin didn’t sell their houses to buy it because they did a fundamental analysis and everything checked alright buy their criteria. Instead, they just played VC’s and angel investors, putting the money they can say goodbye to. And many of those early investors were anarchists who believed in it and wanted it to succeed.
You all know those calculations that go something like: “If you invested 200$ into Bitcoin back in 2011 you would now have 6 million dollars”. The fact is that even if I’ve heard of Bitcoin back then I would never have invested in it, because I would use that 200$ to buy an mp3 player or something. We don’t have money to say goodbye to. Everytime we invest we are doing it to increase our wealth not reduce it.
Doing a proper fundamental analysis of Bitcoin back in 2011 would be impossible. There is no company behind it, the team is anonymous, early adopters and developers worked on improving the network voluntarily, it was the first of its kind so no competition comparison etc.
A similar case can be made for many of the other cryptocurrencies that are flooding the market every single day through an ICO. The only difference is that now we have something to compare them to, and there are team and companies behind them. But the fact that decentralization is the main pillar of cryptocurrencies, makes it hard to evaluate them fundamentally. There are no income stream, cash flows or dividend streams, financial statements and so on.
In this editorial, I will elaborate on the advantages of technical analysis over fundamental when it comes to cryptos.
Advantages
Technical analysis is a form of analysis where an investor uses graphically displayed price movement data to evaluate a security. Why is price analysis better? Well, because the price is determined by supply and demand, and changes in the supply and demand ratio reflect on the price.
Market participants are governed by greed and fear, so often times they are irrational and emotional and technical analysis unlike fundamental takes that into an account. More importantly, participant tends to act in a similar way in similar circumstances - that’s why chart patterns work. Technicians recognize trends and patterns that have occurred in the past in an attempt to project the future price pathway.
Price is always searching itself, so by taking that into account, technical analysts are looking to figure out the market sentiment. Price and volume hold the information and serves as an indicator of that sentiment.
Another principle of the technical analysis is that the price reflects the collective knowledge of the market participants. Charles Dow, described the collective action of participants in the markets as follows:
The market reflects all the jobber knows about the condition of the textile trade; all the banker knows about the money market; all that the best- informed president knows of his own business, together with his knowledge of all other businesses; it sees the general condition of transportation in a way that the president of no single railroad can ever see; it is better informed on crops than the farmer or even the Department of Agriculture. In fact, the market reduces to a bloodless verdict all knowledge bearing on finance, both domestic and foreign.
Fundamental analysis seeks to determine the intrinsic value. Technical analysis is practical because a technician studies the current value and its’ recent fluctuations. Technicians seek to project the level at which a financial instrument will trade, whereas fundamental analysts seek to predict where it should trade. And what you think should happen doesn’t always happen, especially when it should happen. I know a guy who fundamentally knew that the housing market would crash, but has lost all of his money trying to short the market six months earlier.
On that note I will share with you a paragraph from a book I highly recommend called “Technical Analysis of Stock Trends” by John Magee and Robert D. Edwards making the same case, favoring technical approach:
The technical student argues thus: it is futile to assign an intrinsic value to a stock certificate. One share of United States Steel, for example, was worth $261 in the early fall of 1929, but you could buy it for only $22 in June of 1932! By March 1937, it was selling for $126 and just 1 year later for $38. In May of 1946, it had climbed back up to $97, and 10 months later, in 1947, had dropped below $70, although the company’s earnings on this last date were reputed to be nearing an all-time high and interest rates in general were still near an all-time low. The book value of this share of U.S. Steel, according to the corporation’s balance sheet, was about $204 in 1929 (end of the year); $187 in 1932; $151 in 1937; $117 in 1938, and $142 in 1946. This sort of thing, this wide divergence between presumed value and actual price, is not the exception; it is the rule. It is going on all the time. The fact is that the real value of a share of U.S. Steel common is determined at any given time solely, definitely, and inexorably by supply and demand, which are accurately reflected in the transactions consummated on the floor of the New York Stock Exchange. Of course, the statistics which the fundamentalists study play a part in the supply–demand equation — that is freely admitted. But there are many other factors affecting it. The market price reflects not only the differing value opinions of many orthodox security appraisers, but also all the hopes and fears and guesses and moods, rational and irrational, of hundreds of potential buyers and sellers, as well as their needs and their resources — in total, factors which defy analysis and for which no statistics are obtainable, but which are nevertheless all synthesized, weighed, and finally expressed in the one precise figure at which a buyer and a seller get together and make a deal (through their agents, their respective stockbrokers). This is the only figure that counts.”
It’s the same in cryptos. Technology has never been better, it is constantly improving making it faster, more secure, innovation is blooming, media has devoted their fair share of the spotlight to Bitcoin in 2017, governments are trying to create regulations and policies, World Economic Forum had a panel discussion about them… Things are constantly moving forward yet the price is doing its own thing.
Conclusion
Cryptos are a mixture between a currency and a share of the stock. Fundamental analysis is great for evaluating an intrinsic value, but so far I haven’t seen anyone successfully asses an intrinsic value of Bitcoin, let alone hundreds of ICO’s. Some try to calculate how much electricity is consumed to mine a Bitcoin, others are comparing it to the size of the forex market which would bring the price to millions. There are no ways to evaluate an intrinsic value of a cryptocurrency. This price of a coin is solely determined by supply and demand. That’s why Technical Analysis is a better form of analysis to apply on cryptos, in my mind.