Discover How Cryptocurrency Fundamental Analysis Can Help You Make Better Trading Choices
Learn the basics of cryptocurrency fundamental analysis so you can choose winning altcoins while automating your trades.
What is the best cryptocurrency to buy for investment? You can try for months or even years to find the answer to this question without success. How do you decide which cryptocurrency to invest in?
I get asked all the time what cryptocurrency projects I think will do well in the long run, and there’s certainly no shortage of opinions out there.
That said, I’m often quite surprised by how few people understand the fundamental reasons why some projects will succeed while others fail.
Talking about fundamentals isn’t to say that technical analysis is not essential. Still, I think it’s vitally important to understand the fundamentals behind why a specific project is worth your investment.
When we hear the words fundamental analysis in contemporary business, we think of news, political events, and other economic factors attached to a particular market.
However, it’s a whole different thing regarding crypto trading.
As much as these events sometimes affect the crypto market, they are not the essential metrics to look out for when analyzing crypto fundamentally.
Cryptocurrency fundamental analysis is the root of value investing, and it is hard to see how you can succeed unless you are gambling.
However, the concepts are pretty straightforward, basically examining the crypto asset’s yardsticks— use cases, roadmap, network, and other root features of the investment involved.
Introduction to Cryptocurrency Fundamental Analysis
You don’t have to be a professional cryptocurrency analyst, but a clear understanding of fundamental analysis is critical for a successful crypto trader.
If you want to bring a professional approach to investing and trading crypto assets, you can hardly succeed if you do it with a pin.
There are hundreds of articles and resources about technical analysis, where you can sharpen your skills, learn about more indicators and even automate your crypto trading strategies. Still, there is little or no emphasis on fundamental cryptoanalysis.
The technical analysis evaluates securities by analyzing the trajectories generated by market activity, such as past prices and volume.
Some technical analysts do not attempt to research an asset’s intrinsic value but instead use charts and other tools to identify patterns that suggest future price movement.
It is true; charts are the basis of trading. Charts show a clear view; of the market and valuable information into the future price action– By applying tested indicators, such as Bollinger bands, moving averages, and a lot more, you can limit the risk and make tangible profits — making technical analysis relevant in crypto trading too.
In fundamental crypto analysis, following the same path, we are concerned about the factors or variables that make up a particular asset.
These variables are regarded as benchmarks to scale your strategy. Examining these factors can limit the risk and invest at the most reasonable times avoiding market declines, corrections, and bear markets.
You can successfully trade crypto by using metric-tested indicators, readily available via official currency channels.
This article will fill you in on the benchmarks to examine while analyzing your preferred assets. I’ll share a few fundamental analysis theories to help you identify the suitable cryptocurrencies to invest in.
What is Cryptocurrency Fundamental Analysis?
Cryptocurrency fundamental analysis judges a cryptocurrency based on the asset value instead of its market value.
Fundamental analysis is a business valuation process based on assessing company financial statements. It is widely used to identify value investment opportunities based on each company’s latest available financial results as well as historical performance.
Thanks to the easily accessible information (financial results) of businesses or assets online allow for a comparative assessment to be made between altcoins over a range of fundamental analysis criteria.
Performing fundamental analysis will enable you to statistically rank each crypto coin’s financial health to find assets in the most powerful financial positions through to the weakest.
The use of fundamental analysis is critical in determining which asset to invest in; it provides a platform where the company’s recent past performance and expectations are put under the microscope, thus not leaving anything to chance in terms of looking for information.
Indicators like interest rates, financial statements, and price per book ratios are commonly used with fundamental analysis.
So when you look at the fundamentals of any crypto, what are you looking for? Let’s look at metrics to fundamental access and analyze cryptocurrency.
Crypto fundamental analysis is based on three categories:
- Blockchain Metrics.
- Financial Metrics.
- Project metrics.
Cryptocurrency Fundamental Analysis – Blockchain Metrics
Blockchain metrics are linked sets of resources, procedures, and consensus of the blockchain. Usually, this begins with running nodes for that particular network, and then it extends to looking up data on the Internet.
Measuring the relevance of the on-chain units of any platform to profitability is ultimately the primary reason some APIs are provided to look up information. But there is more to comprehending how profitable the Blockchain activities are.
The most commonly used on-chain metrics are hash rates, transaction count, active addresses, transaction fees, transaction value, and more.
Hash rate and stake rate
Every blockchain network has its protocol, often called a consensus algorithm. Consensus algorithms are designed so that all units of the blockchain network come to a standard agreement (consensus) on the current ledger state and run in a trustless and distributed algorithmic environment.
For a Proof of Work consensus model which Bitcoin runs on, hash rate measures the computational rate at which transactions are being processed and bitcoins are being mined. Each transaction in a cryptocurrency network is added to the blockchain.
Many crypto traders willing to invest in a particular coin see the hash rate as the determining factor of investment— as it is the center Proof of the asset.
The more the hash rate, the more miners are equipped to mine for-profits, and the safer the network is. Evaluating a specific hash rate can help determine the profit rate.
Another design model is Proof of stake— familiar with new large-cap alts like Ethereum 2.0, Solana, Cardano, and lots more. It works by staking coins, thereby creating personalized validator nodes.
Staking is simply pledging your coins to be used for validating transactions. Staking is considered the Proof of health of these platforms.
Calculating the amount staked and looking out for the staking performance of a particular asset can help measure investment interest.
Transaction count and active addresses
Implementing a few technical indicators like moving average, we can determine the number of daily verified transactions— highlighting the value of the crypto network to send funds without a breach safely.
You can use this to gauge investment interest and calculate the number of active addresses.
Active addresses are proven to gauge the number of active users on a blockchain since it is primarily less connected to stress tests (which often focus on transaction count).
However, active addresses inherit some natural features from the structure of the specific blockchain, and you must take care to grasp the differences in design model inactive address counts.
Since anyone can create an address and transact on a blockchain, active addresses can still be faked.
You can look out for unique addresses within specific periods and then compare the outcomes to measure interest in the asset.
Transaction value and fees
Assessing the estimated value of transactions in USD on the blockchain is also an essential part of the fundamental cryptoanalysis.
To better understand how this works, if there were a total of five Solana transactions comprising $40 each, all on the same day, the daily transaction value would be $200.
Transactions get into blocks, generally by offering higher fees than others. There is a market for transaction inclusion in Bitcoin; this is called a free market.
The Transactions represent demand, and block space represents supply.
Generally, fees go high when there are many competing transactions. Ethereum’s exuberant gas fees are a great example. Higher gas fees mean that the demand for transactions has increased, accounting for the increase in fees.
Each crypto has its transaction fee, and gauging this asset based on fees paid is a great analysis of interest.
Cryptocurrency Fundamental Analysis – Financial Metrics
Financial Metrics are used to profits and sometimes the losses of a crypto asset. It often includes a report of the company’s revenue and earnings. It also discusses different supply ratios and the analysis of its trading volume over a specific time.
Financial Metric is an essential fundamental analysis method. It offers investors an idea of the project’s yields and the degree of growth they have enjoyed over the years.
Let’s analyze each financial report based on market capitalization, trading volumes, liquidity, and the number of assets in circulation.
A comprehensive report of the market cap over a certain period is crucial in the world of Financial Metrics.
Market cap is the total sum value of a crypto asset, and it is derived by multiplying the current price of the investment by the supply of coins in circulation.
Market cap size indicates the growth rate of an asset. Typically, the larger the market cap, the more stable and less growth potential a coin has.
However, this is not always the case. Dogecoin, for example, has increased over the past few months due to Elon Musk’s effect.
This rapid growth rate is not a 100% deciding factor in investing in the coin. It is essential to understand that other financial metrics like trading volume and circulating supply are imperative.
Trading volume is the heart of the markets; if not for trading volume, the market itself would cease to exist. What drives the trading volume, the possibility of profit.
Without the profit motive, we would have no reason to trade cryptos.
Trading volumes give us strong indications of the psychology affecting traders at a given time in the markets. It is a direct real-time market sentiment indicator.
A high trading volume is an indication that the current trend is likely to continue.
Liquidity is the measure of the buying capacity of a crypto asset. A liquid coin or buy will have many investors in an order book waiting to be filled. This, in turn, streamlines the bid-ask spread, which is an accurate gauge of liquidity.
The circulating supply is the amount of cryptocurrency available to the public, which decreases and increases over a given time.
New coins can be created by mining and staking — depending on the design model of the blockchain.
In the same vein, users can reduce the supply by burning or sending coins to the wrong addresses or losing access to a wallet.
Cryptocurrency Fundamental Analysis – Project Metrics
Project metrics is another tool that you can use to determine and measure the performance of particular crypto. It entails the path a specific project should take—roadmap, mission, vision, and background check on the network.
The background check involves the complete analysis of a particular cryptocurrency. This analysis may include deep research and gathering details such as roadmap track records, if any, and possible accomplishments.
In certain other cases, you can also extend these checks to partners or advisors to the project.
This kind of analysis offers both an attack and defense strategy in which it allows the identification of opportunities and threats in a particular asset.
With competitor comparison, this coalesces all the relevant sources for the analysis of various projects. You must understand the working principle of a possible project to invest in.
Crypto white paper
The white paper is a story that educates users and shows how a particular crypto asset can benefit them. It entails the aim and blockchain behind a specific project.
The influential crypto white paper provides statistics, charts, and diagrams explaining the project’s features and how investors should utilize them.
The most popular cryptocurrency whitepaper is Bitcoin: A Peer-to-Peer digital money network, released by Satoshi in 2008.
Tokenomics and ICOs
Token economies are simply the economics of supplying and distributing cryptos. The increase in demand is proportional to supply.
Blockchain networks enable these economies to function in a decentralized manner. Tokenomics facilitates the functionality of a particular network.
A token functioning effectively with many use cases will attract more users.ICOs are excellent tools for raising development funds to support new cryptocurrencies.
The tokens offered during an ICO can be sold and traded on cryptocurrency exchanges, assuming sufficient demand for them.
Other cryptocurrency fundamental analysis tools
Fundamental analysis, apart from being used to examine the viability of the markets, can be used to screen economies in the crypto market and the future or expected performance of the economy.
External factors that rarely affect crypto are political events, sudden hype (Elon musk’s tweet), and the global pandemic.
One notable event that affects cryptos is Covid-19. During the pandemic, a lot happened in the crypto space — paving the way for the emergence of many blockchain startups, thereby increasing the market capitalization of cryptocurrency in general.
Once you have found fundamentally strong projects, you can then look at the historical price trends for entry points into the market.
Learn more about cryptocurrencies and how to protect you from scams here.
Cryptocurrency Fundamental Analysis – Conclusion
When it comes to analyzing the viability of a blockchain project, fundamental analysis is your best friend. It provides you with the information you need for making intelligent investment decisions.
Crypto fundamental analysis is used to identify value investment opportunities based on each project’s latest available figures as well as historical performance. It is essential to evaluate each project listed on a reputable exchange and conduct proper fundamental analysis.
The biggest mistake you can make as a crypto trader is putting all your eggs in one basket. If you want long-term success, you will have to be well diversified in many different assets.
Cryptocurrencies are growing more mainstream. As more businesses, individuals, and institutional investors pour money into crypto, the value of these assets gets justified.
To understand crypto valuation, you have to look at it differently than traditional markets. Liquid exchange platforms, crypto trading bots, and active communities contribute to a growing ecosystem.
Look at any investment carefully. When investing in cryptocurrency, you need to be sure that you have done your homework. Investors who thoroughly research and perform cryptocurrency fundamental analysis can make a lot of money.
Investing in cryptocurrency is not a shot in the dark. It’s a calculated risk.
Fundamental and technical analysis are the two pillars of investing because both can provide valuable insight.
While many understandings can only be accessed via TA alone, combining TA with cryptocurrency fundamental analysis can help you create a more comprehensive market analysis.
Information and research will help you reduce investment risk. So do your due diligence. Diversify your portfolio and invest wisely.
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