Fundamental analysis entails diving deeply into the available facts regarding a financial asset. In the case of crypto, you may look at its use-cases, the number of individuals using it, or the team behind the project. With this type of information, you can determine whether the asset is overvalued or undervalued. You can then utilize your findings to formulate trading or investing strategy.
Fundamental vs. Technical Analysis
When it comes to technical analysis, it's important to brush up on some of the skills you'll learn in the traditional financial markets. Forex, stock, and futures traders all employ a variety of technical indicators, and cryptocurrency is not an exemption. Technical indicators like RSI, MACD, and Bollinger Bands try to predict how the market will act, no matter what is being traded. These technical analysis tools are also immensely popular in crypto trading.
On the other hand, crypto assets can't be evaluated with tried-and-true methods when it comes to Fundamental Analysis. Contrary to popular belief, fundamental analysis for cryptocurrencies differs greatly from that practiced in traditional markets.
What is Fundamental Analysis?
Crypto Fundamental Analysis is a way for investors to figure out the "intrinsic value" of an asset or project. Their main goal is to figure out if an asset or company is overpriced or underpriced by taking into account a number of internal and external factors. They can then exploit that knowledge to tactically enter or exit positions.
Crypto fundamental analysts tend to use “business-related” measures to figure out how much a cryptocurrency is worth. For example, they will examine the project's future utilities and economics to see how their investment compares to others.
How to Do a Fundamental Analysis?
When figuring out how much a cryptocurrency is worth, you have to look at the current and future macroeconomic conditions of the area and the country, the growth potential of the industry, the profits, earning opportunities, growth potential, and tokenomics.
Consider the three primary indicators that could be used to do a crypto fundamental analysis.
Project Metrics
There are many ways to measure the success of an open-source cryptocurrency project. Things like the cryptocurrency's goals and operation should be thoroughly investigated and examined in this indicator.
Background Analysis
You can tell whether or not a project's crew can deliver a successful product by looking at their track record. Consider the project's early partners and advisors to gauge its legitimacy.
Whitepaper
Read the whitepaper of any cryptocurrency project to get an idea of what it is about. This technical document discusses the technology used, how cryptocurrency can be used, what future features and improvements are planned, how the supply and distribution system works, and so on.
Tokenomics and Utility
One of the most important aspects to consider when trying to determine the value of a cryptocurrency is the supply and demand of tokens. The price of a token will rise if there is greater demand than supply. More users will join a project if it has a clear goal and can be put to good use in the real world.
Project Roadmap
There will be a timetable for most crypto projects for test nets, new features, and release dates. The roadmap gives you a clear picture of what's to come and how you'll be able to track your progress.
Competitors
Finding out who your project's competitors are can help you figure out how it needs to compete. The project's potential must be assessed in light of the larger environment.
Financial Metrics
Metrics for a project are evaluated in a more qualitative way, while metrics for money are evaluated in a more quantitative way. The economics of the cryptocurrency, its market value, trade volumes, and other financial metrics are all taken into account.
Market Capitalization
When calculating a token's market value, the current supply and current price are multiplied to get the total market value. It might be misleading if you merely look at a project's market value. The network's growth potential could also be calculated using this method.
Liquidity and Trading Volume
The volume of trades is an important factor in determining how liquid an asset is. If the market is liquid, the bid-ask spreads will be small, making it easy to sell your item at the current market price.
Circulating Supply
Coins or tokens have a circulating supply when freely traded by investors or traders. The fact that the price of crypto in circulation goes up and down shows that the project is still going on and that a lot of people believe in it.
Blockchain Metrics (On-chain Metrics)
Observing data from the crypto blockchain network is a very useful method for determining the nature of the project. However, manually carrying out this process is time-consuming and resource-intensive. So, it’s best to get the data you need by visiting websites that specialize in providing cryptographic information.
Hash Rate
A mining platform's hash rate is a measure of how much computing power is required to reach a consensus on a proof-of-work algorithm. Investors see it as proof of the currency's stability. More miners will be compelled to contribute to the network as hash rates rise, increasing the network's overall security.
Consensus Mechanism
Every cryptocurrency has a consensus mechanism, eliminating the need for a centralized middleman. Studying how a crypto’s consensus mechanism operates will allow you to understand how the network incentivizes mining, how much energy it requires, future optimizations, and current difficulties it has to overcome.
Active Addresses
An address becomes active once it has participated in a successful transaction, either as a sender or receiver. As a result, active addresses aid in indicating daily user activity on the blockchain. In other words, they show how many people are using the network at any given time.
Transaction Value and Fees
As long as there is a significant volume of transactions, the cryptocurrency is still active. In contrast to prices that are based on supply and demand, fees are a reflection of the demand on the network. The higher the transaction costs, the quicker the transaction may be completed.
Conclusion
To do an in-depth fundamental analysis, one must have patience and perseverance. Because of this, most investors rely on research from reputable exchanges, crypto companies, crypto experts, decentralized crypto websites, and other financial institutions.
Still, if you want to trade or invest well, you need to use a good mix of technical and fundamental analysis. So, as always, trade with caution and do your own research.
Disclaimer: The information and publications in this article are not intended to be and do not constitute financial advice, investment advice, trading advice, or any other advice or recommendation offered or endorsed by Coins.
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