HOW TO EVALUATE CRYPTOCURRENCIES WITH FUNDAMENTAL ANALYSIS

 

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.

 Also Read: The top-ten 10 richest cryptocurrency Investors

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.

 Also Read: Fahimtar Tsarin Centralized, Decentralized da Distributed Ledger(Rarrabawa)



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.

 Also Read: Menene Crypto airdrop da kuma ya yake.

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.

 

 

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