Fundamental analysis is an effective approach to evaluating an asset based on available data. Like technical analysis, fundamental analysis isn’t peculiar to cryptocurrency; it is usually done for all financial markets. Fundamental analysis doesn’t pay attention to the price action of an asset; instead, it tries to ascertain the inherent value of an asset via its utility, roadmap, and relevance. As a result, investors can see if an asset is overvalued or undervalued.
Fundamental analysis long existed before the first cryptocurrency; hence, some myths have been passed around that fundamental analysis is inefficient in cryptocurrency due to the decentralized nature of the blockchain. Initially, fundamental analysis was limited to buying stocks, bonds, ETFs, and other investments related to traditional companies; as a result, these publicly listed companies have to make quarterly reports with standard accounting metrics.
This makes fundamental analysis pretty easy for traditional investments because information flow is definite and less complicated.
Distinguishing Crypto F.A. from Traditional F.A.
Unlike traditional companies, most cryptocurrencies are decentralized and not subject to reporting data or information to the government or revenue bureaucrats. Hence, getting the fundamentals of cryptocurrency and interpreting them may not be as straightforward.
Regardless, knowing what to look out for makes crypto fundamental analysis easily achievable. As an investor, you are expected to take a critical look into all available metrics of the project behind the crypto asset you want to analyze. This helps you understand the crypto asset’s utility and its relevance to the evolution of cryptocurrency and blockchain technology.
For example, since the third and fourth quarters of 2021, crypto projects that focus on solving problems relating to scalability and building the Web 3.0 environment are held in high esteem because these problems delay the adoption of cryptocurrency in mainstream finance.
In addition to this, investors are expected to research the tokenomics, the project’s team, and the roadmap. Hence, you can form an opinion on the crypto asset’s value by combining your findings. Below are some commonly examined metrics when carrying out crypto fundamental analysis.
On-Chain Metrics
For cryptocurrencies with an independent blockchain, analyzing on-chain metrics can provide vital insights into the crypto asset’s performance, letting you know if it is safe to invest. Viewing data such as:
The Daily Active Addresses (DAA) and Transaction count help investors see how well the blockchain network is being used; increased network usage for an extended period signifies active market activity and interest in the crypto asset, which is a positive sign for an entry.
The Hash Rate helps investors to determine the health of a Proof-of-Work blockchain. A healthy hash rate will encourage miners to keep up with their actions (since mining is profitable). As long as blockchain activity increases, the hash rate will remain healthy, and the miners can profit more from transaction fees while securing the network.
The number of staked tokens helps investors determine the health of a Proof-of-Stake blockchain. The higher the number of tokens locked in as stake, the more stable the blockchain will be.
Project Metrics
Analyzing the project detail of a cryptocurrency will provide insights into the crypto asset’s utility and the roadmap planned to achieve these plans. These details are usually found in the whitepaper; it contains every detail about the cryptocurrency, their plans, the team, the problems they intend to solve, the roadmap, token economics, competitors, and how they intend to create value.
It is essential to conduct more profound research into the team members building the project for a crypto asset; they must be verifiable. It would be advantageous if they have recorded previous success in other crypto/blockchain-related projects.
It is also imperative to deep dive into tokenomics and token distribution. Demand and supply move the market; hence, tokens with deflationary or fixed supply may excel more than ones with the potential of inflation. Also, the distribution method should be looked into; it provides insights into how well the currency is shared; the few the number of whales, the better.
Lastly, the media visibility of a project can mean a lot to its progress. For example, DOGE coin soared astronomically in 2020 following the social media wave about the memecoin. Popularity helps to quicken the growth of a crypto asset, indicating a possibility for a greater value.
Financial Metrics
Assessing a crypto asset’s financial metrics helps investors make informed decisions. One key metric is Market capitalization, which signifies the entire value of the crypto asset. High market caps signify stability and lesser risk; in contrast, lower market caps have a greater possibility for huge returns – this is inadvertently accompanied by huge risks.
It is also important to view an asset’s trading volume and liquidity in exchanges to see how well the crypto can be easily bought or sold – an illiquid asset is less likely to appeal to investors.
Environmental Metrics
More than just examining the information about a crypto asset, it is essential to review the human environment and its possible impact on the price of a crypto asset. For example, when Elon Musk announced that Tesla would be buying $1.5 billion worth of Bitcoin, the market moved was stimulated upwards; similarly, when he retracted that statement, the market plunged.
Also, it is crucial to be watchful of governments’ stand on the asset you’re analyzing. Some crypto assets have features that could get them banned in some countries; for example, privacy coins are banned in some countries. Announcing this ban in major countries could lead to a massive price crash.
Another example is the lawsuit filed against Ripple (XRP) by the SEC, claiming that they have illegally conducted security offerings. This has been a court case since 2020, deeply stalling the progress of the crypto asset. Hence, it is crucial to review social events, government regulations, and other politics to understand the environmental metrics of a crypto asset.
Finally,
Fundamental analysis helps traders and investors identify the intrinsic values of crypto assets. Fundamental analysis is crucial because it doesn’t rely much on historical trends; instead, it allows investors to draw conclusions from the current market information. Regardless, it is a good habit for investors to combine more than one analytical method, so as to make the best possible move in the market.
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