Trading volatile assets such as cryptocurrencies requires careful market analysis. You can evaluate your crypto investments using three types of it - fundamental, technical and sentiment analysis. Unlike technical analysis, fundamental analysis deals with studying causes, not effects.

In one of the previous lessons, we took you through the basics of fundamental and technical analysis of digital assets. In this lesson, we will take a more in-depth look at fundamental analysis and how to perform it on cryptocurrencies.

This lesson delves in depth into the topic of fundamental analysis of cryptocurrencies.

 

Content

• What is fundamental analysis?

• How to conduct a fundamental analysis?

 

What is fundamental analysis?

It is worth bearing in mind that in most cryptocurrencies are in fact just projects, not companies as in the case of an exchange. Conducting a proper fundamental analysis by considering all available information about the project will therefore help you determine whether this cryptocurrency has value or not.

Fundamental analysis is focused on assessing the “intrinsic value” of an asset. By considering various internal and external factors, it allows you to assess whether the price of a cryptocurrency is overvalued or undervalued.

 

How to conduct fundamental analysis?

When estimating the value of assets, many factors should be taken into account, such as the current and future macroeconomic situation of the region and the country, industry growth opportunities, profit and dividend forecasts and the cash flow of a given company for these asset.

It is worth bearing in mind that the basic assessment is based on the author's subjective assumptions and therefore the results cannot be treated as 100% accurate. Nevertheless, it is still the most effective analysis, and its assessments are often the only guidance for you when other analyses are not available. Let's take a look at the three main types of indicators that will help you conduct a fundamental analysis of cryptocurrency.

 

Project indicators

Assessing project indicators is a qualitative approach to determining the performance of a cryptocurrency project. We now focus on factors such as the purpose for which the cryptocurrency was created and how the project operates.

• Background analysis - the team behind the project, their track record can show whether they are qualified or experienced enough to “prove” a promising project. To assess credibility, you can also take into account information about the project's early partners and advisors.

• Whitepaper - we strongly recommend reading this official document assigned to any project. It is a technical collection of information including, such as the technology used, cryptocurrency use cases, planned features and updates,and distribution, etc. It is also worthwhile to take into account third-party feedback and reviews to verify the information gained.

• Tokenomics and usability - This provides information on how tokens will be distributed by the project and describes any mechanisms involved in influencing token value. 

• Roadmap of the project – Most crypto projects have roadmaps that show a timeline for test networks, releases and new features. The roadmap provides a clear outline of development plans and measures achievement with milestones.

• Competition - researching market competitors helps in knowing the environment in which a project must compete. Having an idea of the entire ecosystem is important for assessing the potential of any project.

 

Financial indicators

While project indicators involve a qualitative approach, assessing financial indicators is more like a quantitative approach.

• Market capitalization - the market capitalization of a token is calculated by multiplying the supply by the current price of each token. This is a useful indicator for determining, for example, the potential growth of the network over time. 

• Liquidity and trading volume - liquidity tells you how easy it is to buy or sell an asset, while trading volume helps determine liquidity. A high liquidity market will have tight bid-ask spreads. You can then easily sell assets at the trading price.

• Circulating supply - circulating supply is the total number of coins or tokens that are active and available to the general inestors. It differs from the total supply of tokens and varies over time.

 

Blockchain indicators (on-chain indicators)

The blockchain network is a valuable resource that helps evaluate a project by observing the data. However, doing this manually requires a lot of time and resources. A simple solution is to use websites that provide data on various crypto projects.

• Hash rate - is the computing power used in the mining platform's calculations based on the Proof-of-Work consensus mechanism. It is considered by investors as evidence of the good health of a cryptocurrency. If the hash rate is higher, miners will receive more incentive to mine, and the network will be more secure.

• Active addresses - this is the number of active blockchain addresses in a given period. You can add the total sending and receiving addresses of each transaction in a given period or examine the number of unique addresses.

• Value and transaction fees - a consistently high transaction value means that the currency is in constant circulation. On the other hand, fees reflect the demand for blockchain. If you want to transact faster, you will have to pay higher transaction fees.

Performing a professional fundamental analysis of a cryptocurrency requires a lot of time, patience and precision. However, it allows you to obtain information that will be important in the later decision-making process. 

We hope that this article will help you conduct a fundamental analysis of the project. In the following lessons, we will discuss other types of analysis.