Introduction to the Principles of Crypto Analysis - Crypto Academy S4W7 - Homework Post for @imagen

in hive-108451 •  2 months ago  (edited)

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Introduction

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Hello Crypto Lovers,
Week 7 Season 4 greetings to you all. It is no news again that we are already in week 7. I hope you have been enjoying crypto Academy since the commencement of this season. I am Kehinde Micheal and my username is @msquarrtwins here on this great platform. I have read and understood the lecture presented by Professor @imagen on Introduction to the Principles of Crypto Analysis in the intermediate class. In this post I will be answering and explaining the question posted in the homework section. Happy reading!


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1. What are the differences between Fundamental Analysis and Technical Analysis? Which one is used most often?

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Crypto assets are very volatile, their price can fluctuate anyhow and as such traders get proper skills and information before they invest in any project or cryptocurrency. Fundamental and technical analysis are the two tools or techniques normally used to search for information or to determine the current state of the cryptocurrency and how it would turn out to be in the couple of days, weeks, months or years.

Fundamental analysis is a technique used to to systematically determine the value of crypto asset by checking a number of factors in and outside the project ecosystem. The main purpose of fundamental analysis is to determine whether the crypto assets is undervalued or overvalued and then determine to invest on an asset or to distribute it based on the information gotten from the analysis.

In fundamental analysis, the current value of an asset is analyzed and then compared with the actual worth it supposed to have at that time. If after the anlysis done, an asset is seen to be undervalued, traders do invest in it with the hope to make profit as the crypto asset increases in value. Fundamental analysis is achieved by looking at some important factors. It entails analysing the project, financial metric of the project and doing thorough search of the project blockchain which is also called onchain analysis.

In doing project analysis with the hope to get information for fundamental analysis, traders looks for project aim, the developers of the project and their past record to ascertain how reliable the project is. Some other things that are also sought for are the sector in which the crypto works, the competitors of the project and the white paper presented to the public by the project to know the road map of the project, how effective it can stand and compete with the competitors etc. The fundamental metrics is done by looking at the current market capitalization of the project, liquidity, current supply, circulating and maximum supply to get ideas of how people are using the project, the remaining supply that the project is likely to supply in the future etc. And lastly, the onchain metrics is done by looking at past activities on the project's blockchain, like transaction, hash rate, staking volume of the asset, number of address or wallet created etc.

Technical analysis on the other hand is based on the past movement of price. It is the used of chart tools on the price movement to determine the past behaviour of price of an asset and the use the information to determine the future trend of the asset. Technical analysis is done to analyse the history of price of an asset and to determine the beginning of trend, the possible continuation and the direction to which an asset could take in the future.

In technical analysis, the market structures and cycle of an asset are determined with help of technical tools. Additionally, chart patterns are also important part of technical analysis and this are achieved with help of trend lines and some important technical curves and tools which are used on the chart. Price pattern may indicate the reversal of trend or continuation of trend. When traders analysed and see that the price pattern that formed is likely to go against the current trend, they take the advantage of it and position themselves for trade order in line with what the pattern is saying.

Notable differences between Fundamental Analysis (FA) and Technical Analysis (TA) are further highlighted in a table below

Fundamental AnalysisTechnical Analysis
Fundamental analysis is done to determine how undervalued or overvalued an asset is and the take advantage to invest in the project or distribute it base on the information obtained.Technical analysis is done to determine the future price of an asset.
Project analysis, metric analysis and onchain analysis are the major factors on fundamental analysis.Price movement is the main focus of technical analysis.
Fundamental analysis focus on the internal value an asset should haveTechnical analysis is done to get the right time of entry and exit
It is mainly used for investment purposeIt is mainly used for trading purpose.
Decision is taken based on the information gotten from the internal and external analysis carried out.Decision is taken based on the trend pattern and price of an asset.
It does not require to much of skill to carry outIt often require great chart tool skill to carry out technical analysis.
It consider the trading price of an assetIt is solely based on the action behind the price. i.e the price action of an asset.

Now to talk about the one that is mostly used between fundamental and technical analysis, I think fundamental analysis is most used by traders because it is easy to carry out. Technical analysis is not easy to do because it require great chart skill to be able to analyse an asset and as such many traders prefer to use fundamental analysis.


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2. 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)

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For this question, I will be performing fundamental analysis of Polkadot coin called DOT.

Polkadot (DOT)

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History and Team of Polkadot

Polkadot is a project that was created on substrate, a protocol that makes it possible for other blockchain developers to create and systematically customize blockchain. The project was birthed in the year 2016 and it is the innovative idea of a man called Dr. Gavin Wood, who happens to be one of the Ethereum blockchain co-founders. Peter Czaban and Robert Harbermeier are the two co-founder of Polkadot. Peter Czaban is a graduate of Oxford University with quality experience in financial data, data analysis and machine learning. Robert Harbermeir happens to be one of the members of Rust programming community and has vast experience in decentalized network and cryptography.

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Objective, Use and Sector of Polkadot

Polkadot aims to provide blockchains that will be able to interact and communicate with each other. The project objective is to bring all blockchains together and to provide good platform for any blockchain or decentralized project like DeFi, Brigdes, Gaming etc. Additionally, the project also makes cross communication possible. It also makes increase interoperability. The project is a one of the competitor of Ethereum blockchain because of the fast scaling and interoperability seen in the project.

In short, polkadot solve two major issues associated with most blockchain, scaling and interoperability. Most blockchains have slow scaling power and as such transactions are very slow but Polkadot solve this problem. Also, most blockchain operate independebtly and this makes it difficult for them to interact and communicate woth one another. But Polkadot achieved interoperability by bringing blockchains together and allow cross communication between blockchain.

The native token of Polkadot is DOT token and it is used for many purposes. The token can be used as governance token which allow holders to vote and propose new features on the platform. DOT token can also be staked to give support for the project security. It can also be used to for bonding and lastly it can be used to pay transaction fee and to passage message between different chains.

Financial Metrics of Polkadot

According to coinmarketcap the price of 1DOT as at the time of writing this task is $40.86. The screenshot is displayed below.

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The current Market Capitalization of Polkadot is $40,419,774,610 as indicated by a red box in the screenshot below. The market dominance of this token is 1.63% as indicated by a black box in the screenshot below. The token is ranked 8th in coinmarketcap and has trading Volume 1,562,663,939.51 which shows that DOT token is trading with great high liquidity.

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The Circulating supply of polkadot as at the time of writing this task is 987,579,314.96 DOT and the total supply of DOT is 1,103,303,471 as indicated by blue and red box respectively in the screenshot below. Circulating supply is the total number of coins that are in the hands of user and in the market.
As seen in the screenshot below, the Maximum supply of Polkadot written above total supply has no value attached to it, this is because Polkadot has no Maximum value. This means that the circulating supply will continue to grow as time flies. The inflation growth of Polkadot is set to 10% every year. This therefore means Polkadot is a good project to invest in.

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On-Chain Metrics of Polkadot

I will be using polkadot block explorer to show some activities that have been recorded in polkadot platform in the past.
I simply searched for polkadot block explorer and I saw the link given above.
Below is the home page of this website.

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The screenshot above is the home page of polkadot block explorer. From the screenshot above, the total number of Finalized block at at the time of writing this task is 7,326,865 as indicated by a yellow box in the screenshot above. The total number of DOT that has been issued so far is 1.122Billion as indicated in the screenshot by a magenta box. The total number of DOT staked is 703,699M which constitute 66% of the total issuance token. The total transfer that has been done is 4,093,500 as indicated by a black box in the screenshot above. Additionally, there are 297 validators on the polkadot blockchain and a total number of 950,255 are currently holding the DOT token. The current inflation rate of DOT token is 8.34% as indicated by a blue box in the screenshot.

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The screenshot above shows the total number of blocks that has formed. At the time of taking the screenshot, the total number of blocks that have formed is 7,326, 897 as indicated by a red box in the screenshot above.

The screenshot below show the details of the last block. The hash, the parent hash and the status that inform us that the block is finalized.

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The last extrinsic transaction is 7,326,910-5 as indicated in the screenshot by a black box.

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And the total number of extrinsic transaction as displayed below is 5,566,456 which is indicated by a red box in the screenshot below.

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3. 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).

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For this exercise, I will be buying DOT with my USDT asset.
• I logged in to my Binance App. Below is the screenshot showing that my account is verified.

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Screenshot From Binance App


•Then I switched to the homepage. From the homepage, I clicked the trades page as indicated by a red circle in the screenshot.

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Screenshot From Binance App


• Then the trade page appear before me as displayed in the screenshot below. The crypto pair that I meant there isn't the one I wanted to invest in, so I simply clicked the crypto pair as indicated by a blue arrow in the screenshot to change it.

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Screenshot From Binance App


• Then the search page appeared. From the search page I searched "dot" and the result came forth. From the result, I clicked DOT/USDT as shown by a red box in the screenshot below.

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Screenshot From Binance App


• Now we have DOT/USDT in my trade page as indicated by a sky blue box in the screenshot below.
• I placed a buy order to exchange 11 USDT for DOT token at a market price of $40.44 as displayed below.

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Screenshot From Binance App


• The order was executed immediately and I went straight to check the order details. Below is the order detail of the order placed.
• As seen in the screenshot below, the order later got filled at a price $40.43, giving 0.27 DOT. The date and time the order get filled is indicated in the screenshot by a black box which is 2021-19-10 16:41:10.

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Screenshot From Binance App


• Then I cjeck hthe total amount of DOT in my spot wallet. $10.90 woth of DOT happened to be the totalbDOT gotten as seen in the screenshot below.

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Screenshot From Binance App


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4. 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).

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For this task, I will be using tradingview platform.
• To access trading, go to Tradingview.com.
• The then home page will appear for you. From there, I clicked the three horizontal line at the top left of the page to access the chart. I then clicked chart as indicated by a red arrow in the screenshot below

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• Then the chart appear for me as displayed below. I put the chart to 4h Time frame as indicated by a red arrow in the picture below.

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• The current trend of DOT/USD based on this time frame is bullish as the market structure continues to make Higher highs and higher lows as identified in the screenshot below.

• The market keeps creating Bullish trend from point zero as indicated by (0) in the picture below. At the high indicated by a red arrow, the price couldn't create high that is higher than the previous one and also, the previous low has not broken. Until the previous low is broken, the asset is still considered bullish.

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• Let's now add the fib retracement to this chart.
We simply go to the left side of the chart and click the fib tool ad indicated by a small red box in the picture below.
• The I clicked the Fib retracement as displayed in the scrwenshot.

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• Then, the Fib retracement is drawn by placing the origin to the last HL to the recent HH. The last HL is indicated as point A and the recent HH is point B. As seen in the screenshot, the firat retracement is a long wick which almost retraced to 100% Fib level as indicated by a red arrow in the screenshot. Then, the price rallied up but didn't make a new high before it retraced back and currently the price is $40.49 at around 78% fib level as indicated by a black arrow in the screenshot below. Until the previous low is broken, the asset is still bullish.

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After 24hours, the price of DOT/USDT increased and rallied up. In fact, it broke the previous high. The previous high is indicated by a black arrow in the screenshot. The current price of this asset as indicated by a blue arrow is $44.54. This means DOT has moved up with over $4 from where it was 24 hours ago. The rsupport identified is at 61.8 Fib level. An order block was created around this point before price rallied up.

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Then the price evolution was checked again after 48 hours. DOT retraced to the support level identified in the screenshot. The price came down from $44.45 to around 41.9 and then went up again and currently the price is at $42.27 around 38.2 Fib level.

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5. 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.

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Bolling bands are technical indicator that was developed by John Bollinger. This indicator generate and measure the oversold and overbought region of an asset. It is made of up three lines, the simple moving average which ia the middle band, the upper and the lower band. The upper and lower band are often called the positive and negative deviation for the middle band. Although they can be adjusted to fit the trading style or strategy.

Bollinger band make use of period and standard deviation to calculate the bands. The default period is 20 and 2 is used for default standard deviation. These two parameters can be adjusted. Additionally, it is used to determine how high or low the price of an asset is at a particular period of time.

How Bollinger Band can be Applied to Crypto Technical Analysis

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The screenshot above shows the Bollinger band on BTCUSD chart. The middle and is referred to as Moving average. The upper and and lower band is indicated in the screenshot by blue arrows.

When market are in low volatility phase, the bands are constricted and that may indicate a sharp move of price in the later time. But when the band are seen to be distant far f from each other, it means there is volatility in market. Traders often use the band for both entry and exit point. For instance, if price crosses the middle band upward, the upper band would be used for profit target of any other taken from the middle band. Furthermore, Bollinger band may be used to determine the trend. For example, when price is hanging on the band envelope for a long period of time, it means continuation in the trend of an asset.

Combining Stochastic Oscillator with Bollinger Band

One of the indicator that can be used alon with Bollinger band is stochastic oscillator. Stochastic oscillator is an indicator that measures the oversold and overbought region of an asset. I.e it gives overbought and oversold signals.

Stochastic oscillator is a momentum indicator that can help traders to detect the trend of an asset and also give possible point where there could be trend reversal. It is made up of two lines that go in line with the price movement. The two lines of stochastic oscillator are called %K line and %D line. Another thing of note is the overbought and oversold region of stochastic. An asset is said to overbought when the stochastic lines are between 80 & 100 and it is oversold when it is between 20 and 0.

When %K line cross the %D line at the overbought region, the current trend is assume to be ending and sell order is always envisage. But when this happens at the oversold region, the reverse is the case. Buy order is always envisaged around at this region.

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The picture above shows stochastic oscillator and Bollinger band oscillator on BTC/USD Chart. Bollinger band is plotted on and move alon with the candlesticks. The stochastic oscillator is rightly below. The overbought and the oversold region is indicated in the screenshot. The %K line and D line is also indicated above.

When price bounces at the upper Bollinger band, traders always look for sell order and they always use middle band for target but when price bounces at the lower band, buy order is always on the look for.

Stochastic oscillator can now be used to confirm this strategy to better confirm the the signal given by the Bollinger band. For instance, at the area with the spot light in the screenshot, the price bounced on the upper Bollinger band which signifies that price may reverse. Stochastic oscillator also gave the same signal in that both %k line and % D line crossed each other at the overbought region. This therefore confirmed the signal of sell oder given by Bollinger band.


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Conclusion

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Traders need to familiarize themselves to Crypto analysis to be able to make good market decision. Cryptocurrencies are very volatile, so traders should be very careful. The role of Fundamental and technical analysis in determining or making good market decision can never be overemphasized.

While fundamental analysis seeks to determine how overvalued or undervalue an asset is, technical analysis relies on the price movement and or the pattern formed through price movement.

In doing fundamental analysis, project analysis must be checked very well to be able to be confident of the project, also the financial metrics and onchain metrics must be analysed thoroughly.

In this task I have done fundamental analysis of Polkadot and I was able to male the investment Prof asked us to do through our verified account. Thanks to Prof. @imagen for this great lecture . it added a whole lot to me.

Thank you for reading.

Written by :-@msquaretwins
Cc:-@msquaretwins

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Rating ScaleGradeObservations
Originality1.0/1.5
Topic Depth2.0/2.0
Consistency of the Method2.0/2.0
Analysis Quality2.0/2.0
Structure & Language1.5/1.5
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  • Cumples con todos los requisitos.
  • Buena presentacion.
  • Uso de lenguaje sencillo y comprensible.
  • Buen nivel de contenido.
  • Buena capacidad para analizar.

Continua esforzandote, espero seguir corrigiendo tus asignaciones.