Investing in cryptocurrencies requires knowing the project well through fundamental crypto analysis. Most crypto projects provide a lot of information about the purpose of crypto . By considering certain quantitative and qualitative factors, you can derive a view on crypto using fundamental analysis . Understanding fundamental analysis helps you evaluate whether a crypto is worth buying or selling. We explain how to analyze cryptocurrencies using fundamental analysis, including the key factors to consider.
What is fundamental analysis?
Fundamental analysis is when a potential investor attempts to determine the true value of an asset. It does this by using all publicly available information about the asset to assess how financially worthwhile it will be to own it. Information about the asset or economy changes estimates based on fundamental analysis. Investors assume that an asset will gravitate toward its fair market value over time. So, if the result of the fundamental analysis is different from the current market price, there is a trading opportunity . Good fundamental analysis allows investors to buy undervalued assets and sell overvalued ones.
Fundamental analysis of stock market shares
For many assets , their fair value is the present value of all their future cash flows. On a stock, this means the present value of all dividend payments the shareholder will receive. For debt securities, this may include multiple coupon payments and repayment of principal at the end.
These valuation methods depend on numerous assumptions, including the discount rate chosen by the investor. Additionally, these investments can usually be sold instead of collecting cash flow indefinitely. However, discounted cash flows provide a mathematical model to solve for the fair value of the asset.
Fundamental analysis without cash flow
Bitcoin and other assets that do not generate cash flows, such as gold and silver, are not valued based on future cash flows. Therefore, fundamental analysis of a crypto such as bitcoin is strictly aimed at determining what course the asset's price is taking. There are countless methods to determine this number, but most of them rely directly on the supply and demand of the currency.
The circulating supply of bitcoin is easily and accurately estimated due to its predictable monetary policy. This leads to several models, including the often cited stock-to-flow model . This model aims to predict prices based on the rate of new bitcoins added to the network compared to the existing supply.
Factors to consider when fundamentally analyzing a crypto
Investors can evaluate specific data to gain insight into an asset. Blockchain volume, address creation, and network fees are some of the many publicly available statistics regarding the cryptocurrency network . These numbers can indicate the future use of the currency, as well as the ease of transactions. These two pieces of information can greatly influence an investor's prediction of the demand and final price of the asset or crypto. The main objective of fundamental analysis of a crypto is to reduce the risk faced by investors and to assess the profit potential of the asset. Fundamental analysis can be applied in three broad categories:
Blockchain indicators
Blockchain is a valuable resource, but manually extracting insights from raw data can take time and resources . Fortunately, there are platforms to make investment decisions easier. Major cryptocurrency exchanges have developed tools that provide an abundance of actionable information, such as the number of active users, total transactions, and transaction value. The three most basic metrics for fundamental analysis of a cryptocurrency are hash rate , active addresses, and transaction value and fees. Learn more about this data that provides trading insights.
Hash rate
Hash rate is the combined computing power used in mining to perform calculations. This is done on a PoW (Proof-of-Work) blockchain. The higher the hash rate, the more incentive miners have to mine for profit. As a result, the network is more secure. However, when the hash rate begins to drop, miners may begin to find the cryptocurrency unprofitable, leading to miner withdrawal. Withdrawal often occurs when markets crash, causing miners to sell their hardware. Declining hash rates indicate a loss of interest from investors.
Transaction Value and Fees
Just like technical analysis, fundamental analysis also prioritizes the evaluation of transaction values. If there were five bitcoin transactions of $250 each on the same day, the daily transaction value would be $1,250. A consistently high transaction value shows a currency in regular circulation, while comparisons reveal data regarding potential future market movements. Fees reflect demand on the blockchain, or the number of transactions paid to be added to blockchains as quickly as possible.
Financial Indicators for Crypto Fundamental Analysis
The goal of fundamental analysis is to produce a quantitative value that allows an investor to analyze the outlook of an asset. Financial evaluation of cryptocurrencies involves understanding the trading conditions of the assets, including their liquidity, surrounding factors and market reaction. All of this proves to be valuable crypto fundamental analysis, especially when evaluating the prospect before formulating an investment plan.
Market capitalisation
Market capitalization represents the value of a network . It is obtained when we multiply the current price by the supply of tokens in circulation. So, investors may believe that digital currencies with lower market caps have higher growth potential, although higher market caps may also indicate stronger infrastructure and lasting power. Market capitalization provides an approximation of the network value of a currency.
Liquidity and trading volume
Liquidity is an indicator of the ease with which it is possible to buy and sell an asset. Indeed, if a cryptocurrency asset can be quickly bought or sold without its market value being radically modified, liquidity is strong. This helps reduce the spread between bid and ask prices.
Crypto Project Factors
Crypto project indices adopt quality analysis to evaluate cryptocurrency performance. They focus on factors such as the purpose of the cryptocurrency and how its project works.
Context analysis
Cryptocurrency project websites will include a list of their team members. A careful analysis of the team's profiles and their background helps on the project's potential for success. Past experience and achievements should be well documented. This helps get to know the team you trust to follow the roadmap. But you can also take into account the project's initial funders or advisors. You will have information to assess its credibility.
White paper on cryptocurrencies
The cryptocurrency white paper is a technical document that describes the objective and operation of the project. This is the most important project document. Review the white paper with a healthy dose of skepticism and seek out third-party opinions on the project.
Comparison of crypto project competitors
Market competition helps distinguish winners from losers. A thorough research of market competitors helps identify the landscape in which each project must compete. Understanding the overall ecosystem is essential to assessing the potential of a project.
Fundamental analysis of a cryptocurrency: in brief
Before deciding to invest in the crypto market you must carry out well-constructed analyses. Do it by taking inspiration from professional traders. Besides technical or chart analysis, fundamental analysis is very important. It allows you to make very clear trading decisions with less risk of losing your money. When trading cryptos, often consider the market capitalization, liquidity, and trading volume of the digital currency. However, you will be able to get back to the basics of the crypto in question by analyzing the crypto project, its whitepaper and its roadmap.
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