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It's another week in the Crypto Academy. This post is written in response to the assignment given by Professor @imagen. He taught Introduction to the Principles of Crypto Analysis and dwelled more extensively on the said topic. So, in the next paragraphs, I will be answering the questions one after the other. Follow me closely.
What are the differences between Fundamental Analysis and Technical Analysis? Which one is used most often?
In this part of the question, I am going to be showing you how fundamental analysis is different from technical analysis and the one that's used most.
Fundamental analysis is one of the methods use in carrying out analysis on cryptocurrency asset. It deals with the use of analysing internal and external data to know the value a cryptocurrency asset worth. The goal of doing fundamental analysis is to determine if a particular asset is devalued or overvalued. Knowing this will help traders to know whether the asset is worth investing in or not. In cryptocurrency fundamental analysis, there are three important variables to look at to have a successful analysis and to be able to get right information or result as to whether the asset is overvalued/overpriced or devalued. These three things are: project analysis, metric analysis and analysis. These three analysis must be done if fundamental analysis will be done completely.
Technical analysis is another method used to analyze the price of a crypto asset. This method is majorly deals with the use of chart to analyze the price pattern of an asset, hence it is also called chartism. Technical analysis deals with the study of past price behavior to determine and predict the future direction of price. There are many technical analysis tools that traders use to predict the movement of price. Some of these tools are chart and candle sticks pattern, Fibonacci retracement tool, technical indicators, etc. These tools are used on the chart to study the history of price to determine when the trend will end or when the the trend will continue so as to capitalize on joining it.
The following in the table below are the differences between fundamental and technical analysis.
|Fundamental Analysis||Technical Analysis|
|Fundamental Analysis is done to know or determine the worth of cryptocurrency asset||While technical analysis is done to determine when the trend is likely change so as to determine the future direction of price|
|Three variables like project analysis, on-chain analysis, metric analysis are always taken into consideration when doing fundamental analysis.||Technical analysis is conducted by the use of technical tools, such as chart and candlestick pattern, fibonacci retracement, technical indicators, etc.|
|Internal and external information and data are needed to conduct fundamental analysis. Hence, decision is made based on the information that available for the asset.||Only price history showing on the charts is needed to conduct technical analysis. Hence, market price, pattern and trend are what determine the kind of decision the traders make.|
|The source of information or data in fundamental analysis is from economic reports, calendar of events, news, management, statistical reports etc.||The source of data is from the chart. Every information and data traders need will be taken from the chart by studying the history of price action.|
|External news doesn't affect fundamental analysis||External news can affect the movement of price in technical analysis.|
|Fundamental analysis involves that traders know how to use statistical data and read news and event. So, soundness is required in statistical analysis and||The use of technical analysis method involves knowing the tools and master them very well. Therefore traders must develop skill in using the tools.|
Now, let's see the one that's used most.
Fundamental analysis can be regarded as the analysis perform which determines the long term worth of the cryptocurrency. But technical analysis used only short term data. Hence, technical analysis is mostly used for short term trading. Both methods of analysis is used by people. However, in my personal opinion, I think fundamental analysis is mostly used in cryptocurrency. People prefer fundamental analysis because, a lot of skill is needed to use technical analysis and that the volatility nature of cryptocurrencies may make one to lose entire capital if one doesn't know how to use technical analysis tools very well. But with the use of fundamental analysis one may decide to invest in a cryptocurrency asset if it's devalued and hold his asset. Although both fundamental and technical analysis will provide good analysis when combined together. But, I think fundamental is mostly used in cryptocurrency.
Choose one of the following crypto assets and perform a Fundamental Analysis indicating the objective of the Project, Financial Metrics and On-Chain Metrics. •Cardano (ADA) • Solana (SOL) • Terra (MOON) • Chiliz (CHZ) •Polkadot (DOT)
For this task, I am going to choose Solana (SOL). I will explaining and doing the fundamental anlaysis for this asset.
Solana platform is a blockchain platform that was founded by Anatoly Yakovenko in the year 2017. The blockchain platform was created to deal with the problems that are found in Bitcoin and Ethereum blockchains.
The native token of solana blockchain is called SOL token.
Solana has partnered with so many organization. These organizations are big organizations which believe in Solana project and its future. Some of these firms are , Chainlink, Project Serum, FTX, Tempest, Terra, Formatic etc.
Objective of Solana (SOL)
The core aim of Solana is to offer a platform for decentralized applications (DApps) in such a way that scalability will be placed in order for them. To be different from other blockchains and solve of the problems of associated with Bitcoin and Ethereum, Solana introduced some features which offer fast transaction. And this is achieved by the use of SOL token. SOL is used in executing the custom programs, and transaction are sent, too using SOL.
Uses of SOL Token
SOL token is majorly used for two things:
- Payment of transaction fees
- For staking.
Although, some DApps built on the blockchain also use Solana token in the governance for voting.
One of the variables to consider when doing fundamental analysis is metric analysis. For metric analysis, we will look at some features such as market capitalization, volume, circulating supply, liquidation etc. For this analysis, I am going to be using a platform called marketcap. The website of marketcap is https://marketcap.com. On visiting the site, we can search for the token by using the search box at the top of the page and type the name of the token. So let's see the screenshot below for Solana (SOL) token.
Fig. 1: Solana (SOL) price, market cap., rank, volume etc. | marketcap.com
As at the time of writing this post, the Solana (SOL) token parameters on coinmarketcap is listed below as it's on the screenshot above.
Price is $158.02
Rank is 7
Market Capitalization is $47, 492, 708, 199
Volume is $1, 583, 305, 487
Circulating supply is 300, 545, 524.56 SOL
Fully diluted market cap. is $79, 944, 992, 421
In metric analysis, one of the most important factor to consider is, market capitalization.
Market capitalization of the asset is the product of circulating supply and price. It's should be noted that when an asset shows low market capitalization, it's a sign that it has capacity to grow. But a project with large or great market capitalization may not have enough capacity to grow as it's already stable. The market capitalization of Solana token is circulating supply × price which is 300, 545, 524.56 × 158.02 = $47, 492, 708, 199.
Circulating supply means the number of token in circulation. The circulating supply of solana (SOL) is 300, 545, 524.56 SOL. This means, this is the total number of tokens in the hand of entire populace.
Total supply is the amount of coins out there after removing the burned and withdrawn token from the amount of coins or tokens in existence. The total supply of Solana token is 488, 630, 611 SOL.
Maximum supply means the amount of the token that will be existence in the future. Each token is unique and have different amount. The total supply of Solana token issue out at the time of launch is 500, 000, 000 SOL. According to research, 11million of the token was burned leaving the total supply to be 488, 630, 611 SOL.
But, many people still touted that the maximum supply is 488, 630, 611 SOL Even, Coingecko even put the maximum supply to be the amount.
Fig. 2: Maximum and Total Supply of Solana by Coingecko | Coingecko.com
But according to Solana inflation schedule, "they said that is not the case". See the screenshot below.
Fig. 3: Solana (SOL) Inflation Schedule
Now, before I move further to show another factor. Let's consider this. The total amount of SOL in circulation is 300, 545, 524.56 SOL And the total supply is 488, 630, 611 SOL. This means, there are still about 188, 085, 087 SOL (More than 188 Million SOL) which are not in the circulation, in the hand of the public.
The other factor that is also consider is liquidity.
Liquidity means how easily a token can be exchanged to Fiat money or other cryptocurrency. To know how liquid a token is, the trading volume is considered. Below is the trading volume of Solana by Coingecko.
Fig. 4: Solana (SOL) trading volume | coingecko.com
As it is seen in the screenshot above, the trading volume is $1, 464, 747, 082.
Now, circulating supply, total supply and maximum supply are used to determine the inflation rate. If it inflation rate is high, the token will lose its value as the price increases over time. This means, for a token to be considered a good vehicle of investment, its inflation rate must not be high.
The inflation rate of Solana is designed to be reducing yearly. According to Solana breach, the initial inflation rate is set to 8% an it will be reducing by 15% every year. This means even when the price of SOL increases, the token will not lose value.
Fig. 6: Solana (SOL) Inflation Schedule
Fig. 7: Solana (SOL) Inflation Schedule
For on chain metric analysis, the block explorer for the Solana will be checked to get some data. These data are very useful to determine the how the future of the project will look.
For this, I am going enter the block explorer of solana. I will enter the ezoai.com block explorer and show some data.
The total number of blocks that have been formed is 37, 054768. Transaction is 19, 851, and **there are 694, 169 live addresses. The details of these things can be found in the screenshot below.
Fig. 8: Solana Block Explorer showing Transaction, Block etc. | ezoai.com
Now, the next thing we are going to see is the number of token that's staked or locked. It's important that we know this for our fundamental analysis. 407.44 M SOL is staked See the screenshot below.
Fig. 9: SOL staked or locked | ezoai.com
Then, let's see the unlocked and non circulating. About 72. 9M is unlocked but not circulating. The screenshot below shows it. And about **11.3 M SOL is on binance for market making.
Fig. 10: Unlocked and non circulating | ezoai.com
Considering all these data, we will see that, SOL token has a good foundation and the future is also promising. Although its price is high but it still has long way to go. The price is going to rise even more in the future.
Make a purchase from your verified account of at least 10 USD of the currency selected in the previous point. Describe the process. (Show Screenshots).
In this part of the question, I am going to be purchasing Solana (SOL) token with USDT. And I am going to be using my verified binance exchange platform to make the investment. Below is the screenshot showing my verified account.
Fig. 8: My verified binance exchange| binance exchange platform
I have about 24USDT in my wallet. I am going to use this asset to buy SOL.
Fig. 9: My Wallet Section | binance exchange platform
Now, since I know asset taht I am going to use to buy SOL. Then next thing is to go buy SOL. To do this, I am going to click on the trade section at the bottom of the page.
Fig. 10: Trade section on binance | binance exchange platform
Then upon clicking on this, a page will appear where we are going to buy SOL. But we need to search for the cryptocurrency pair we want to trade. In my case, I am going to search for SOL/USDT since I want to buy SOL with my USDT. In the screenshot below, an arrow is pointed at where you will click to search the cryptocurrency pair you want to trade.
Fig. 11: Trade Page on binance | binance exchange platform
Now, upon clicking on it, a search box will appear where we can search for the cryptocurrency pair. So, in the search box, I am going to put SOL/USDT and I will click on it once it shows the result.
Fig. 12: Searching for SOL/USDT | binance exchange platform
Once it's clicked upon, you will be taken to a trade page. Then we can buy our SOL.
Now, I am going to buy 12$ worth of SOL. Iam buying at the market price. The current price at the time of making investment is $156.75. So, I am buying at that price. Then after filling all the details, I will click on buy.
Fig. 13: Buying SOL with USDT | binance exchange platform
Upon clicking on buy, the order got filled immediately. Below is the order details of the trade. You can see that I got 0.7 SOL
Fig. 14:Order Details | binance exchange platform
Also, let's see this asset I bought in my wallet. The screenshot below shows it.
Fig. 15: $12 worth of SOL in my wallet | binance exchange platform
Apply Fibonacci retracements to the previously selected asset with a 4 hour time frame on the platform of your choice. Observe the evolution of the price at 24 and 48 hours, did it go up or down in value? Look to identify resistance and support levels. (Show Screenshots at 0, 24 and 48 hours of purchase where the date and time are observed).
In this part of the question, I am going to apply Fibonacci retracement to the chart of SOL/USDT. Now to apply this, I am going to use trading view. You can visit the website by clicking here. Then, once it's loaded to the homepage, click on the chart at the left top of the page and the chart will be loaded for you.
The time frame which will be used is H4. You can click the top of the page on the chart to set your time frame. Here, I have set mine.
Fig. 16: SOL/USDT chart set to H4 time frame | tradingview.com
Now, the time which I'm performing this task is 16:00pm WAT /15:00 UCT – 19/10/2021. It's required that I show this because the question demanded it. See where the arrow point at in the screenshot below.
Fig. 17: SOL/USDT chart showing Time and date | tradingview.com
Now, to add fibonacci retracement tool to the chart of SOL/USDT, navigate to the left of the chart. The tools features are listed with icon. Click on the icon where an arrow I pointed at in the screenshot below. Then once you click on it, you will see features appear showing different tools. Fibonacci retracement is the first tool. Click on it.
Fig. 18: Adding Fibonacci retracement to the chart of SOL/USDT | tradingview.com
Now, to draw fibonacci retracement, we must know the current trend in the market. Because, Fibonacci retracement could only be drawn correctly if the trend is known. A bullish trend is composed of high highs and higher lows while a bearish trend comprises of lower lows and lower highs. Now, if we consider the chart of SOL/USDT on H4 time frame, we will realize that the current trend is bullish trend. The price of the asset is making series of higher highs and higher lows. Now, let's see the screenshot below.
Fig. 19: SOL/USDT is in a bullish Trend on H4 Time frame | tradingview.com
We can see that the price is trending up. Now, having known that the trend is bullish, how do we now draw our fibonacci retracement on this bullish trend chart? Simple! For bullish trend, you are going to start from the low of the price to the high. Now, in our case, the last low point that the price left before rallied up is point 2. And we can see that the price has made higher high, which is point 3. So, we are going to start drawing from point 2 to point 3. See the screenshot below.
Fig. 20: Fibonacci Retracement applied to the chart of SOL/USDT | tradingview.com
In the screenshot above, I have already applied the Fibonacci retracement on the chart of SOL/USD. The price retraced to 0.618 or 61.8% three days ago (17th Oct. 2021) and now, today at 15:02 UCT / 19TH Oct. 2021, the price is between 0.382 and 0.5 fibonacci level. So, this means, the retracement to this level may have formed wave 4 and wave 5 is already forming. In the next 24 and 48 hours, we are going to see what the price would do.
Supports and Resistance on the Chart
Supports and resistance are key levels area where the price of an asset has difficulty. They are regarded as the demand and supply area, that's where people buy and sell asset. Support can turn to resistance if the price breaks it downward and resistance, too can turn to support if the price breaks it upward.
The screenshot below shows the Support and resistance levels on the chart of SOL/USD.
Fig. 21: Support and Resistance Levels on the Chart of SOL/USDT | tradingview.com
Now, putting fibonacci retracement together with the Support and resistance marked, we can see that the Fibonacci levels are regarded as support and resistance levels. In fact, the price is currently reacting to a key level, support (0.5 fibonacci level). See the screenshot below.
Fig. 22: Support and Resistance Levels and Fibonacci retracement on the Chart of SOL/USDT | tradingview.com
24Hrs After the Analysis
Now, at 24 hrs , the value of the asset has increased. The analysis was done on the 19th of October 2021, and on the 20th of October, 2021, the price has rallied up. During the time of the analysis, the price was at 156.0000 and 24hrs after the analysis, the price has increased to 164.8736
Fig. 23 : 24hrs After the Analysis | tradingview.com
The price is now at a resistance level and we can't say if it will break this level or will respect the level and price will rally downward. See the screenshot below.
Fig. 24 : 24hrs After the Analysis – Price at the Resistance Level | tradingview.com
As it is seen in the screenshot above, the price is at the resistance level. Only time will tell if it's going respect or break the level.
48Hrs After the Analysis
Now, let's see what price is going to do at 48hrs. When I opened the chart, the price has rallied up. This means the asset, SOL/USDT has increased in value. The price is now at 181.7650. This time around, the increment was great. Let's see the screenshot below.
Fig. 25: 48hrs After the Analysis | tradingview.com
Now, the price broke the resistance and turned that resistance to support. In fact, it has met another resistance and it's trading back down. It's in the middle of the new resistance and support. See the screenshot below.
Fig. 26 : 48hrs After the Analysis – Price broke the Resistance and rally up to create another Resistance | tradingview.com
What are Bollinger Bands? How do they apply to Crypto Technical Analysis? With which other tool or indicator do you combine Bollinger Bands to analyze a Crypto? Justify your answer.
In this part of the task, I am going to be explaining Bollinger band, how they apply to crypto technical Analysis and some of the indicators that can be combined with it to make good analysis.
What is Bollinger band?
Bollinger bands is a technical indicator which is used by traders to predict the movement of price. It's regarded as a trend indicator. The indicator is developed by a popular Analyst called John Bollinger. The indicator shows the loudness or quietness of the market.
The indicator is composed of three lines plotted on the main chart. The limes are called bands, and they named as lower band, middle band and upper band. The lower band shows the average price of an asset at a particular time. The upper and lower band are about two deviation (standard deviation) away from the middle band. They are often reffered to as mean price.
The bands expand and contract. When the band contracts, it means there's no volatility in the market and at this particular time, you will see the bands having little distance from each other. Traders called the market a quiet market when the bands contract. When the bands expand, it means that there's great volatility in the market and the bands are seen far away from each other. Then the market at that time is called a loud market because there's a great movement in the market.
Traders often look at the bands before deciding to trade. If the band is seen contracted, they won't trade because there's no or slow movement of price at the particular time, and if the bands are wisely opened, then it means there's movement in the market, then they can decide to join the trend. So, bollinger bands show how volatile a market is at the particular time.
There are two strategies traders often use bollinger bands for. There's a strategy called Bollinger bounce and the other is known as bollinger squeeze.
Bollinger bounce strategy is used when the market is ranging. Now, it should be noted that market may be ranging and still be loud. So, it's used for a loud ranging market. A market that has no clear direction. Now, in the ranging market, it is believed that the price will always return to the middle band. What traders do is that, the will use lower band as support, and upper band as resistance. So, when the price touches the upper band, traders sell and put the take profit at the middle band and when the price touches the lower band, they buy and put the take profit at the middle band. So middle band is always used as a take profit level in bounce strategy.
Fig. 27: Bollinger band in a ranging market – Bollinger bounce | Mt4 Platform
The other strategy is bollinger squeeze. Traders who use this strategy are always looking for a quiet market and monitor it for a breakout. It's believed that when the market is quiet, it will later break to a side. However, the side it will break to is difficult to predict. Also, the squeeze is very difficult to recognize, it doesn't occur every time and they are often found on lower time frames. So traders switch to lower time frames to be on the look out for bollinger squeeze. So, after a squeeze is identified, traders look for the price of the upper band and add about 10pips to it and the price of lower band and subtract 10pips from it. They use some call level apps and set these values there to be able to be alerted when the squeeze break to either direction and then trade it.
Fig. 28: Bollinger Squeeze | Mt4 Platform
How do they apply to Crypto Technical Analysis
There indicators which People or traders say it's not apply to cryptocurrency. But when we talk of bollinger bands, it can be applied to cryptocurrency. Remember I said that Bollinger bands show how loud or quiet an asset is. And when the asset is quiet, people don't trade, but when there's volatility, when there is loudness in the market, traders trade.
Since cryptocurrency is volatile in nature, then to me, I think bollinger bands will be a good indicator to predict the movement of price. And also, Bollinger bands shows volatility estimate the volatility of a cryptocurrency asset.
So, in essence, since most cryptocurrency is very volatile in nature, they will show clear trend. And hence, the bollinger bollinger strategy will still work well for trading he cryptocurrency pairs.
With which other tool or indicator do you combine Bollinger Bands to analyze a Crypto?
One of the best technical indicators that could be used together with bollinger bands to analyze crypto is relative strength index (RSI).
RSI is an indicator which shows when an asset is oversold and overbought. It's an oscillator based indicator.
RSI consists of a single line which oscillates up and down the window scale. It is scalled from 0 to 100. The scale of 30 – 0 is called oversold region , the screenshot between 30 and 70 I known as neutral and 70 - 100 is called overbought region. When an asset has been in a bearish trend for long and RSI enters the scale of 30 and goes below, that is a signal that the market is about to reverse as the sellers momentum is being reduced because the asset is oversold. Then this time, buyers are preparing to enter and take over the market. On the other hand, what the market has been in a bullish trend and RSI crosses 70 and goes above, it's a signal for sell as the price is overbought an buyers are being overpowered.
Fig. 29: Relative Strength index (RSI) | Mt4 Platform
The screenshot above shows relative strength index. We can see the scale of 0 -100. In essence, when the RSI enters oversold region it is a buy signal and it enters overbought region, it is a sell signal.
Another signal from this indicator is known as divergence. Divergence occurs when an asset is going in a direction and RSI goes through other direction. Ideally, RSI suppose to be going in the direction of price, but in case the opposite happens, divergence has occurred.
Now, let's see how to combine RSI with Bollinger band.
In a ranging market, when the price touches the lower band, traders buy the asset and use middle band to take profit. Also when the the price touches the upper band, traders see and put the take profit at the middle band. But with the use of RSI, the signal can be filtered.
Let's see the screenshot below.
Fig. 30: Using RSI and Bolling band in a range market | Mt4 Platform
Now, we can see that as price touches the lower band and we have RSI enters oversold, too that is the double confirmation that the price of the market will experience a rally up. Using RSI Indicator can be useful as when the price enters oversold, we know that the sellers are weakened and that the buyers are taking over.
In a trending market, when the the price crosses over the middle band and the price stays above the middle band, it means the trend is bullish. On the other hand, when the price crosses the below the middle band and the price stays below the middle band, that's a bearish trend. In a trending market, bollinger bands and RSI can be used together to accurately predict the movement of price. See the screenshot below.
Fig. 31: Using RSI and Bolling band in a Trending market | Mt4 Platform
As it is seen from the screenshot, the price of the asset , ETHBTC has been in an up trend for a period of time as we know that when the price is above the middle band, the trend is bullish. So, when the price crosses below it, it is a signal for sell. The price crosses the middle band at the peak of the price. That signifies a sell signal. However, you can see that the price still rallied up a bit. But looking at the RSI, we can see that as the price rally up a bit, RSI gave a counter direction. Ideally, RSI supposed to move in the same direction of price, but it went the opposite direction. That confirms the signal from the bollinger bands as we now that divergence has occurred. And immediately the divergence occurs, the price rallied downward.
Cryptocurrency analysis is a medium which traders use to decide whether to invest in a project or asset or not. It's good to analyze a particular project thoroughly before putting money in to it. Although, in investing, people are always advised to put what they can lose, but in the real sense, nobody wants to lose. We all take risks with the sense that we may win. So, even when we take risk, we still want to win, we want to gain. Analysis is very important. Its importance can never be overemphasized. People who put their money in a project they which they never analyzed may find themselves to be blamed. So, it's good to take risks, but it's better to take calculated ones. And the only way to take calculated risks is by doing analysis on the project you want to invest in.
Fundamental and technical analysis are methods of analysis used in cryptocurrency trading. Fundamental analysis deals with the use of project, metric and on chain analysis to determine the intrinsic value of an asset, the worth of an asset. Technical analysis deals with the use of technical tools on the price chart to study the past behavior or history of price in order to determine the future direction of price.
Technical analysis requires that traders are skilled in the use of technical tools which they will be using on the chart to make a good analysis. Fundamental analysis majorly deals with data or information. The information that's available will only be used to analyze the asset.
Combination of the two methods of analysis will give a traders edge and will make a better analysis. More tools such as technical indicators and fibonacci retracement, patterns etc are available to analyze in technical analysis. These tools can help traders make good analysis. They are even better when they are combined together as they will serve as confluence. It is pertinent to know that there thousand of cryptocurrencies out there, but to make profit from them either in a short term or long term, traders must learn how to analyze and combine tools . Failure to do and learn this will always result in losing money in cryptocurrencies.
Thanks to Professor @imagen for bringing this course up. I have learnt one or two things from this course. I have been able to learn how to do fundamental analysis. I look forward to seeing more lessons from you.
Written by @msquaretk