Fundamental analysis is the process of examining the internal and external, qualitative and quantitative components of a business, a corporation, or an asset from a theoretical perspective. In contrast to trying to predict an asset’s future price fluctuations, the fundamental analysis aims to find an asset’s “correct” or “intrinsic” worth.
Components of crypto fundamental analysis
Whitepaper
When it comes to digital currencies, the whitepaper is the equivalent of the prospectus for a startup business. According to the Securities and Exchange Commission, a corporation is required to publish a preliminary and final prospectus for its new security. All of the information you need to make a decision about investing in security is contained in the prospectus. White papers in the crypto industry are similar in that they contain information necessary to comprehend the asset’s intended usage, its specifications, and the motivations of its creators.
It’s a good idea to double-check any bold claims made in crypto whitepapers because they aren’t yet produced in collaboration with a regulatory body like the SEC.
A trader who performs fundamental analysis looks at the general situation of the economy while focusing on aspects that are directly relevant to his interests. In conducting these analyses, you should look into financial activities of all kinds, even if they aren’t directly related to trading. The markets can be greatly affected by a variety of factors, including those in politics, society, and the broader economy.
Financial metrics
You can understand the economics of a cryptocurrency through its financial parameters. Many of these variables can be quantified, making them easier to track and quantify. It’s common knowledge that these are the primary considerations for investors, but don’t stop there!
In crypto fundamental analysis, the most obvious financial indicator to look at is a coin’s market capitalization. In order to calculate a crypto’s market capitalization, you need to multiply the current price of the coin by the entire supply. While coins with a small market cap may be more volatile, those with a large one tend to hold their value better.
It is also crucial to examine liquidity, which refers to the ease with which an asset can be bought and sold. The bid-ask spread can be difficult to quantify, but it is often a good predictor. The difference between bids and offers is known as the bid-ask spread. The lower the spread, the more likely it is that a currency is more liquid.
Additionally, many crypto-fundamentalists examine the way a cryptocurrency manages its supply chain. Some cryptos, such as Bitcoin, have a limited supply and gradually decrease the amount they issue at a time. Inflation-fighting measures like this one may be appealing to some, but they may also make the currency less attractive to new users.
No single statistic can be relied upon to measure the worth of a cryptocurrency accurately. In order to avoid any misinformation, fundamental crypto analysis takes into account all aspects of the cryptocurrency market.
Project metrics
Financial measurements are similar to typical stock market indicators, but project elements are a little more unique. When it comes to crypto, these metrics focus on how and why crypto was created. You can find a few and measure them, but the majority of these elements are qualitative rather than quantitative.
To understand a token’s fundamentals, many crypto fundamental experts look at its competitors. When a token’s whitepaper explains its ambitions, it can show what other tokens it may compete with. It’s unlikely that competition will dissuade investors, but if other initiatives are more lucrative, a currency’s value may dwindle faster than initially anticipated.
Investors can learn about potential risks by looking at how a cryptocurrency got its start. If the company’s founders and early investors retain the majority of the supply, investing in the company could prove to be a risky proposition. Control of the market by only a few players could allow them to exert more influence over it in the future.
Another useful project metric is the identity of the inventor or team behind the cryptocurrency. Some cryptocurrencies’ inventors remain a mystery, but others can be tracked down and have a verifiable background. An individual developer’s track record might demonstrate whether they are trustworthy and also reveal their success rates with similar projects in the past.
Blockchain assessment
Cryptocurrency transactions are recorded on a blockchain, which is a significant source of data. It can expose information about an asset’s activities and the technology and processes that underlie it. On-chain metrics can be difficult to locate at first, but many businesses and websites are dedicated to providing this information to the general public.
As an asset’s security is determined by its hash rate, this is a critical blockchain factor to consider. A blockchain’s hash rate measures the speed at which users can mine a block. Typically, miners have an increased likelihood of receiving a block reward, and hackers have a more difficult time hacking if the hash rate is higher.
Investors can learn a lot more from a hash rate than just security. A falling hash rate implies not only a decrease in security but also a rising lack of interest from miners. If users have lost interest in mining a cryptocurrency, it may be an indication that the currency is no longer profitable.
A blockchain’s transaction count might indicate how active the network is. Additionally, this element can help disclose changes in transaction volume over time, which may indicate growth or decline. Despite this, there is no way to identify how many parties are engaging in this activity, which could lead to it being inaccurate.
Transaction value is a related but distinct metric that measures how much money has been exchanged on a blockchain in a certain period of time. Investors can transact in the crypto or in a fiat currency counterpart. This can also be deceptive, but it can be used to estimate how much a cryptocurrency’s value will fluctuate.
In summary
In order to determine if an item is overvalued or underpriced, you can use fundamental analysis to assess its intrinsic worth or how valuable you think it will be in the future. It’s difficult to evaluate a cryptocurrency on the basis of expected future cash flows. For this reason, crypto fundamental analysis is focused solely on predicting the asset’s future value. For the most part, all of these strategies are based on how much of the crypto is available versus the level of demand.
