Fundamental analysis in crypto
Through fundamental analysis , we can try to detect the authentic and objective value of cryptocurrencies in spite of their market price.
Through these techniques, we can assess whether a cryptocurrency is undervalued or overvalued, and we can detect a trading opportunity.
With fundamental analysis , traders evaluate and study what can affect the price of a security, such as external factors or events. This type of analysis takes advantage of tools like periodic financial statements, financial ratios, economic forecasts and other types
of additional information that can affect the value of a security.
There are different approaches to fundamental analysis that analyse micro and macroeconomic variables in different ways:
1. Top-down approach: through this approach, the trader analyses macroeconomic variables first and then microeconomic variables. Global information is taken in first, followed by more detailed and specific values and variables addressed. With this approach, the trader looks at the world economic situation, and then looks more at the most economically attractive countries, along with the sectors with the most potential, and within them, chooses which ones are most convenient to invest in.
2. Bottom-Up approach: this approach is the opposite of the previous one: first the trader chooses companies with growth potential, analyses the sector they operate in and then the economic situation of their countries; the overall global economic situation is the last thing to be analysed.
THE ADVANTAGES:
This approach allows the investor to collect and analyse information external to the markets but that might still influence prices. This way, the investor has a clearer vision of the reality of the market.
THE DISADVANTAGES:
The trader using fundamental analysis needs more thorough knowledge and experience of accounting, business and, in the specific, the sector of interest.
Moreover, investment terms with a fundamental analysis are longer because it requires more studying and background with respect to other analytical tools, like technical one.
It can also be outweighed by chance factors, such as physical disasters affecting commodity prices and companies in general. In general, markets can also be surprised by unexpected changes in economic and political scenarios.
In the specific case of crypto markets, fundamental analysis can be used to analyse the exterior components that can affect cryptocurrencies.
Fundamental analysis can be carried out by looking at its use cases or community, but also at the team behind every specific crypto project, something that tells a lot about its
overvaluation or undervaluation.
Indeed, in the case of crypto markets, there are no financial statements, and therefore they cannot be evaluated as normal financial assets. Most cryptocurrencies are still in the
developing stage and they do not have a lot of real-world applications; they rely mostly on miners, users and, of course, developers.
It can be of great importance given that crypto markets are relatively more volatile and less stable than others, and due to their irregular situation investors react quickly to exogenous factors. These factors can vary and go from regulatory pressures to simple tweets - take Elon Musk as an example.
Fundamental analysis can indeed help comprehend the fair value of crypto assets - data about this can be found on different websites, such as Reddit or Telegram. The use of technology is of utter importance.
The investor can assess the usability of the adoption of the cryptocurrency he's interested in, but this tool can also be used to study how governments value cryptocurrencies and whether they want to implement new regulatory policies about it. We can also identify the progress that it's being made in terms of technology, such as how the activity of cryptocurrency is developing, along with its software or media coverage - all these factors contribute to
increasing the crypto asset's value.
From a psychological point of view, it can also help the investor trade with more confidence, knowing that a thorough analysis has been carried out. When the analysis is done daily, it
can help you develop a finer investment strategy.
In terms of financial metrics, what can be used is:
Market capitalisation: the investor can look at the total market worth of cryptocurrency, which indicates whether there is space for growth. To get that, you multiply the current price per coin by its supply.
Liquidity, or how easy it is to buy or sell the asset. A liquid market is a competitive market and is usually favoured by investors, also because it entails a lower bid-ask spread.
Volume:
it spurs liquidity because it is telling of how much money has been exchanged for a certain asset.
Fundamental analysis usually prioritises the assessment of transaction values. If the transaction value is consistently high, it means that the cryptocurrency is in steady circulation.
Fees:
they reflect the demand on the blockchain. Every cryptocurrency can have its own transaction fee.
The assessment of the fees paid over various periods gives the
trader an idea of how secure the crypto asset is.
Supply mechanisms:
general microeconomics state that when supply is low and demand is high, price rises. A general belief for cryptocurrencies is that when supply runs out, the price will rise (this is, for example, a general prediction of Bitcoin holders). On the other hand, investors can also use project metrics for their fundamental analysis:
Whitepaper:
it is a technical document outlining the purpose and operation of the
project. It should comprise the blockchain technology solutions, the use cases for the currency, the planned features and upgrades, sale and team information, and tokenomics (the factors that impact the tokens' use and value).
The team:
crypto teams are easily accessible to assess nowadays so that the investor can learn more about them and their credibility.
The competitors:
the investor can conduct an analysis of the crypto assets; competitors. If there are other cryptos which are more widely adopted or valuable, maybe it is best to back off from the item of interest.
Last but not least, important instruments when evaluating cryptos through fundamental analysis are Blockchain metrics or On-chain metrics. The rising popularity of blockchain
has made sure that lots of different types of information could become extremely popular, such as the number of active users, total transactions and transaction value.
There are three fundamental metrics in this case:
1. Hash Rate:
this is a measure of the mining machine's ability to conduct hashing computations in an efficient way.
The hash rate also determines the profitability of the miner, as it indicates the likelihood that a block will be mined, and, indirectly, the chance of receiving the block reward. An investor should look at cryptos with a more extensive network because they are more resistant to attacks or data manipulation.
2. Status and Active Addresses:
active addresses measure the number of dynamic blockchain addresses over a period of time. They are helpful in comparing the growth or decline of the activity or interest in the coin or token. The investor can also get to
the active address through the computation of the total number of unique addresses over time (and a comparison of the results).
3. Transaction values: they can be determined for the assessment of the regular circulation of the crypto asset. It indicates how much money was exchanged on a given period, and therefore, the number of transactions.
Through these techniques, we can assess whether a cryptocurrency is undervalued or overvalued, and we can detect a trading opportunity.
With fundamental analysis , traders evaluate and study what can affect the price of a security, such as external factors or events. This type of analysis takes advantage of tools like periodic financial statements, financial ratios, economic forecasts and other types
of additional information that can affect the value of a security.
There are different approaches to fundamental analysis that analyse micro and macroeconomic variables in different ways:
1. Top-down approach: through this approach, the trader analyses macroeconomic variables first and then microeconomic variables. Global information is taken in first, followed by more detailed and specific values and variables addressed. With this approach, the trader looks at the world economic situation, and then looks more at the most economically attractive countries, along with the sectors with the most potential, and within them, chooses which ones are most convenient to invest in.
2. Bottom-Up approach: this approach is the opposite of the previous one: first the trader chooses companies with growth potential, analyses the sector they operate in and then the economic situation of their countries; the overall global economic situation is the last thing to be analysed.
THE ADVANTAGES:
This approach allows the investor to collect and analyse information external to the markets but that might still influence prices. This way, the investor has a clearer vision of the reality of the market.
THE DISADVANTAGES:
The trader using fundamental analysis needs more thorough knowledge and experience of accounting, business and, in the specific, the sector of interest.
Moreover, investment terms with a fundamental analysis are longer because it requires more studying and background with respect to other analytical tools, like technical one.
It can also be outweighed by chance factors, such as physical disasters affecting commodity prices and companies in general. In general, markets can also be surprised by unexpected changes in economic and political scenarios.
In the specific case of crypto markets, fundamental analysis can be used to analyse the exterior components that can affect cryptocurrencies.
Fundamental analysis can be carried out by looking at its use cases or community, but also at the team behind every specific crypto project, something that tells a lot about its
overvaluation or undervaluation.
Indeed, in the case of crypto markets, there are no financial statements, and therefore they cannot be evaluated as normal financial assets. Most cryptocurrencies are still in the
developing stage and they do not have a lot of real-world applications; they rely mostly on miners, users and, of course, developers.
It can be of great importance given that crypto markets are relatively more volatile and less stable than others, and due to their irregular situation investors react quickly to exogenous factors. These factors can vary and go from regulatory pressures to simple tweets - take Elon Musk as an example.
Fundamental analysis can indeed help comprehend the fair value of crypto assets - data about this can be found on different websites, such as Reddit or Telegram. The use of technology is of utter importance.
The investor can assess the usability of the adoption of the cryptocurrency he's interested in, but this tool can also be used to study how governments value cryptocurrencies and whether they want to implement new regulatory policies about it. We can also identify the progress that it's being made in terms of technology, such as how the activity of cryptocurrency is developing, along with its software or media coverage - all these factors contribute to
increasing the crypto asset's value.
From a psychological point of view, it can also help the investor trade with more confidence, knowing that a thorough analysis has been carried out. When the analysis is done daily, it
can help you develop a finer investment strategy.
In terms of financial metrics, what can be used is:
Market capitalisation: the investor can look at the total market worth of cryptocurrency, which indicates whether there is space for growth. To get that, you multiply the current price per coin by its supply.
Liquidity, or how easy it is to buy or sell the asset. A liquid market is a competitive market and is usually favoured by investors, also because it entails a lower bid-ask spread.
Volume:
it spurs liquidity because it is telling of how much money has been exchanged for a certain asset.
Fundamental analysis usually prioritises the assessment of transaction values. If the transaction value is consistently high, it means that the cryptocurrency is in steady circulation.
Fees:
they reflect the demand on the blockchain. Every cryptocurrency can have its own transaction fee.
The assessment of the fees paid over various periods gives the
trader an idea of how secure the crypto asset is.
Supply mechanisms:
general microeconomics state that when supply is low and demand is high, price rises. A general belief for cryptocurrencies is that when supply runs out, the price will rise (this is, for example, a general prediction of Bitcoin holders). On the other hand, investors can also use project metrics for their fundamental analysis:
Whitepaper:
it is a technical document outlining the purpose and operation of the
project. It should comprise the blockchain technology solutions, the use cases for the currency, the planned features and upgrades, sale and team information, and tokenomics (the factors that impact the tokens' use and value).
The team:
crypto teams are easily accessible to assess nowadays so that the investor can learn more about them and their credibility.
The competitors:
the investor can conduct an analysis of the crypto assets; competitors. If there are other cryptos which are more widely adopted or valuable, maybe it is best to back off from the item of interest.
Last but not least, important instruments when evaluating cryptos through fundamental analysis are Blockchain metrics or On-chain metrics. The rising popularity of blockchain
has made sure that lots of different types of information could become extremely popular, such as the number of active users, total transactions and transaction value.
There are three fundamental metrics in this case:
1. Hash Rate:
this is a measure of the mining machine's ability to conduct hashing computations in an efficient way.
The hash rate also determines the profitability of the miner, as it indicates the likelihood that a block will be mined, and, indirectly, the chance of receiving the block reward. An investor should look at cryptos with a more extensive network because they are more resistant to attacks or data manipulation.
2. Status and Active Addresses:
active addresses measure the number of dynamic blockchain addresses over a period of time. They are helpful in comparing the growth or decline of the activity or interest in the coin or token. The investor can also get to
the active address through the computation of the total number of unique addresses over time (and a comparison of the results).
3. Transaction values: they can be determined for the assessment of the regular circulation of the crypto asset. It indicates how much money was exchanged on a given period, and therefore, the number of transactions.
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