What Is Crypto Fundamental Analysis? All You Need To Know

Introduction

The idea of a broker gives rise to a person surrounded by charts and complex calculations. Most professional brokers and investors depend on data and computation to generate and dissolve new investing positions.

However, it does not take a mathematical genius to perform all the market analyses for investing. Many brokers can develop a better understanding of the trading markets using simpler analytical techniques such as Fundamental Analysis.

What is Fundamental Analysis?

Fundamental Analysis, or FA, is a method that investors use to find out the intrinsic value of an investment product such as cryptocurrency. FA considers internal and external factors to calculate whether the asset is over or undervalued.

Investors must know that Fundamental Analysis is objectively different from Technical Analysis due to its outcome. Unlike TA, Fundamental Analysis comprised of indicators like earnings per share and price-to-book ratio.

The main objective of FA is to measure the underlying value of an asset that may or may not be reflected by its current market price. Using FA techniques, investors can manage the risks involved and create long or short positions depending on the results.

Origin of Fundamental Analysis

Fundamental Analysis in its current form can be traced back to a book called Security Analysis, published in 1934. The book was authored by a British-American economist called Benjamin Graham. The book highlighted the basic structure of Value Investment in detail, which served as the baseline infrastructure for Fundamental Analytical studies and research.

Fundamental Analysis uses the historical and present available data concerning an asset to determine if the current price is close or far from its underlying value. FA also operates under the assumption that markets can miscalculate the price of an asset but later adjust it to the correct point.

Therefore, FA investors are seeking over or undervalued assets to make profits. Most modern investors use a combination of FA and TA to filter out the risks while investing and to formulate a winning trading strategy.

Levels of Fundamental Analysis

When it comes to learning about performing fundamental analysis, there are a considerable number of indicators that make up part of the system.

However, by breaking down the FA into its reductive stages, it will become easier to get a clearer picture of this methodology. Here are the main components of FA at the most rudimentary level:

Economic Analysis

The most basic and crucial part of Fundamental Analysis is based on the forces of macroeconomics. Without developing knowledge about the economic systems and their basic forces, it is impossible for an investor to successfully conduct FA for any given asset.

Keeping in view that FA is focused on finding out the true value of an asset means that the analyst should be aware of the forces that determine its value.

Economic metrics such as demand and supply can help investors to determine if an asset is likely to rise or drop in price. Therefore, the economic evaluation makes up the stratosphere for FA.

Industry Analysis

Moving forward to the second layer of Fundamental Analysis, the investors have to keep their eyes on microeconomic factors. For a company stock that manufactures consumer goods, the presence of another competitor or more giants pouring into the sector can make a huge difference in sales.

In the same manner, many blockchains and cryptocurrencies serve a unique purpose for investors. Hence, investors need to identify which of the cryptocurrencies that serve the same underlying features are likely to retain their traction or increase in demand in the future.

This is where the Industry Analysis comes into play. Investors have to keep an eye on all competing assets hailing from the same industry or same niche. In doing so, the investors can collect more data to predict which assets are best for investing.

Company Analysis

The last and equally important aspect of Fundamental Analysis is the asset product itself. Rather than performing comparative analysis with other companies or economic factors, the investors now use the data from one asset only.

For example, if an investor is planning to invest in a cryptocurrency after narrowing down their choices based on economic and industrial analysis. They first have to take the past data related to the cryptocurrency to measure the difference between its real value and book value.

With the last tier of FA, investors can ascertain the ratio of their investment and the appropriate trading period.

Types of Fundamental Analysis

Depending on different results, FA can be divided into different types. Here are some of the most used and well-known types of Fundamental Analysis:

Quantitative and Qualitative Fundamental Analysis

Qualitative Fundamental Analysis is based on all the information regarding an asset class that is based on intangible factors. Options like the goodwill of an asset among the investors, the popularity of the brand in the market, the historical performance of the company, or blockchain.

These types of fundamental analytics can be collected based on the news and social media websites. However, modern analytical tools also provide formulas and qualitative representation for these options, such as market sentiment gauges, etc.

By reading these signs, investors can understand whether the asset is going to retain its market share. In many cases, the perception of value among investors regarding an asset can trump its utility.

Therefore, in addition to keeping an eye on the technical aspects of the asset, using the Quantitative FA approach, investors also ensure to keep a watchful eye on the quality aspects. On the other hand, Quantitative FA prevents investors from making emotional decisions and eliminates human error.

Top-down and Bottom-up Fundamental Analysis

As mentioned above, there are three fundamental layers of Fundamental Analysis, namely Sector, Industry, and Company. When using FA analysis investors can choose two approaches based on their direction using this three-tier system. The first option is called Top-down, and it allows the investors to start from a massive scale and then narrow down their trading options.

On the other hand, there is also an option for investors to use the Bottom-up method and start their analysis from a worm’s eye view and magnify it to an economic scale. Using the Top-down method, investors can ensure greater accuracy for their FA results. On the other hand, by employing the Bottom-up method, investors can crack the real value of the individual asset class instantly and keep eliminating the jargon moving upscale gradually.

How to Perform Fundamental Analysis for Cryptocurrencies?

Professional investors do not apply the same metrics and trading rules on cryptocurrencies as equity markets. The main reason for that is cryptocurrencies are closer to commodities rather than stocks in nature.

Therefore, the FA calculations that are used for cryptocurrencies are distinct from the usual FA tools. Here are some of the most important metrics used for the FA of cryptocurrencies:

Blockchain Metrics

Cryptocurrencies originate from blockchain just like a stock is issued by a company. Therefore, investors have to start at the baseline using on-chain data or the data generated from the basic blockchain activity.

There are several cryptocurrency exchanges and independent aggregators that use APIs or application programming interfaces to make proper investment decisions. Here are some of the most important on-chain FA metrics:

Hash Rate

Hash Rate is the measure of the number of new cryptocurrencies mined in a given period. The PoW or Proof-of-Work blockchains depend heavily on hash rate production for FA. These blockchains, such as Bitcoin and Ethereum, require the services of miners for transaction verification.

By learning about Hash Rate production and its patterns the investors can see the dynamic of trading demand throughout the trading cycle and estimate whether the cryptocurrency is going to increase or decrease in demand.

Active Addresses and Status

The number of active addresses refers to the amount of new or old cryptocurrency investors who are actively trading the asset at present. FA has included this metric to determine important factors for investors, such as the amount of liquidity before they jump into a new trading position.

On the other hand, the status or the total number of unique addresses is the most effective way to measure the current demand and past demand patterns for a cryptocurrency.

Transaction Value and Fees

Cryptocurrencies are decentralized entities which means that they use encryption for verification. Therefore, when a cryptocurrency is gaining traction the transaction value and the transaction fees increases on a blockchain. The most investors are active on a blockchain, the more they are going to raise the transaction verification commission to attract the attention of miners.

Therefore, by reading the transaction fee pattern investors can calculate the ideal time going in and out of their trading positions. On the other hand, the consumers can also calculate the total expense for moving their cryptocurrencies beforehand and make sure that their profit percentages are not slashed by the inflated gas fee or transaction value.

Financial Metrics

Financial Metrics make up the quantitative analytical part of the FA. It uses data and scales to reach conclusions that are helpful on their own. Furthermore, these data collections are useful for performing Technical Analysis and other important calculations.

Market Capitalization

Market Capitalization is the measure of the total value of a blockchain based on the aggregate value of all its cryptocurrencies. Market Capitalization is often used as an indicator of the current strength and traction of a cryptocurrency project.

Furthermore, there are many technical analysis indicators and other options that use the latest or a ratio of Market Capitalization as the baseline data source. By comparing the current and past Market Capitalization charts, investors can measure the increasing or decreasing trends for a cryptocurrency and make better decisions by diagnosing the causes behind these options.

Liquidity and Trading Volume

Liquidity is one of the most important friends of an investor. A cryptocurrency project that garners high liquidity is considered more attractive for investors because it means that they can enter or exit their positions without any resistance. Most professional brokers also enter the market when there is sufficient liquidity.

On the other hand, the consumers also have to use Trading Volume as one of the most fundamental FA metrics. Trading Volume refers to the traffic of cryptocurrency users who are selling and buying the asset actively during a given trading period.

Trading Volume increases and decreases can signal major trend reversals for their investors.

Circulatory Supply

The circulatory supply of a cryptocurrency is the amount of the asset class under question that is part of the trading community. Therefore, the total supply or the availability of a cryptocurrency among public traders is an important FA metric.

The changes in CS can grant insights to investors about the changing demand and highlight the supply pattern for a given cryptocurrency. CS is an ever-revolving metric that keeps changing concerning time, and it is most useful in the form of comparative analysis or ratio-based study.

Project Metrics

Project Metrics cover the qualitative part of the FA methodology. The investors focus on internal and external attributes related to the cryptocurrencies, such as follows:

Background Analysis

There have been several unfortunate events where cryptocurrency investors are lured into financial scams. The main reason behind these incidents is the lack of background checks. Consumers who do not have enough education about investing and cryptocurrencies end up putting their money into crypto projects that are run by fraudulent and shady developers.

Therefore, cryptocurrency investors must invest their time in learning about the companies and individuals behind any new project before investing. They should learn about the sponsors and the performance reviews of the individuals who are introducing or promoting these cryptocurrencies rather than joining in based on market speculation.

Crypto White Paper

Blockchains and cryptocurrencies need to be sophisticated and well-planned tech projects. If a developer has good intentions, but they do not have the correct knowledge or vision to manage a blockchain they are going to drive it into dust.

For average investors, a verified and vetted Whitepaper is one of the best ways to ascertain the credibility of a blockchain. Here are some important points that can be verified with the help of a Whitepaper:

  • The practical use case for the cryptocurrency
  • Advanced Solutions for the Blockchain
  • Upgrade plans and Unique Features
  • Sales Information and Token economics
  • Team Credentials

Competition

As mentioned before, the presence of competing forces in an industry can make a huge impact on the performance of an asset such as cryptocurrencies.

Therefore, when investors narrow down their choices for all other cryptocurrency projects, they should list all other variants that serve the same purpose. In this manner, the investors can get a leg ahead in the race and get a chance to place winning trading bets.

Future Projects

Road Map is an important fundamental metric that separates the best projects from the flukes. The most successful cryptocurrency projects have a dedicated community or a group of developers that is always updating their future projects.

Therefore, investors who wish to collect information about the future development of the said cryptocurrency can take reference from its latest Road map.

Tokenomics and Utility

Tokenomics is a term that is related to the force of demand and supply for a given cryptocurrency. Blockchain projects like Bitcoin not only focus on their current demand and supply dynamics but also put features in place to control the same economic dynamics for the future as well, such as halving etc.

At the same time, the investors should also concern themselves with the practical value of a cryptocurrency; otherwise, it can inflate comically and experience a sudden crash due to lack of real utility. When investors can look for these important metrics in cryptocurrencies, the assurance increases exponentially.

The Main Objectives of Fundamental Analysis

For many new investors distinguishing between Fundamental Analysis and finding out its main objective can be a challenge. However, the following objective perfectly rounds up the main objectives of Fundamental Analysis and defines why it is so important:

  • FA is used to determine the real price or intrinsic value of an asset regardless of its current market value.
  • FA is useful for investors as it allows them to project future changes and movements for its prices based on rudimentary changes.
  • The business performance of an asset can be measured using FA metrics and evaluation techniques.
  • FA can also help investors determine how to manage their current trading positions and provide them with insight into making internal financial decisions.
  • Without FA, it would be very difficult for investors to measure the credit risk related to a cryptocurrency project.
  • Using FA the traders can drive the inherent or underlying value of their trading positions and make informed decisions about adding or subtracting them.
  • FA is a useful way for beginning traders who are only getting started with trading analysis without being overwhelmed with technical analytics.
  • Key FA indicators such as Network Value to Transactions Ration (NVT), Market Value to Realized Value Ratio (MVRV), and Stock-to-Flow model are very helpful.

Conclusion

Fundamental Analysis, or FA, is the best way to get started with the cryptocurrency trading analytical process. This is the gateway to the world of conducting trading research and understanding the most basic forces that dictate trading trends. Therefore, by learning more about fundamental Analytical tools and methods, cryptocurrency can advance their trading skills and advance on the investing scale.

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