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How to perform crypto fundamental analysis
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MARCH 23, 2021

How to perform crypto fundamental analysis

Devin Partida

DAO Member

Since cryptocurrency (“crypto”) is so young, new currencies emerge all the time, and a coin’s value can change in an instant. Given this volatility, it can be challenging to keep up with what’s performing well and what isn’t. Cryptocurrency trading can be risky, but it’s less so with some help from crypto fundamental analysis.

The same factors that can scare away some investors are what make crypto so enticing to others. This fast-moving landscape means a small investment could lead to a considerable payoff before long. To find which assets could represent a profitable investment and what won’t, users can learn a thing or two from the stock market.

Cryptocurrency has several key differences that set it apart from the traditional stock market, but there are some similarities, too. Techniques like fundamental analysis that help traditional investors can apply to crypto as well.

Here’s a closer look at what fundamental analysis is and how crypto users can use it to invest more safely.

What is fundamental analysis?

Fundamental analysis first emerged in 1934 with the publication of “Security Analysis,” a book about investing. In this text, the authors argued that investors should look at all of the business fundamentals surrounding a security before investing in it. Coming off the Great Depression, it was critical for investors not to rely on just a handful of factors.

The Great Depression has long since ended, but the idea of considering each of a security’s factors is still crucial. It can be tempting to see one promising metric and base an investment choice on that. Single metrics can be misleading, though, causing over-enthusiastic investors to pour money into something with no long-term potential.

The authors of Security Analysis focused on stocks and bonds, but investors soon applied fundamental analysis elsewhere. It’s the core concept behind value investing, made famous by Warren Buffet. So what exactly is fundamental analysis?

Fundamental analysis works off the idea that the market could undervalue or overvalue an asset at first. Over time, though, the market will correct itself and come to reflect the security’s actual value. By performing fundamental analysis, investors can determine if something is overvalued or undervalued, better informing their decisions.

Fundamental analysts recommend buying undervalued stocks and staying away from overvalued ones. That way, investors can avoid risky but enticing options in favour of less in-demand investments with more potential.

How is fundamental analysis relevant to crypto?

Fundamental analysis is a popular method for investing in the stock market, but what about crypto? While cryptocurrencies aren’t technically securities, they do behave like them, often more so than an actual currency. Crypto trading bears many similarities to stock trading, so users can apply some of the same concepts.

When people start investing in crypto, they may put all of their money in currencies with strong recent growth. While these may show impressive short-term results, they can quickly shift in the opposite direction. Like traditional stocks, a cryptocurrency’s current market value or performance may not reflect its real value.

Crypto fundamental analysis applies the same valuing techniques to cryptocurrencies. Using these strategies, a user can determine whether a cryptocurrency is overvalued and stay away from it. Since the crypto market is so young, there’s a high chance that some currencies are undervalued or overvalued.

There are thousands of cryptocurrencies, and more than 1,000 have failed already. New currencies emerge virtually every day. The crypto market is also unregulated. All of these factors mean that crypto market movements can be misleading and risky. Fundamental analysis offers some more trustworthy information.

Since crypto values change so quickly, buying an undervalued currency could lead to considerable profits. Conversely, investing in an overvalued currency could be disastrous. Crypto fundamental analysis helps users distinguish between the two.

What to consider in crypto analysis

To perform crypto fundamental analysis, users have to look at a wide range of factors. With traditional assets, that would include things like a company’s revenue, interest rates, and the overall state of the stock market. Not all of these apply to cryptocurrency, and there are some unique factors to consider too.

While the general concept of fundamental analysis is the same between crypto and traditional assets, the specifics aren’t. Since cryptocurrencies are decentralised, it can be more challenging to find a source of information. Crypto fundamental analysts may not have a single source of truth to reference, but they can look at the surrounding factors that impact value.

Some of these influencing factors, like the number of active users, are easy enough to recognise. Others, like global sociopolitical events, are less obvious but can likewise impact a crypto’s value. Users have to consider a wide range of these, if not all, to perform full fundamental analysis.

These factors can be either quantitative or qualitative. Quantitative aspects are those that relate to hard numbers and measurable characteristics. Qualitative metrics are typically less clear. They relate to the nature or quality of something, not definitive facts.

The sheer number of metrics that affect a crypto’s value can be intimidating at first. Dividing them into categories can make them more approachable and easy to understand. Not every factor will fall neatly into a subset, but, in general, most are either a financial, project, or blockchain metric.

Financial metrics

Financial metrics are related to a cryptocurrency’s economics. Many of these are quantitative factors, so they’re easier to find and measure. These are often the first things investors will look for, but it’s important not to stop there.

The most obvious financial metric to look at in crypto fundamental analysis is a coin’s market capitalisation. Market cap multiplies a crypto’s current price by its circulating supply, providing the total value of all a crypto’s available coins. Coins with a low market cap may be more likely to grow, but high-cap assets are often more stable.

Another important financial metric to consider is liquidity, or how easy it is to buy and sell an asset. This can be harder to define, but the bid-ask spread is generally a reliable indicator. The bid-ask spread is the gap between the highest bid and the lowest ask. Lower spreads typically indicate higher liquidity.

Many crypto fundamental analysts also look at how a currency handles its supply. Some cryptos, like Bitcoin, have a finite supply and reduce how much they produce at once over time. These restrictions can be attractive to some, since they counter inflation but could make the currency less favourable to new adopters.

Some of these factors are somewhat subjective, so no single metric is a reliable indicator of a crypto’s value. Crypto fundamental analysis looks at all of them together to avoid any misleading information.

Project metrics

While financial metrics resemble traditional stock market indicators, project factors are a little different. These metrics deal with the development side of crypto, looking at how it works and why it came about. Most of these factors are qualitative rather than quantitative, but not all are difficult to find or measure.

The most critical project metric to consider is a crypto’s whitepaper. Whitepapers are a statement from a crypto’s developers that outline the project, from its purpose to its technology to its goals. Generally, investors want to look for a comprehensive, informative whitepaper that doesn’t sound overly ambitious, dishonest, or unrealistic.

The creator or team behind a cryptocurrency is another helpful project metric. While the creators of some currencies remain anonymous, others are easy to find and have a history. The developer or team’s record can reveal whether they’re trustworthy or have had success with similar technology in the past.

Many crypto fundamental analysts also look at a token’s competitors. Most whitepapers describe an asset’s purpose and goals, which can reveal what other tokens it would likely compete against. Competition in itself shouldn’t discourage investors, but if other competing projects are more valuable, a currency may not last long.

Cryptocurrencies can start in various ways, and these beginnings give investors insight into any potential risks. If the founders and initial investors kept most of the supply, it could be a risky investment. Early control between just a few parties could allow them to manipulate the market later.

Blockchain metrics

All crypto actions run on a blockchain, and this chain can be a valuable source of information. It can reveal factors about an asset’s activity and underlying technology and processes. On-chain metrics can seem challenging to find at first, but many services and websites find and post this information for investors.

Hash rate is a crucial blockchain factor to consider, as it indicates an asset’s security. A hash rate reflects how fast users can mine a block on the blockchain. If this figure is higher, miners have a better chance of getting a block reward, and it’s harder to perform a successful hack.

Security isn’t the only thing investors can learn from a hash rate. A decreasing hash rate reflects not just declining security but growing disinterest from miners. If users aren’t interested in mining a cryptocurrency anymore, it could indicate a lack of profitability.

A token’s transaction count can show how much activity is happening on a blockchain. This factor can also reveal changes in transactions over time, hinting at growth or a lack thereof. There’s no way to tell how many parties are involved in this activity, though, making it potentially misleading.

A similar but distinct metric is transaction value, which is how much value has moved on a blockchain in a given timeframe. Investors can measure this either in the currency at hand or in the equivalent in a fiat currency. This can be misleading too, but it can help measure how much a crypto’s value might shift.

Fees paid is another helpful blockchain metric for crypto fundamental analysis. The fees users pay indicate demand, as paying higher fees signifies bidding for their transactions to be confirmed sooner. This factor doesn’t apply to all cryptocurrencies, but it’s particularly helpful for those with decreasing block rewards, like Bitcoin.

Final crypto analysis considerations

Of course, these are not all of the factors that can go into crypto fundamental analysis. Some metrics don’t fit into these categories, either, like sociopolitical environments. Uncertainty over politics or significant social movements can make users cautious, leading to lower activity and demand.

User actions play a crucial role in a currency’s value, as supply and demand are more impactful here than in fiat currency. These factors are also some of the most challenging to assess. Any number of external events can change users’ behaviour, but that doesn’t mean investors can’t understand it.

SwissBorg’s hourly asset analysis tool automatically combines several factors to provide a baseline analysis of a cryptocurrency’s value. This includes community sentiment, which shows the balance between pressure to buy or sell an asset. This balance doesn’t reveal the outside factors influencing user behaviour, but it shows the practical consequences of these events.

The hourly asset analysis tool isn’t a quick way around crypto fundamental analysis. Fundamental analysis is an in-depth, sometimes lengthy, process that involves a reasonable amount of investor intuition and opinions. It can give curious investors a head start in this process, though.

Asset analysis tools provide information about several metrics at once, from user sentiment to trading activity. These can give investors a general idea of a cryptocurrency’s value before diving into deeper analysis. Since they provide so much information upfront, they also streamline the crypto fundamental analysis process, letting investors invest sooner.

Invest in crypto with confidence

Crypto fundamental analysis can help investors see through misleading market values to learn what a currency is really worth. Taking the time to understand and analyse these metrics can give users confidence in an otherwise unpredictable market. With tools like hourly asset analysis and fundamental analysis techniques, investing in crypto doesn’t have to be a gamble.

Cryptocurrency can seem intimidating to new investors, but it can be immensely profitable with careful, thoughtful investing. Following these steps and taking advantage of available tools can give anyone the confidence they need to invest in crypto.

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