Fundamental analysis is the process of finding the intrinsic value of an asset, with the goal of determining whether it is overvalued or undervalued. That information can be leveraged in conjunction with technical analysis to decide whether to invest or trade an asset.
In fundamental cryptocurrency analysis, the approach is somewhat different from what is typically used to evaluate traditional market assets. Crypto assets do not have the necessary historical data, as there is typically no history of profit reporting or profit and loss accounts.
For cryptocurrency analysis, it is necessary to search for all available information about the asset through research including its use cases, its network, the team behind the project, vesting schedules, and so on. By looking at the right set of factors, traders can determine the fundamental value of an underlying project before investing.
Here are the 10 steps that are considered most useful:
1. Read the white paper
Especially for long-term buy-and-hold investment, it is essential to read a token’s white paper. This is the document that gives an intentional and detailed description of a project. A good white paper explains:
- The objectives of the project
- Use cases and distribution
- The vision of the team
- token technology
- Upgrade plans and new features
- How the token brings value to users
2. Evaluate the white paper claims
Be skeptical because the people behind the projects may misrepresent, or even undermine, the truth.
This happens more often than most realize. For example, Michael Alan Stollery, CEO and founder of Titanium Blockchain Infrastructure Services, raised $21 million in an initial coin offering (ICO).
He later admitted to forging parts of the project’s white paper.
It’s important to ask yourself some tough questions and get comprehensive answers before investing money in a project.
Some questions to consider:
- Are the tokens actually distributed as promised?
- Do they meet the expectations of the roadmap?
- Are they making up a problem just to solve it?
- What do others say about it?
- Are there warning signs?
- Do the goals seem realistic?
3. Look at the competitors
According to some industry sources, almost 40% of the cryptocurrencies that were listed in 2021 no longer exist.
That serves as an important truth for investors to keep in mind; many projects, almost half and it could be even more, fail and fail miserably.
Analysis of a project’s white paper reveals the use case the crypto asset is addressing and the problem it is trying to solve. Next, you have to consider whether that use case is, in fact, viable and desired.
Besides, it is important to identify competing projects and examine existing projects that this new one could replace, if successful. Conclusion: Smart investors look for whether this project is better than others or not.
4. Observe the team behind the project
A project is only as good as the team behind it.
The people offering the project must have precisely the right skills to make your project work. The white paper should have information on each team member, but doing some independent research can also be helpful.
Some questions to consider about the people behind any project:
- Have they worked on other reliable and successful projects in the past?
- What are your credentials? They have experience?
- Are they reputable members of the crypto community and the blockchain ecosystem?
- Have they been involved in any questionable projects or scams?
And if there is no team? Then search the developer community.
Find out if the project has a public GitHub. Check the number of collaborators and activity levels. The more consistent the development activity in a project, the better.
5. Check the on-chain metrics
On-chain metrics are obtained by looking at the data on the blockchain.
Data can be pulled from websites or APIs, such as on-chain analytics, data graphs, and project reports, specifically designed to inform investment decisions.
Some of the facts worth considering:
- Transaction Count: A measure of activity that takes place on a network. The more activity, the better.
- Transaction value: amount of value that has been traded in a period of time. The higher this number, the better.
- Active Addresses: How many blockchain addresses are active at any given time. Again, the more active addresses, the better.
- Fees Paid – How the demand for block space for a token grows or decreases based on fees.
- Hash Rate: A measure of the health of the network in proof-of-work cryptocurrencies. The higher the hash rate, the more difficult it is to successfully perform a 51% attack.
- Staking: The amount staked at any given time shows the level of interest, or lack thereof, in the project.
6. Look at the tokenonomy
Invest in projects that create useful tokens; otherwise, the token may have no utility in the market.
Furthermore, if the token is useful, it has yet to be determined how it will be accepted by the market, thus making sense of the token’s price movements and allowing investors profit opportunities on an ongoing basis.
Some questions to consider:
- Is the token useful?
- How do people get the token?
- What is the rate of inflation or deflation?
- Was it an ICO asset?
7. Market capitalization, trading volume, liquidity
Some of the most important analysis concerns the financial metrics of the token associated with a project, including:
- Market Capitalization: The value of the network represented by the hypothetical cost to purchase each unit of the asset. The “market capitalization” gives an idea of the growth potential of the network and is calculated by multiplying the circulating supply by the current price.
- Trading Volume: The amount of security that was traded in a certain period of time (daily, weekly, monthly). Indicates whether a token has sufficient liquidity.
- Liquidity: An indicator that measures the ease with which a token can be bought and sold. The more liquid a token is, the easier it will be to sell at its current trading price.
8. Community
When a community is behind a project, it tends to help the project token appreciate in value.
Social media, for example, can have a significant impact on the price action of a crypto asset. Meme coins like Dogecoin and Shiba Inu skyrocketed in price, in part, due to the excitement of social media.
Solana’s BONK token recently saw a large price increase as activity on social media pushed interest levels in the asset to new highs.
A community supporting a coin is a powerful catalyst, so here are some questions to consider:
- Is the community active and excited?
- Are there many fake accounts?
- Is the feeling good?
- Are there many developers?
Remember that the price of a token only goes up if there is interest and action in the market. The more people talk about and invest in a token, the more likely its price will appreciate.
9.Marketing
Investors can currently choose from 21,910 cryptocurrencies – lots of competition!
The team behind a project needs to actively market its token in order to stand out from the crowd, and industry insiders say it’s harder than ever to stand out now.
Besides, With new tokens continually appearing on the market, established cryptocurrencies are struggling to maintain their market share.
Therefore, the team behind the project must actively build brand awareness, acquire customers and retain them to improve sales and profits.
Some issues to consider before investing in a project:
- Is the core team marketing the product well?
- Do they have a dedicated marketing team?
- Are they increasing market share or not?
10. If the main product is available, test it
This can be a bit difficult for someone just looking to invest in the underlying token of a project. However, let’s say one is considering an investment in Ethereum (ETH).
Since Ethereum is a decentralized global software platform, a functional and secure digital network technology would certainly demonstrate how the platform actually works.
Knowing this could definitely help inform a potential investment decision.
After all, If the platform is difficult to use, takes a long time, or creates more problems than it solves, it would be wise not to invest in it until these problems are fixed.
So there it is – 10 steps to fundamental analysis to help you assess the profit potential of any asset before any investment or trade.
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Cointelegraph is a publisher of financial information, not an investment adviser. We do not provide personalized or individualized investment advice. Cryptocurrencies are volatile investments and carry significant risk, including the risk of permanent and total loss. Past performance is not indicative of future results. Figures and graphs are correct at the time of writing or where otherwise specified. Tested strategies do not constitute recommendations. Consult your financial adviser before making financial decisions.
All returns quoted are correct as of February 16, 2023…