Cryptocurrency Fundamental Analysis Trading the News

Cryptocurrency Fundamental Analysis: Trading the News

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Trading cryptocurrency is not an easy job, especially for intra-day and swing traders. This is because the industry is still developing and experiencing major changes in terms of regulation, adoption, use cases, and correlation to traditional markets. Thus, the wild volatility isn’t fading, and the market is often unpredictable. Still, conducting fundamental analysis and trading the news does make sense despite all challenges.

In a previous article, I compared technical and fundamental analysis methods and concluded that the two should go hand in hand, even if not necessarily in a proportional manner. In the following lines, I’d like to focus on fundamental analysis and explain what to look for when trading the news. While writing this, I presume that you’re mixing these fundamental analysis recommendations with technical analysis, even though exploring the latter is not the scope of this article.

What is Fundamental Analysis?

Before delving deeper into the topic, let’s briefly describe what fundamental analysis is. In a nutshell, it is an analysis method used by traders and investors who seek to understand the market sentiment and consequently find out the real value of a crypto asset, whether it’s Bitcoin or an altcoin.

Unlike technical analysis, which operates with the chart and complex indicators, fundamental analysis is all about monitoring relevant news and reports that reflect the economic factors impacting the cryptocurrency’s value. The goal of this method is to help traders assess the intrinsic value of an asset and detect whether it’s undervalued or overvalued. In the case of Bitcoin, for example, one may analyze the supply/demand ratio, the adoption level across various regions, the health of the market, and so on.

If you go back to May 2020, you may remember the hype around the halving event, which was expected to boost the price of Bitcoin. Monitoring such events and assessing the potential impact on the price – that’s the job of fundamental analysis.

Fundamental Analysis Trading based on Cryptocurrency News

One of the most popular strategies based on fundamental analysis is trading the news. While this may sound easy – “watch the news and open positions” – there are many details that, if ignored, can wipe out your balance.

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The news is a very important element of the crypto space because there are millions of people who are still not familiar with blockchain and digital currencies, so the first place they go is a crypto-oriented site that provides news and guides. Also, the market is still at a nascent stage, and there are many events happening every day – think about upgrades, governments adopting regulations, companies integrating blockchain and cryptocurrencies, and so on. Thus, major news can impact the market, whether positively or negatively. You can leverage this phenomenon for your own benefit and open long or short positions based on the news.

There are several ways to classify the news, but you should consider the two most important types:

  • Periodic or Scheduled Events – there are news and data that are released periodically. For example, the open interest in Bitcoin futures can be checked every month or so. Elsewhere, the halving event is also periodic – it happens every three years or so. In the case of Ripple, it reports its financial performance every quarter, which always has a say in the sentiment formation.
    Also, there are scheduled events that are often priced in advance. For example, the transition of Ethereum to Proof of Stake has a roadmap that you can check at will. Every time we approach a new milestone, the price of Ethereum might react, and you can get on the right side of the forming trend.
    There are scheduled events and reports that are not intrinsically related to cryptocurrencies but are directly affecting the market. For example, the government of a major jurisdiction, such as China, India, Russia, the US, or the EU, might announce that it would release a regulatory framework for cryptocurrencies on a certain date. Obviously, the cryptocurrency market would wait for that date and react when a draft bill is released or voted.
  • One-Time or Unexpected News – most of the time, the market reacts drastically to the unexpected news that takes traders by surprise. However, if you are vigilant and watch the news regularly, you can quickly benefit from the steep trend that forms as a response to market sentiment. For example, in mid-March, the cryptocurrency market lost half of its value following the slump in the stock market as a result of the coronavirus pandemic and the lockdown measures. Events like the pandemic or a financial crisis are difficult to predict, but timing the crypto market’s reaction to them is important.
    It turns out that unexpected news with major impact is more likely to affect the cryptocurrency market in a negative way, though it’s not always the case. For example, if a major company or government integrates blockchain or cryptocurrencies, the market can turn bullish. For example, when Chinese President Xi Jinping praised blockchain for its possibilities and use cases, the crypto space formed a major bullish trend.
    If you trade tokens with lower market cap than Bitcoin and Ethereum, such as LINK, DOT, NEO or ATOM, trading the news might be even more relevant since every announcement relating to high-profile partnerships or upgrades can move the market. In this case, such news is more likely to impact the altcoin in a positive way. Still, there may be instances when the upgrade is a failure or the partnership turns out to be irrelevant.

How to Actually Trade The News?

The most common method to trade news is to wait for a period of uncertainty or consolidation ahead of big news and then enter the market when the price breaks the resistance or support level on the back of the news. If the news or event is unexpected, but with a potentially great impact, you should wait a few minutes so that the hype or fear effect fades. Then, you can enter the market in the direction of the trend. This approach might be used by both intra-day traders and swing traders, especially when the news has a really major impact, like the pandemic or China’s blockchain strategy.

Where Should I Check News?

Whenever you monitor news, make sure to operate with reliable sources. If you fall for fake news from unreliable sources, the market won’t react at all, and you may end up trading against the trend. The best way to stay up-to-date is to regularly check cryptocurrency news sites and social media. Speaking about news sites, I personally have contributed to a lot of reputable news outlets, though the list below doesn’t reflect my personal view but the acceptance level among the crypto community based on the Alexa rank and Google news visibility.

Here are the most popular crypto news sites that you can check from time to time:

  • CoinDesk – this leading crypto media brand ranks first in almost all tops. Launched in 2013, CoinDesk has quickly grown into one of the most reputable sources for cryptocurrency and blockchain news. The site is publishing several posts every day and also hosts a learning portal, videos, podcasts, and a research section. The news posts are always fresh and relevant. CoinDesk makes sure to interview leaders of the crypto community or obtain comments on various discussed topics.
  • Cointelegraph – another famous name among crypto news sites is Cointelegraph, which was also founded in 2013. The site provides almost real-time news that is concise and informative. Cointelegraph can be read in multiple languages, including English, Chinese, Spanish, German, Italian, and Japanese. The site also hosts an impressive collection of educational materials.
    Sometimes Cointelegraph can publish sponsored stories, but the site makes sure to indicate when an article is sponsored. 
  • Bitcoin Magazine – if you’re a Bitcoin fan and interested in understanding the cryptocurrency from different perspectives, you should read Bitcoin Magazine. This is probably the oldest cryptocurrency websites. Originally, the magazine was printed until 2015. Ironically, the brand was founded by Ethereum co-founders Vitalik Buterin and Mihai Alisie. Today, Bitcoin Maganize publishes regular news and analysis articles about Bitcoin and altcoins as well. The language may be more sophisticated for newcomers, but it’s worth it.
  • TheBlock, Bitcoin News, NewsBTC, CryptoSlate, CryptoPotato, Bitcoinist – as it turns out, Coindesk and Cointelegraph lead the crypto news space and then comes the rest. However, you can find many interesting angles on these sites as well, especially from a technical analysis perspective. The drawback of lower-tier sites is that you should make sure to detect sponsored stories that may be under the disguise of news, though that doesn’t apply to all outlets listed above.
  • Reuters, Bloomberg, CNBC, Business Insider, Forbes – besides dedicated crypto news sites, you should also check traditional financial sites as they often publish important crypto or blockchain-related news. In fact, very often happens that crypto news sites like Coindesk or Cointelegraph are rewriting major stories initially published on Reuters or CNBC, which have firsthand access to executives, politicians, and entities that may have to do with the crypto space. Bloomberg even has a dedicated cryptocurrency page.

Besides news portals, you can also comprehend the market sentiment based on social media posts. You can check the following channels:

  • Twitter – the crypto community has embraced Twitter thank to its simplicity and concept of expressing opinions. When it comes to crypto startups and fans, Twitter is by far the most used channel that surpasses Facebook or LinkedIn by a margin.
  • Reddit – this is the place where the crypto community likes to come together and discuss the latest news and development in the market.
  • Telegram – Telegram is a messaging application that comes with unbeatable encryption that doesn’t let any government have access to the chats. Crypto startups might use the app for announcements, airdrops, product launches, and so on.

You should be careful with social media channels because much of the information there is prone to manipulation. Every crypto business making the first steps would consider aggressive marketing strategies that involve social media sites, especially Twitter, Reddit, Medium and Telegram. Thus, you have to be selective and trade the tokens that you understand well and are confident in their success.

In the worst-case scenario, you may end up in a pump-and-dump scheme that may slash your balance in a blink of an eye. If you are beginner, you should better trade cryptocurrency with large market capitalization figures. Pump-and-dump schemes generally work well for low liquidity coins. Here is the main mechanism: a group of traders gather on social media and decide to promote a coin, whether they are insiders or not. They evangelize it on several channels, such as Twitter, Telegram, and Reddit, thus triggering a coordinated bullish frenzy for the token. As the token’s price increases, other traders that have no clue about the scheme are joining the buying spree due to the natural fear of missing out (FOMO). At one point, when the price is peaking and reaches the overbought level, the horde of initiated traders are taking the profits, leaving the rest with false promises and losses. Such schemes were more popular during the ICO frenzy, but you can still encounter them today.

Correlation to Traditional Markets

I mentioned in an example above that the cryptocurrency market tumbled right after the stock market nosedive. You may wonder if the crypto market is correlated to traditional markets. Well, the answer tends to be affirmative today, even though Bitcoin used to be regarded as an independent asset for years.

When the coronavirus pandemic seized the whole world in the first quarter of 2020, Bitcoin started to act very similarly to the stock markets, given that institutional investors dumped both crypto and traditional assets for cash. Since then, the correlation level has maintained to a certain degree, reaching the all-time high at the end of July. Here is the realized correlation between Bitcoin and the S&P 500 index, which tracks 500 of the largest US public companies.

Bitcoin and S&P500 Realized Correlation - Fundamental Analysis
Source: Skew – Bitcoin and S&P500 Realized Correlation

You can better understand the correlation on this chart:

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Bitcoin and US Dollar Correlation - Fundamental Analysis
Source: Skew – Bitcoin and US Dollar Correlation

Bitcoin has shown correlation to gold as well, mainly when both rallied in July as investors looked for safe havens to hedge against the crisis.

What I’m trying to say is that you should not focus on cryptocurrency news alone but try to assess the whole picture of the world economy. This might give you hints about the general mood of investors. When the US stock market is experiencing sharp moves, you may see the same behavior from Bitcoin, though that’s not a rule.

Thus, you should additionally check macroeconomic factors that may drive the stock market. The most important reports to consider are the interest rate decisions from central banks, especially the Federal Reserve, gross domestic product (GDP) performance, inflation, manufacturing and services activity, and labor market data.

The main factor that drove Bitcoin and stocks from May to August is the aggressive fiscal stimulus implemented by central banks and governments. The Fed has injected so much cash through its unlimited quantitative easing that the purchasing power of the US dollar is decreasing due to inflation. Because fiat money is more liquid and accessible than ever, investors are dumping it for safe havens and stocks. This is only one example of how major events from traditional finance can directly influence the value of cryptocurrencies.

The Final Note

Trading the news might be lucrative, especially when you merge your research with technical analysis. You should accurately identify when the price break the resistance or support line, which is not difficult thanks to basic technical analysis.

It is better to have a calendar and know the dates and times of the most important events in both the crypto and traditional markets. Also, make sure you have a ready-made strategy that you can follow without deviations. Needless to say, you should not ignore risk management.

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