Have you ever questioned whether a
bitcoin asset is valued correctly or incorrectly? By examining its use cases,
community, and project team, you may determine whether it's worthwhile to buy
in or trade with using a method known as crypto fundamental analysis. This can
help you determine whether the token is inherently cheap or overvalued. We will
provide you with a detailed explanation of how to analyze cryptocurrencies in
this article.
Before making any cryptocurrency
investments, keep in mind that because there are no financial statements,
evaluating cryptocurrencies is very different from evaluating traditional
financial assets like equities. Utilizing financial statements to assess a
company's viability and financial health constitutes fundamental analysis of
equities.When evaluating cryptocurrencies, there are no financial statements
because:
There is no prior experience to draw
upon, and practically all cryptocurrencies are still in the early stages of
development.
Cryptocurrencies are virtual representations of money or other
assets that depend on users, developers, and miners.
DEFINITION OF FUNDAMENTAL ANALYSIS
By researching and analyzing an
investment to predict its future value, fundamental analysis is a method you
may use to determine whether a cryptocurrency has inherent value that isn't
reflected in its current market price. Then, as an investor, you may use this
data to make tactical purchase or sell decisions depending on whether the coin
is overpriced or underpriced, even while taking into account the volatility of
cryptocurrency values. Indeed, even widely used currencies like Bitcoin and
Ethereum are prone to price changes.
HOW TO ANALYZE CRYPTOCURRENCIES USING THE FUNDAMENTAL ANALYSIS
STRATEGY
Because it considers how the asset
has performed over time, fundamental analysis of cryptocurrencies is typically
used for long-term investment. Having the right information is essential for an
investor to make the greatest financial decisions, especially for long-term
performance. By determining if an investment is profitable and projecting the
future of a coin, daily fundamental analysis can help you create the best
investing strategy.
When an investor does fundamental analysis, they are aware that the
moment to buy is when a coin's price falls below its intrinsic value.
Conversely, you sell the coin when its market value surpasses its inherent
value.
Quantitative fundamentals, which are used in fundamental analysis,
are often divided into three categories:
● Financial Feasibility
● Project Potential
● Blockchain/Protocol Used
Quantitative fundamentals are constructed using numerical data that
has been back-tested to determine their ability to beat the market over the
long term. However, it could be challenging to distinguish between what is
important and what isn't because there might be too much data.
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FINANCIAL METRICS
Data on the currently traded asset, liquidity, external variables,
and market reaction are among the financial indicators..
MARKET CAPITALISATION
Data on the currently traded asset, liquidity, external variables,
and market reaction are among the financial indicators. Investors consider a
cryptocurrency initially by examining its market capitalization. It represents
the overall market value of cryptocurrencies in USD and shows how much room
there is for expansion.
Information on the currently traded asset, liquidity, outside
variables, and market reaction are all included in financial indicators.
Investors look at a cryptocurrency's market capitalization first when debating
it. It measures the potential for growth by providing the entire market value
of cryptocurrencies in dollars.
Liquidity and Volume
Liquidity is the simplicity with which an asset can be bought or
sold. A competitive market with a narrower bid-ask spread is one that is
liquid. On the other side, a market with little liquidity makes it challenging
to trade assets for a fair price. Since trading volume reveals how much money
has been exchanged during a certain period, it is used to determine liquidity.
SUPPLY MECHANISMS
Supply mechanisms are one of the metrics that traders should pay
close attention to. According to the law of supply and demand, prices in all
marketplaces increase when there is a lack of supply and a high level of
demand.
For instance, the majority of Bitcoin owners wager that the price
will increase as soon as the supply is exhausted. Because the maximum supply is
21M, there are currently 19.1M Bitcoins in use, and only 1.9M Bitcoins remain
to be mined. Since 900 BTC are mined every day, the supply of BTC will run out
in 6 years. Rising demand may cause the price of BTC to rise, or vice versa if
supply is increased.
PROJECT METRICS
The performance of the team, the whitepaper, and the competition
are taken into account while determining the project metrics. They examine how
cryptography functions and how it was created, concentrating on the development
side.
THE WHITEPAPER
A technical document known as a
whitepaper provides a thorough explanation of the Bitcoin concept. It's a good
idea to cross-reference this information with project dialogues when performing
fundamental analysis. Learn more about the goals and any red flags that other
people have identified.
Typically, whitepapers will include the following details:
●
Objectives
●
Provides details on the technology's open-source code
●
Distribution scheme
●
Roadmap
●
Tokenomics
●
Target Demographic
The Team
Most cryptocurrencies make sure that
the development team's information is readily available, despite certain
currencies' creators, like Satoshi Nakamoto of Bitcoin, preferring to maintain
their anonymity. To find out more about the team, the individuals who are
responsible for the project, see whether they have shared any information on
their official website, social media accounts, or platforms where they can host
their open-source projects (developer community). These platforms include
Github, Bitbucket, GitLab, Google Cloud Source Repositories, Phabricator, and
RhodeCode.
Look at the organization of the
development community. How many and how involved are the contributors? Check to
see whether any team members have the abilities necessary to complete the task.
Have they completed similar projects successfully in the past? Are they
employed or involved in any shady business enterprises or swindling schemes?
THE COMPETITORS
Examine the organizational structure
of the developer community. How many people contribute, and how active are
they? See if any team members possess the abilities needed to complete the
mission. Have they conducted any successful projects of this sort in the past?
Are they employed or have they been associated with any shady endeavors or scam
games?
Another smart move is to thoroughly
research the rival coins of your choice. A currency might be attractive, but if
other cryptos are more valued and frequently used, it might not last very long.
BLOCKCHAIN METRICS
These metrics correspond to activity on a blockchain and are
supported by network data. They are known as on-chain metrics. It can reveal
specifics regarding the behaviors of an asset and the systems and procedures
that make them possible. Application programming interfaces (APIs) are more
effective in extracting information from raw data than manually doing so, which
requires time and resources.
On-chain measurements could initially be hard to find. Although
this is the case, the biggest cryptocurrency exchanges have created reporting
systems that offer essential data including total transactions, active users,
and transaction value.
Cryptocurrency exchanges like Coinmetrics, Binance Research, and
CoinMarketCap, for instance, will offer you a wealth of data to do a basic
analysis of Bitcoin.
When analyzing a cryptocurrency using blockchain analytics, the
three most important factors to take into account are the hash rate, active
addresses, transaction amounts, and fees.
Let's examine how this knowledge might help you as an investor.
HASH RATE
A mining machine's capacity to carry out hashing calculations
quickly and accurately is measured by its hash rate. The hash rate directly
correlates to a miner's or mining pool's profitability.
The chances of mining a block increases with increasing hash rate,
and as a result, so does the likelihood of earning the block reward. On the
other hand, a decline in hash rate suggests that miners are leaving the network
since it is no longer viable for them (miner capitulation).
A cryptocurrency with a higher hash rate is harder to attack with a
51% attack.
A 51% assault can place when one person or group controls the
majority of the hash rate on a blockchain network, possibly harming the network.
Cryptocurrencies with a larger network should be your first choice
as an investor since they are more secure against attacks and data
manipulation.
ACTIVE ADDRESSES
The amount of active blockchain addresses over a given time period
is known as the active addresses count. By counting the number of transmitting
and receiving addresses over time (days, weeks, or months) and comparing the
increase or decrease, they can be determined.
The total number of unique addresses over time can be calculated,
and the results can be compared, to determine the active addresses.
TRANSACTION VALUES
Similar to technical analysis, fundamental analysis focuses on
identifying transaction values. The fact that the transaction value is
continually high shows that the coin is actively being used. The native unit of
the protocol or fiat money such as the USD can be used to quantify transaction
values.
Consider the scenario where Cardano had 20,000 transactions each
day, each valued $100. This means that on that specific day, there were 200
transactions recorded (20,000/100), as the transaction value reveals how much
money has been transferred in a given period.
FEES
The amount of transactions paying to be added to blockchains or the
number of users vying to have their transactions included as quickly as
possible are both shown through fees, which also serve as indicators of demand
on the blockchain. Ethereum gas is a prime illustration of these charges.
You can determine how secure a coin or token is by looking at how
much has been paid in fees over time. Transaction costs can naturally increase
over time since the block subsidy or block reward is falling in accordance to
the mining difficulty. For those like Bitcoin whose block rewards are
declining, this is helpful. Cryptocurrency miners will start to lose money and
abandon the blockchain if the reward isn't changed.
Fundamental analysis ultimately uses both quantitative and
qualitative metrics to assess a cryptocurrency's potential.