A Guide to Cryptocurrency Fundamental Analysis
WHAT IS FUNDAMENTAL ANALYSIS (FA)?
The fundamental analysis (FA) is a method of determining the intrinsic value of an asset or business. Their main goal is to determine whether an asset or business is overvalued or undervalued by using a combination of internal and external factors. They can then leverage that information to strategically join or exiting positions.
Although technical analysis also yields valuable trading data, the results are very different. According to TA users, they are able to predict future price movements based on the past performance of assets. This is achieved by identifying candlestick designs and learning essential indicators.
THE PROBLEM WITH CRYPTO FUNDAMENTAL ANALYSIS
Cryptocurrency networks cannot really be compared to traditional businesses. The more decentralized offerings, such as Bitcoin (BTC), are closer to commodities. However, even with more centralized cryptocurrencies (such as those issued by organizations), traditional FA indicators are ineffective.
Therefore, we must turn our attention to different frameworks. The first step in this process is to identify solid metrics. This means metrics that are hard to play with. For example, Twitter followers or Telegram/Reddit users are probably not good metrics as it is easy to create fake accounts or buy social media interactions.
It’s important to note that there is no single metric that can give us a complete picture of the network we’re evaluating. We were able to look at the number of active addresses on a blockchain and see that it has increased significantly. But that alone doesn’t tell us much. As far as we know, it could be an independent actor, transferring money back and forth with new addresses every time.
ANALYZING THE CHAIN METRICS
By analyzing the activity of a Blockchain investors can derive the value of a certain coin. The number of wallets designed, the volume of coins available on an exchange, and the number of investors.
WHY YOU NEED TO READ THE PROJECT BLUEPRINT: THE WHITEPAPER
By reading the white paper, everyone will be able to understand the potential use cases of the project, the technical infrastructure used, the team leading the project, and the consultants involved to increase their expertise in a specific area. The white paper also shows the latest mission and vision of the asset or product.
THE TEAM TALK
Some crypto projects can be orchestrated by a team, others cannot. When looking at a crypto project, you need to examine the team’s background and its potential to scale the project. This is also measured because crypto projects require experts in the field or people who have a good understanding of the domain and market.
HOW TO PERFORM FUNDAMENTAL ANALYSIS?
One thing to keep in mind is that functioning fundamental analysis in crypto is different from analyzing the various traditional investments.
- Analyzing the competitor of the crypto project one is interested in gives more leverage as the analysis offers more leverage to the investor before making the investment call.
- This exercise will also give an investor some provision of creating a Margin Safety bar to analyze the bull and near market times.
While project metrics offer a qualitative outline of a crypto project, the financials are quantifiable research put together by analyzing numbers on the crypto asset graph. The two financial metrics to analyze are:
Market Capitalization: The market capitalization of a crypto asset displays the supply versus demand of the asset. The market cap is calculated by dividing the current market price of the asset by the total number of tokens in circulation.
Liquidity and volume: Liquidity is one of the key indicators of the crypto project. These metrics indicate the assets’ overall standing in the market as an individual investor can gauge the buyer and seller flow in the market.