By Yashovardhan Sharma
Fundamental analysis involves determining the intrinsic value of an asset to assess whether it is overvalued or undervalued. This approach is crucial in deciding whether to invest in or trade an asset, and when applied to cryptocurrency, it requires a different strategy compared to traditional market assets. Cryptocurrencies lack historical data such as earnings reports, making it necessary to delve into various aspects through comprehensive research. To conduct effective cryptocurrency fundamental analysis, investors must explore information related to the asset's use cases, network, project team, and vesting schedules, among other factors. By scrutinizing the right set of elements, traders can ascertain the fundamental value of a project before making investment decisions. The following are ten essential steps in this process:
For long-term, buy-and-store investment strategies, it is imperative to thoroughly examine a token's white paper. This document provides a detailed overview of the project, explaining its goals, use cases, distribution, team vision, underlying technology, plans for upgrades, and how the token delivers value to users.
Considering that nearly 40% of cryptocurrencies listed in 2021 no longer exist, investors must acknowledge the high failure rate of projects. Scrutinizing a project's white paper helps identify its targeted use case and the problem it aims to solve. It is crucial to assess the viability and demand for the use case. Additionally, investors should identify competing projects and analyze existing ones that the new project may replace if successful. In essence, smart investors seek to determine whether the project offers superior features compared to others in the market.
The success of a project is intricately tied to the competence of its team. The individuals steering the project must possess the precise skills necessary for its success. While the white paper typically provides information about each team member, conducting additional independent research can offer valuable insights. In cases where information about the team is not available, attention should be directed to the developer community. Checking if the project has a public GitHub repository allows for an evaluation of the number of contributors and the consistency of development activity. A higher level of ongoing development activity generally indicates a more robust project. Some key considerations about the project team include:
Blockchain serves as a valuable resource by providing users with on-chain metrics, which are data points derived directly from the blockchain. While manually extracting information from raw blockchain data can be time-consuming, various application programming interfaces (APIs) offer tools to facilitate informed investment decisions. Prominent crypto exchanges have also developed reporting tools that furnish actionable information, including the number of active users, total transactions, and transaction value. The key metrics for fundamental analysis in the cryptocurrency space encompass hash rate, the number of active addresses, transaction count, transaction values, and fees. These metrics provide essential insights into the health and viability of a cryptocurrency project and helps you to manage risk.
Liquidity serves as a gauge of the ease with which a cryptocurrency can be bought or sold. When a cryptocurrency can be swiftly transacted without causing substantial shifts in its market value, it is deemed to have robust liquidity. A liquid cryptocurrency is characterized by numerous buyers and sellers with pending orders, resulting in a narrower bid-ask spreada reliable indicator of liquidity. In contrast, in illiquid markets, investors encounter challenges in selling their cryptocurrency at a "fair" price due to a scarcity of willing buyers. In such situations, investors face the dilemma of either reducing the selling price or patiently awaiting an increase in liquidity.
However, it's crucial to recognize that holding onto the cryptocurrency (HODLing) may compromise long-term returns if the price fails to appreciate. Trading volume serves as a valuable metric indicating a cryptocurrency's ability to sustain momentum. It quantifies the number of cryptocurrency units changing hands over a specific period. If an upward price trend is supported by substantial trading volume, there is a likelihood that the cryptocurrency's price will continue to rise. Conversely, price fluctuations without significant trading volume may be mere transient fluctuations.
In the past year, there has been a tightening of regulations surrounding cryptocurrencies, driven by significant events such as the collapse of FTX and 3AC's bankruptcy. Notable examples include the legal challenges faced by Ripple (XRP) and the sanctions imposed on Tornado Cash (TORN). These regulatory developments have led to significant price fluctuations for XRP and TORN, reflecting the ongoing shifts in regulatory landscapes. With the U.S. government taking a more proactive stance in regulating specific cryptocurrency sectors, investors must assess the potential impact of negative regulations on their chosen cryptocurrency investments. Understanding and adapting to evolving regulatory environments and crypto taxation is a crucial aspect of making informed investment decisions.
Assessing investor behavior remains a challenging aspect in the evaluation process. Recent trends indicate a shift towards users making investment decisions based on the influence of key opinion leaders (KOLs), who are typically individuals boasting substantial followings on social media platforms such as Twitter, Instagram, and TikTok. Consequently, if a cryptocurrency establishes partnerships with these influential KOLs, it can significantly enhance its marketing efforts and attract a larger investor base. Therefore, investors must closely monitor the project's social media follower count and the level of engagement within their community. A notable illustration of this phenomenon is the relationship between Dogecoin and Elon Musk. Through a mere tweet about the crypto (DOGE), Musk has the ability to propel the price of DOGE to unprecedented heights, thanks to the sheer number of followers he commands.
In employing fundamental analysis, investors gain crucial insights into the world of cryptocurrencies. Despite its nuances compared to traditional market analysis, the tools available for scrutinizing the cryptocurrency market continue to expand. Beyond fundamental analysis, investors can also leverage technical indicators to identify opportunities and monitor their investments effectively.