Successful investing involves a mix of fundamental and technical analysis. On top of that, it requires a keen eye in identifying value in places others don't (yet) realise. Let's begin by discussing some fundamental analysis.
To perform a fundamental analysis on the price of any cryptocurrency, one useful model that is easy to understand and dynamic is the basic model of demand and supply in economics.
First let us consider: what are the things affecting demand for a particular coin?
We can split the factors into general reasons and coin-specific reasons.
General factors affecting all currencies include:
- Growing awareness and acceptance of cryptocurrencies as an alternative asset for investment.
- Expectations of entire market's performance/price in the future.
- Rising income levels globally.
- Population growth.
- Destabilising fiat currencies.
Specific factors for a coin would include:
- Complementary effect to existing/new & growing services and products
- Social-herding effects a.k.a. "everyone I know is buying it so it must be a good investment"
- Expectations that price of cryptocurrency will increase
- Government regulation
- Network effects
In future posts we will examine each factor in greater detail and study how we can combine different factors together to arrive at useful quantitative estimates for price. Follow me to learn more. :-)