Crypto’s new generation of technical traders is forcing fundamentals to the fringe
by Shafiq Shabir
Head of Electronic Trading, Intertrader
Traders have tended to pick a side in the debate between technical and fundamental analysis, with each group adamant that their approach is the most effective. The emergence of cryptocurrency as many people’s introduction to trading in recent years, and this community’s proclivity for the technical, now seems to be creating a new generation of technical traders.
Technical analysis focuses on historic data and pricing patterns to try to predict future movements. For crypto, it involves looking at past statistics for the currencies in question, including factors like volume and movement, in the same way many traders of forex, stocks or other securities have done for decades.
Clearly there is a whole group of crypto traders who are HODLing and see the long-term trend as upwards, so for them there is no need to analyse any datasets at all. For the more pragmatic trader though, the technical analysis of patterns and trends presents itself as the more viable of the two routes to inform their calls, even with the relatively limited past performance data available for crypto.
Following in technical analysts’ footsteps
Those who have been brought into trading by the bright lights of crypto have well-established technical paths to follow.
This approach is based on a few assumptions which will feel natural to many. They include that the market discounts everything, so all you need to know about an asset is already in its price; that prices move in line with existing trends; and that these trends will repeat over time.
It is based on a statistical confidence in the data available, and the decision to ignore the broader macroeconomic factors that fundamental traders may consider more important.
Technical analysts want to know what is happening now, and then how they can quickly adjust their positions to take advantage. Average Directional Index and On-Balance-Volume are some of the more popular indicators used to find those shorter-term trends.
The fundamental approach may be alien to crypto-only traders. Assessing a security’s intrinsic value, through studying the overall economy, sector conditions, as well as financial performance, business practices and management records of individual companies, may seem more traditional and long term in outlook than their purposes require.
Crypto traders have often been attracted by its seeming dislocation from other market trends, so traditional metrics don’t carry weight. Discussion over crypto’s ability to act as a hedge in portfolios is growing all the time, as shown by high-profile institutional and individual traders looking to manage their risk and volatility exposure in other assets.
As and when this new generation looks to expand into forex, stocks or futures, their familiarity with technical metrics and aversion to fundamentals will reshape the balance between the two in the trading community.
Central banks are bypassing fundamental metrics
As traders’ preferences change, national monetary policies seem to have steamrolled many of the indicators that inform a fundamental approach. Critics of global central bank responses to the economic slowdown will point to businesses or currencies being propped up with lifespans or values above where they would otherwise be without the availability of cheap, low-interest loans and other financial support.
If the intrinsic value of a security is tied more to the Fed’s policy than any other particular attribute, then the fundamental approach can only be further sidelined.
The future for fundamental analysis
We should remember that no one way to trade is intrinsically better than another, so there will long remain traders sticking by their fundamental approach, particularly looking to the economic calendar for guidance.
The of fundamentals may eventually reside in a more blended approach. For example, a trader may employ fundamental analysis to identify an undervalued stock and then use technical analysis to discern their preferred entry and exit points, based upon historic patterns.
Technical traders could look ahead to an earnings report, judge using fundamental criteria that there is a high potential for a volatility event, and map that to a value trend to inform how and when to make the trade.
The momentum has seemed to be behind technical analysis in the longer term, but the recent sell-off in traditional global markets and a deep correction for cryptocurrencies will have hit many technical traders’ portfolios. Fundamentalists will use this as evidence for alternative coins being very overvalued, but as crypto trading matures, it will be worth tracking how the two sides of this debate adapt and change in this volatile environment.
Published: 28 April 2022
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