Fundamental analysis (FA)
Fundamental analysis is a
framework that aims to
identify the "true" value of an
asset. Fundamental analysts
study economic and financial
factors to figure out if the
market's valuation of an asset
is fair. Those factors could be
macroeconomic factors like
the state of the global
economy, the overall industry condition, or businesses connected to the
asset (if there are any).
Again, the goal here is to establish whether an asset is undervalued or
overvalued. Suppose that Alice rigorously studies a cryptocurrency –Bobcoin – which trades for $10. But Alice's findings indicate that the asset
should actually be worth $20. In this case, she might decide to buy lots of
Bobcoins as she believes that the market will eventually value them at
$20.
On the topic of cryptocurrency-specific fundamental analysis, it's worth
noting that some consider on-chain metrics when conducting their
research. On-chain metrics is an emerging field of data science. It is
concerned with data that can be read from public blockchains: network
hash rate, distribution of funds, the number of active addresses, etc. By
taking this abundance of public information, analysts can create
sophisticated indicators that measure the network's health.
Fundamental analysis is popular in the stock markets, but it's perhaps not
very suitable for cryptocurrencies in their current state. The asset class is
so new that there simply isn't a standardized, comprehensive framework
for determining market valuations.
What's more, much of the market is driven by speculation and narratives.
As such, fundamental factors will typically have negligible effects on the
price of a cryptocurrency. However, more accurate ways to think about
crypto asset valuation may be developed as the market matures.
Want the low-down on fundamental analysis?
Check out the Binance Academy article:
⬥ What is Fundamental Analysis (FA)? ➤ bit.ly/AcademyEBook1