Fundamental analysis of cryptocurrencies involves a deep and comprehensive study of the available information about any asset. For example, you can see the options for its use, the number of active users, and also find out which team is responsible for its development.
All this is needed in order to establish whether an asset is overvalued or undervalued. And you can use, especially at the initial stage of analysis, information about your trading positions.
Trading a volatile asset like cryptocurrencies requires certain skills. At least - the ability to choose the right strategy, understanding the basic mechanisms of trading, as well as fundamental and technical analysis. All this, however, can be learned.
In the case of technical analysis, experience gained from traditional financial markets can be used. Crypto traders use the same indicators as those who trade, for example, in Forex. Because such instruments as RSI, MACD and Bollinger Bands help predict the market situation regardless of which assets are being traded. So it is not surprising that they have found their application in the cryptocurrency space.
The situation is similar with fundamental analysis. You can use the same approach as in traditional markets. But first, let's try to figure out what it is and why it is needed at all.
What is fundamental analysis?
Fundamental analysis is the approach that investors use to determine the “intrinsic value” of an asset or business. By evaluating various internal and external factors, it is possible to establish whether the selected asset is overvalued or undervalued. And this can already be used to select the moment of entry or exit from positions.
Technical analysis works differently. It is believed that it can be used to predict future price movements based on past price movements. For this, "candlestick patterns" and main indicators are used.
In fundamental analysis, analysts look to business metrics and related dimensions. This is “earnings per share,” and the ratio of price and book value, and much more. Moreover, all this is done with several companies in the same niche in order to compare them and choose what exactly to invest in.
What are the problems?
Most cryptocurrency projects simply cannot be judged by the same metrics as traditional companies. As for bitcoin, in this regard, it is closer to raw materials, and not to currencies. With stablecoins, everything is a little simpler, but even here traditional fundamental analysis can help little.
But this does not mean that it is not effective at all. You just need to choose reliable indicators. Those that are extremely difficult to manipulate. The number of subscribers in the project's social network, for example, is not such an indicator, since accounts can be fake or purchased.
It is also important to remember that no indicator gives us a complete and comprehensive picture of what is happening. If, for example, the number of unique active addresses in the blockchain suddenly increases, then this does not mean anything specifically. After all, it can be one user who creates new addresses and actively transfers assets between them.
Therefore, now we will consider three categories of metrics, which together help to more or less adequately assess the situation with assets.
This is what can be observed by looking at the data officially provided by the blockchain. This can be done, for example, by connecting to a network and starting a node in it. However, it is long, expensive and requires certain technical skills.
Alternatively, you can get the information you need from websites or apps specially designed to facilitate the work of investors. Examples are CoinMarketCap, Coinmetrics charts, and Binance Research project reports.
Now let's look at the main parameters that are worth paying attention to.
The total number of transactions is a good indicator. In addition, you can plot the amount versus time and see how the number of transactions has changed. However, it must be borne in mind that this indicator can also be faked. Banal "kitchen" - automatic "pouring" of assets to simulate active work.
Cost of transactions
Shows the amount for a certain period of transactions were concluded. Indicated either in dollars or in the units in which the calculation took place. It can also be counterfeited by automation.
Those addresses in the blockchain that are active during this period. It is determined by counting the senders and recipients of transactions for a certain period. But addresses can be created by one user, so this is not a very reliable indicator.
Perhaps the most objective parameter used. Indirectly shows the demand for a particular cryptocurrency. It is especially relevant in situations where the priority of transactions is determined by the amount of added value to them. Users pay their money to make transfers earlier than others. It is unlikely that someone will do this if this cryptocurrency is not relevant for him.
Hash and staking
The difficulty of calculating the hash is the foundation of the security of PoW blockchains and the reason for the popularity and cost of mining. The higher the speed of its calculation, the more difficult it is to successfully carry out a 51 percent attack. A decrease in the hash rating indicates the extinction of miners' interest due to some of their reasons. These reasons include increased energy costs, current asset prices, total transactions, fees, wear and tear on equipment and its inability to provide the required processing power.
Staking is an alternative consensus building mechanism. Users block some of their assets to be eligible to confirm transactions. The greater the total value of the stake, the more in demand the cryptocurrency is.
If on-chain metrics are linked to internal “quantitative” blockchain data, then project metrics describe a “qualitative” approach to the idea itself. This includes a white paper, a roadmap, information on the team's past projects, and more.
It is worth reading it before making investment decisions. This data gives us a fairly accurate overview of the cryptocurrency project. If everything is done correctly, then you will be able to understand not only the goals, but also such key features as:
Technologies used (open source or not)
Roadmap for updates and planned implementation of new features
Token supply and distribution scheme
This also includes information related to the discussion of the project in the community. What do people think about this? What are they afraid of? Are the stated goals considered realistic?
The track record of project participants allows you to understand whether the team as a whole has the skills necessary to achieve the assigned tasks. And if one of the developers was previously involved in the creation of an openly fraudulent project, then this is an occasion to reconsider their attitude to the case as a whole. However, it also happens that there is no specific team, and most of the community is working on the idea. In this case, you should read the information provided on GitHub. At least - with the degree of activity of the participants.
Technical documentation allows you to understand what niche the project plans to occupy. And with whom to compete. And yes, you will also have to subject your competitors to the most rigorous fundamental analysis. Because everything is learned in comparison - an idea may be attractive apart from reality, but against the background of analogs it may look frankly "pale".
Tokens and their distribution
Some projects create their own tokens for different tasks. And it is extremely important to determine whether this asset has real usefulness? After all, it is utility that guarantees price stability and high interest from traders and investors. It also matters how these tokens are distributed. ICO (unreliable), IEO (more reliable), mining (also reliable), or something else. And if, in the process of analyzing the distribution, it turns out that the main assets belong to only a few large traders, then this is a reason to think - is this a conspiracy to manipulate the market?
This is information about how exactly the asset is being traded at the moment. And also - methods of stimulation and some foreign economic indicators.
Or "total cost". It is obtained by multiplying the current coin turnover by its price. In fact, it is the cost of one-time purchase of all existing units of a given asset (without slippage).
But imagine the situation - a certain team issues 10 million tokens, 1 of which is actually bought for $ 1. And that's it - the market capitalization is $ 10 million at once. In the future, of course. And the fact that the market is generally not interested in this project cannot be understood from this.
Moreover, in most situations it is impossible to determine exactly how many tokens are in circulation. After all, the initial release / offer and what circulates in the ecosystem are different things. Tokens can be lost, "burned", forgotten. Therefore, there are always fewer of them than originally planned.
However, market capitalization in general can be used to determine the growth potential of a project. With amendments, of course, but it can.
Liquidity and volume
Liquidity is an indicator of how easy it is to buy or sell an asset at the real market price. A related concept is the general liquidity of the market, that is, the degree of filling with buy and sell requests. And this leads to a tighter supply and demand spread.
We will not be able to sell an asset at its real value in an illiquid market. You will either have to change the price to a less profitable one, or wait. Neither one nor the other suits traders.
Trading volume is one of the indicators that allows you to calculate liquidity. It shows at what cost assets were sold or bought in a given period of time. Most often - in a day. Expressed either in dollars or in units.
Supply and delivery mechanism
From an investment point of view, this is an extremely interesting indicator. Especially its variant of Stock-to-Flow (S2F), which has recently become especially popular among Bitcoin supporters.
Attention should be paid to the maximum supply, the circulating supply and the inflation rate. Yes, a decrease in the number of coins over time can lead to an increase in their value, as demand can exceed supply.
On the other hand, a tightly limited total coin supply can have negative consequences in the long run. Users are simply not interested in the active circulation of such tokens, preferring to accumulate them.
Correctly conducted fundamental analysis gives a comprehensive understanding of various cryptocurrency projects and the prospects for investing in them. Remember, market value is not the “true price” to target. In addition, fundamental analysis alone is not enough for accurate forecasting - it is better to combine it with technical analysis. And yes, there is no one-size-fits-all scenario. So remember all this before you get serious about investing in cryptocurrency projects.