Detailed Guide to Crypto Fundamental Analysis

When conducting crypto fundamental analysis, one must thoroughly examine the pertinent information related to a financial asset. This entails assessing various aspects such as its applications, user base, and the project's development team.

The ultimate objective is to form a conclusion regarding whether the asset is overvalued or undervalued. Armed with this understanding, traders can make informed decisions when establishing their positions in the market.

Basics

Trading cryptocurrencies requires skill and a solid understanding of various analysis techniques. Traders must select suitable strategies, grasp the intricacies of the trading landscape, and become proficient in technical and fundamental analysis. In technical analysis, traders often leverage familiar indicators from traditional markets, such as RSI, MACD, and Bollinger Bands, to predict market behavior across different assets, including cryptocurrencies. These tools have gained popularity within the cryptocurrency space due to their effectiveness in assessing market trends.

However, fundamental analysis of cryptocurrencies requires a distinct approach. While similar principles apply, traditional tools cannot be directly applied to evaluate crypto assets. Instead, a comprehensive understanding of the sources of value within the cryptocurrency ecosystem is crucial for conducting effective fundamental analysis. By delving into the unique characteristics and underlying factors of each cryptocurrency, traders can make informed decisions about their trading positions.

What Is Fundamental Analysis?

Investors employ fundamental analysis (FA) to evaluate the intrinsic value of an asset or business. This involves assessing a range of internal and external factors to determine whether the asset or business is undervalued or overvalued. Armed with this understanding, investors can make informed decisions about their market positions, strategically entering or exiting trades.

On the other hand, technical analysis (TA) offers a distinct perspective by utilizing historical data to predict future price movements. TA practitioners analyze candlestick patterns and key indicators to gain insights into potential market trends. By studying past performance, they aim to anticipate future price behavior and make trading decisions based on these patterns and signals. Both fundamental and technical analysis play important roles in guiding investors' decision-making processes, providing valuable tools for assessing investment opportunities in the market.

Crypto Fundamental Analysis

Assessing cryptocurrency networks differs from evaluating traditional businesses. Decentralized offerings like Bitcoin (BTC) resemble commodities, while even centralized cryptocurrencies issued by organizations are not effectively evaluated using traditional FA indicators.

To gain meaningful insights, we need alternative frameworks and robust metrics that resist manipulation. Metrics such as social network followers are unreliable because it is easy to inflate the numbers through fake accounts or purchased engagement.

Understanding a network requires considering multiple measures. For example, solely observing an increase in active addresses on a blockchain does not provide comprehensive information, as it could be the result of a single entity transferring funds using different addresses.

On-Chain Metrics

Obtaining on-chain metrics involves analyzing data provided by the blockchain. While it is possible to do this by running a node for the desired network and exporting the data, it can be time-consuming and costly, especially if the goal is solely focused on investment without unnecessary resource expenditure.

A simpler approach is to gather information from dedicated websites or APIs designed to provide insights for investment decisions. For example, CoinMarketCap offers comprehensive on-chain analysis for cryptocurrencies, providing a wealth of information and data. This enables investors to access valuable metrics without the need for extensive technical setup or resource investment.

Number of Transactions

The transaction count serves as a reliable indicator of network activity. Plotting the number over specific periods or utilizing moving averages allows us to observe changes in activity over time. However, it's essential to approach this metric with caution. Similar to active addresses, there is a possibility that the apparent on-chain activity is inflated by a single entity transferring funds between their own wallets.

Value of Transactions

Distinguished from the transaction count, the transaction value provides insights into the total value transacted within a specific period. To illustrate, suppose ten transactions involving Bitcoin occurred in a single day, with each transaction worth $100. In this case, we would determine that the daily transaction volume amounts to $1,000. It is worth noting that transaction value can be measured using a fiat currency such as USD or the native unit of the protocol, such as BTC.

Real Addresses

Active addresses refer to blockchain addresses that demonstrate activity within a specific period. There are various approaches to calculating active addresses, with one popular method being the inclusion of both senders and receivers for each transaction over defined periods, such as days, weeks, or months. Additionally, some analyses also consider the cumulative number of unique addresses, which provides a tracking of the total count over time.

Fees

Transaction fees are a key indicator of the demand for block space in cryptocurrencies. They function like bids in an auction, where users compete for timely transaction confirmation. Higher fees result in faster processing, while lower fees may lead to longer waiting times.

In cryptocurrencies with decreasing emission schedules, transaction fees become particularly significant. These cryptocurrencies, such as major Proof of Work (PoW) blockchains, offer a block reward consisting of block subsidies and transaction fees. As the block subsidy gradually decreases over time (e.g., in Bitcoin halving events), transaction fees need to rise to cover the increasing mining costs. This ensures miners remain profitable and sustains network security. Monitoring transaction fees provides valuable insights into the economic dynamics and security of the blockchain.

Hash Rate or Staked Tokens

Blockchains utilize various consensus algorithms, each with its own mechanisms, which play a vital role in securing the network. Delving into the data associated with these algorithms can offer valuable insights for fundamental analysis. One important metric in PoW cryptocurrencies is the hash rate, which serves as a measure of network health. A higher hash rate makes it more challenging to carry out a 51% attack, indicating a more secure network. However, an increasing hash rate can also indicate a growing interest in mining, likely driven by lower costs and higher profits. Conversely, a decrease in hash rate suggests miner capitulation, as mining is no longer profitable enough to maintain network security.

Several factors impact the overall costs of mining in PoW cryptocurrencies. These include the asset's current price, the volume of transactions being processed, and the fees paid by users. Additionally, the direct costs of mining, such as electricity and computing power, play a crucial role in determining the profitability of mining operations.

In the realm of consensus mechanisms, Proof of Stake (PoS) introduces the concept of staking, where users stake their own holdings to participate in block validation. By examining the amount staked at a given time, we can gain insights into the level of interest or disinterest in the network. This metric offers valuable information about the confidence users have in the network's stability and their willingness to contribute to its security.

Project-Specific Metrics

Project metrics provide a qualitative assessment of blockchain projects, focusing on factors beyond observable on-chain data. These metrics consider elements such as the team's performance, the quality of the project's whitepaper, and the roadmap for future development.

Evaluating the team behind a blockchain project is crucial as their expertise and track record can greatly influence its success. By assessing their qualifications, experience, and previous achievements, investors can gauge the team's ability to execute the project effectively.

The whitepaper, a foundational document outlining the project's goals, technology, and implementation strategy, is another essential project metric. A thorough analysis of the whitepaper helps investors understand the project's purpose, innovation, and potential impact on the market.

Additionally, project metrics consider the roadmap, which outlines the project's planned milestones and development timeline. A clear and realistic roadmap indicates that the project has a well-defined vision and a strategic plan for achieving its goals.

By incorporating project metrics into their analysis, investors can gain a comprehensive understanding of a blockchain project, assessing both the technical aspects and the team's capabilities. This information is crucial for making informed investment decisions and identifying projects with promising prospects for long-term success.

The Whitepaper

Before investing, it is highly recommended to thoroughly review the whitepaper of any cryptocurrency project. The whitepaper serves as a technical document that provides an overview of the project and offers valuable insights. A well-written whitepaper should clearly define the network's goals and provide information on important aspects such as:

1. Technology: It is important to understand the technology being used and whether it is open source. This helps assess the project's transparency and potential for collaboration and innovation.
2. Use case: The whitepaper should outline the specific use cases that the project aims to address. Understanding the problem the project intends to solve and its potential impact is crucial in evaluating its viability.
3. Roadmap: Examining the project's roadmap is essential to gain insight into the planned upgrades and future features. A comprehensive roadmap demonstrates a clear vision and strategic direction for the project's development.
4. Supply and distribution scheme: The whitepaper should provide details on the supply and distribution of coins or tokens. Understanding how tokens are generated, allocated, and distributed helps assess the fairness and sustainability of the project.

In addition to reviewing the whitepaper, it is advisable to engage in discussions about the project. By seeking out the opinions of other individuals and experts, you can gain a broader perspective. Pay attention to any red flags raised and evaluate the realism of the project's goals.

The People Behind

When evaluating a cryptocurrency network, it is important to assess the team behind it and its track records. By examining the members' past ventures and achievements in the industry, we can gauge their skills and determine if they are capable of successfully realizing the project. It is crucial to consider the following aspects:

1. Previous successes: Have team members been involved in successful projects or ventures within the cryptocurrency industry? Their past accomplishments can provide insights into their capabilities and increase confidence in their ability to deliver results.
2. Expertise: Assess whether the team possesses the necessary expertise to achieve the milestones outlined in the project's roadmap. Analyzing their skills, qualifications, and experience helps determine if they have the knowledge and competency required for project execution.
3. Integrity: Investigate if any team members have been associated with questionable projects or scams in the past. It is crucial to ensure the team maintains a strong reputation and operates with transparency and ethical practices.

In cases where there is no specific team, it is essential to examine the developer community. If the project has a public GitHub repository, assessing the number of contributors and the level of activity can provide valuable insights. A project with consistent development and regular updates may be more attractive than one that has been stagnant for an extended period.

Competitors

Conducting thorough fundamental analysis is essential during this evaluation process. While a crypto asset may appear promising on its own, comparing it to similar projects and applying the same indicators can reveal its relative strength or weakness in comparison to others in the market. By assessing these factors, investors can gain a more comprehensive understanding of the asset's potential and its competitive positioning.

By delving into the whitepaper and conducting rigorous fundamental analysis, investors can make more informed decisions about the viability and competitiveness of a crypto asset within its target market.

Tokenomics and Initial Distribution

When evaluating cryptocurrency projects, it is crucial to assess the utility of their associated tokens and the initial distribution of funds. The token should serve a real purpose and have value recognized by the market. Examining whether the token was distributed through an ICO, IEO, or mining can provide insights, including the allocation for founders, team, and investors. Investigating if the asset's creator engaged in premining is crucial if the token is earned through mining. Examining the distribution of tokens can help to assess potential risks, such as if a small number of parties hold the majority of the token supply. These factors help investors make informed decisions about the viability and potential risks associated with a cryptocurrency project.

Financial Metrics

Fundamental analysis involves considering various aspects of an asset to gain valuable insights. While factors such as current trading patterns, past trading prices, and liquidity are important, there are other metrics worth exploring. These metrics delve into the economics and incentives of the crypto asset's underlying protocol. Understanding these factors can provide a further understanding of the asset's value and potential.

Capitalization

Market capitalization, or network value, is determined by multiplying the circulating supply of a cryptocurrency by its current price. While this metric indicates the cost of acquiring all available units of the crypto asset, it can be misleading. A token with a high market cap might not have any real value, and its price may be artificially inflated. Therefore, it is important to consider additional factors beyond market capitalization when evaluating a cryptocurrency's potential.

Accurately determining the exact circulating supply of a cryptocurrency is challenging due to various factors such as coin burning, lost keys, and forgotten funds. As a result, reported figures regarding the circulating supply are approximate rather than precise. Despite these limitations, market capitalization remains a commonly used metric to assess the growth potential of cryptocurrency networks. While some investors believe that small-cap coins hold greater growth prospects, others argue that large-cap coins with stronger network effects are more likely to succeed compared to smaller, less-established coins. Evaluating multiple factors alongside market capitalization can provide a more comprehensive understanding of a cryptocurrency's investment potential.

Liquidity and Volume

When considering an asset, liquidity plays a crucial role in determining its ease of buying or selling. A liquid asset signifies that we can effortlessly sell it at its trading price. Likewise, a liquid market refers to a competitive marketplace flooded with both buy and sell orders, resulting in a narrower bid-ask spread.

In the case of an illiquid market, we may encounter difficulties in selling our assets at a "fair" price. This implies a lack of buyers willing to make the trade, leaving us with two choices: adjust the asking price or wait for an increase in liquidity.

To assess liquidity, the trading volume serves as a valuable indicator. It quantifies the value of transactions executed within a specific timeframe. Typically, trading volume is depicted on charts, reflecting daily trading activity denominated either in native units or in dollars.

Supply Mechanisms

Investors often find the supply mechanisms of coins or tokens to be intriguing and significant for their investment decisions. A growing trend among Bitcoin enthusiasts is the use of models like the Stock-to-Flow (S2F) ratio.

When considering investments, factors such as maximum supply, circulating supply, and the rate of inflation can play a crucial role. Some coins gradually reduce the production of new units over time, which attracts investors who anticipate a high demand for these units that exceeds their availability. On the other hand, some investors may view a strictly enforced supply cap as having long-term disadvantages. They express concerns that such a cap discourages the use of coins or tokens, as users tend to hoard them instead. Additionally, critics argue that it creates a disproportionate advantage for early adopters, whereas a steady inflationary policy would be fairer for newcomers.

FA Indicators, Metrics, and Tools

Metrics, which consist of quantitative and sometimes qualitative data, are important in basic analysis. However, they do not provide a complete picture on their own. To gain deeper insights into the fundamentals of a coin, it is essential to consider indicators.

Indicators are created by combining multiple metrics using statistical formulas to establish more easily analyzable relationships. The distinction between metrics and indicators can be blurry, as they often overlap in definition.

For a more comprehensive understanding, metrics like the number of active wallets can be combined with other data. For example, calculating the percentage of active wallets relative to the total or dividing a coin's market capitalization by the number of active wallets provides insights into network activity and user confidence in holding the asset. Fundamental analysis tools, such as aggregators or dashboards, make it easier to gather these metrics and indicators efficiently. Some tools even allow the creation of custom indicators using preferred metrics.

Combining Metrics

Let's now discuss how we combine metrics to gain a better understanding of the financial health of the assets we're analyzing. It's important to do this because each metric has its limitations, and relying solely on numbers overlooks crucial information. Consider the following scenario comparing two coins, Coin A and Coin B, based on various metrics:

Simply comparing the number of active addresses in isolation doesn't provide substantial insights. To conduct a comprehensive analysis, we need to understand how this figure relates to other metrics, such as market capitalization or transaction count.

A more effective approach is to create ratios using specific metrics for each coin and compare them. This allows us to establish a standardized valuation method. For example, dividing the market capitalization by the transaction count can be used as a ratio. For Coin A, the ratio is 5, while for Coin B, it is 0.125.

Based on this ratio alone, Coin B may appear more valuable than Coin A because of its lower calculated number. It indicates that Coin B has a higher number of transactions relative to its market capitalization, suggesting greater utility or potential undervaluation compared to Coin A.

However, it's important to note that these observations are not investment advice but rather an example of how we can analyze a small piece of the larger picture. To assess the significance of metrics like transaction count, we need to understand the goals and functions of the projects. Without this context, we cannot determine whether Coin A's comparatively smaller transaction count is positive or negative.

Another popular ratio in the cryptocurrency markets is the NVT ratio, introduced by analyst Willy Woo. It involves dividing the market capitalization by the amount transacted, typically on a daily basis. It is often referred to as the "price-to-earnings ratio of the crypto world."

These are just a few examples of the indicators that can be utilized. Fundamental analysis aims to develop a systematic approach for evaluating projects across the board. The more thorough our research, the more data we have to work with, enabling better analysis.

Key FA Metrics

When it comes to indicators and metrics, the options are abundant. For beginners, it's advisable, to begin with the most popular ones. However, keep in mind that each indicator provides only a partial picture. To gain a comprehensive understanding, it's recommended to use a variety of indicators in your analysis.

1. Network Value to Transactions Ratio (NVT): This indicator is similar to the price-to-earnings ratio used in stock analysis. It measures a coin's market capitalization divided by the daily transaction volume. A higher ratio can indicate a potential bubble, while a decreasing ratio suggests the coin is becoming less overvalued.
2. Market Value to Realized Value Ratio (MVRV): MVRV compares a coin's market cap to its realized cap. The realized cap takes into account lost coins in inaccessible wallets. A high MVRV ratio may indicate overvaluation and a potential sell-off, while a low ratio suggests undervaluation and a buying opportunity.
3. Stock-to-flow model: This model analyzes cryptocurrencies with limited supply, treating them as scarce resources like precious metals. It calculates the ratio by dividing the total circulating supply by the annual production. Bitcoin's reward halving events contribute to its scarcity. The stock-to-flow model has shown a good correlation with Bitcoin's price, but it has limitations, such as predicting extremely high prices and struggling with deflation scenarios.

Common FA Tools

1. Baserank is a research platform that aggregates information and reviews from analysts and investors. It provides an overall score from 0 to 100 for each crypto asset, based on the average of review scores. Free users can access a comprehensive overview of reviews covering various aspects such as team, utility, and investment risk. Baserank is a suitable tool for quickly getting an overview of a project or coin, but it's important to conduct further research before investing.
2. Crypto Fees: This tool displays the fees of different blockchain networks over the past 24 hours or seven days. It helps analyze the network's traffic and usage. High fees usually indicate high demand. However, comparing fees across networks can be challenging since some blockchains prioritize low fees. It's recommended to consider other metrics like transaction amount in conjunction with the fee data for a more accurate analysis.
3. Glassnode Studio: Glassnode Studio offers a subscription-based dashboard that provides a wide range of on-chain metrics and data. It offers free on-chain data that is suitable for amateur investors and provides in-depth insights. Glassnode Studio stands out with its extensive selection of metric categories and subcategories. Additionally, it includes TradingView with charting tools, allowing users to combine technical analysis with their chosen metrics. This comprehensive platform streamlines the analysis process by providing all the necessary information in one place.

Conclusion

Fundamental analysis is a useful tool that can give traders unique insights into cryptocurrencies that technical analysis may not provide. It helps traders distinguish between the market price and the intrinsic value of a network, which is valuable for trading. However, it's important to note that technical analysis also has its advantages, and many traders nowadays use a combination of both approaches.

There is no universal playbook for fundamental analysis that applies to every situation. This article aims to provide an understanding of key factors to consider when entering or exiting positions with crypto assets. By incorporating fundamental analysis into your trading strategy, you can make more informed decisions.