As an investor, there are countless different methods you can use to research prospective investments in crypto trading. Two of the most common techniques traders use are fundamental analysis and technical analysis, which can help you build effective investment and trading strategies.
Fundamental analysis refers to the process of evaluating a cryptocurrency’s inherent value by examining its technology, tokenomics, network activity, community involvement, and various underlying factors. Technical analysis, on the other hand, focuses on predicting price movements by analyzing price charts, patterns, and indicators.
Fundamental analysis aims to help investors determine the intrinsic value and potential of prospective investments, helping them make informed investment decisions. It differs from traditional asset evaluation, which focuses on financial statements and other conventional metrics. That makes it a good way to determine the potential popularity and value of a crypto asset.
Core Components of Crypto Fundamental Analysis
Crypto fundamental analysis generally focuses on several core components:
1. Technology and Blockchain Infrastructure Evaluation
Fundamental analysis requires a thorough evaluation of technology to understand a cryptocurrency’s scalability, security, and innovation capabilities. Crypto investors can identify factors like:
- Does the cryptocurrency present a solution to a significant problem?
- Can it improve existing systems or industries?
- How steep is the competition?
Evaluating the blockchain and overall technology allows you to look beyond the hype and deeply measure an asset’s potential.
2. Team Assessment and Leadership Analysis
Investors should look into the team behind the project. An accomplished team with years of experience is a positive signal of a project’s credibility. A strong team can increase the possibility of success. On the other hand, an anonymous team is usually a red flag. However, not all anonymous projects are bad and Bitcoin is the obvious example.
It’s often smart to examine the development activities of the team. Watch to see whether they are they actively working on development of the project. Also, check to see whether they are making regular project updates and that they engage with their community. Regular updates and high community engagement may suggest that the project is heading in a positive direction.
3. Whitepaper Deep Dive and Roadmap Review
The project’s whitepaper serves as a roadmap where the project’s goals, vision, and technology details are recorded. Reviewing the roadmap allows you to discover details like:
- What the project plans to achieve
- The timeline in which they plan to achieve their goals
- Whether they’re hitting milestones
- What’s new coming in the future
In short, reading crypto whitepapers and assessing their potential is essential before deciding to invest.
4. Tokenomics and Token Supply Mechanics
Tokenomics refers to the economic principles governing token use and distribution, which significantly impact cryptocurrency value. It’s important to assess whether there’s a fixed supply cap, how tokens are distributed, who holds them, and whether there’s a burning mechanism or staking system.
Tokens like Bitcoin have a fixed supply cap that typically raises demand and value in the long run. However, tokens with no fixed cap might create market inflation, reducing their value. Often, tokens that don’t have fixed supply caps use staking or burning mechanisms to limit supply, thereby increasing demand and value.
Quantitative Metrics That Matter
Several quantitative metrics help investors and traders assess the performance and potential of a cryptocurrency’s success. Some of them include:
1. Developer Activity and Commit Analysis
Higher developer activity often indicates guaranteed future growth. A blockchain with a high number of pull requests, code commits, and system events shows that the project might be undergoing active development. Ongoing innovation and improvement introduce new features, apps, and tools, which are most likely to attract more users and investors, increasing the asset’s value.
2. Network Growth Metrics and User Adoption Rates
From the rate of network growth, one can understand how quickly the number of users on a blockchain is increasing. A steady exponential increase in the rate of network growth is a great sign. This could mean that the blockchain project is driving economic growth by offering something of value that attracts more users.
However, exercise caution with this financial data and make sure to consider other data points and fundamentals. Some Ponzi schemes may have similarly impressive growth metrics. Other than that, a healthy network growth rate is a great sign for most crypto projects.
3. Total Value Locked (TVL) Analysis
Total value locked or TVL is the total amount of cryptocurrencies locked or staked on a blockchain platform. It suggests whether a blockchain project is trusted or investment-worthy. However, with TVL, the diversity of the staked assets should be taken into account.
Like many of these important factors, it’s important to dive into the details of a platform’s TVL. For example, you can cross-check the platform’s user figures with its TVL to see if it’s just a handful of whales inflating the platform’s TVL. Suspect projects sometimes heavily inflate their TVL as bait to attract users.
4. Revenue Per Token Holder Calculations
This metric evaluates the average revenue generated per token holder, which can offer insights into the potential economic value associated with holding a token, especially for tokens that have explicit revenue-sharing or reward mechanisms.
However, it’s important to note that not all tokens entitle holders to a share of protocol revenue. For most tokens, simply holding them usually does not guarantee direct revenue, and value may be derived from other factors such as utility, governance rights, or market speculation.
Investors should consider the specific tokenomics and distribution mechanisms of a project to accurately assess whether token holders are proportionally benefiting from the network’s activity relative to the asset’s market price.
5. Burn Rate Analysis and Treasury Management
Burn rate analysis and treasury management in crypto are vital factors that involve monitoring how quickly a project spends its treasury funds to maintain financial health. The burn rate measures the speed at which a project uses its venture capital to cover operational costs before generating sustainable revenue.
A high burn rate shortens the project’s runway, the time before funds run out, potentially signaling funding challenges unless new capital or revenue is secured. Effective treasury management balances spending with income generation to ensure long-term sustainability. Tracking burn rate helps stakeholders assess financial stability and make informed decisions about the project’s viability and growth prospects.
6. Price-to-Mining Cost Breakeven Ratio
The price-to-mining cost breakeven ratio is a metric that can be applied to specific DeFi assets. This metric can only be measured for cryptocurrencies that are still available for mining. The price-to-mining cost breakeven ratio essentially compares the cryptocurrency’s price with its mining cost. A high price-to-mining cost breakdown ratio means mining the cryptocurrency is likely unprofitable, signaling governance problems in the future.
Evaluating Use Cases and Market Demand
It’s important to understand a crypto project’s use cases and market demand to get a good idea of its potential. Here are some of the factors to consider:
Market Size
To understand a cryptocurrency’s market size, investors must assess demand, transaction volume, and adoption rates, including:
- What’s the demand at present?
- What will the demand be in the future?
- Are people using this cryptocurrency?
- Can this cryptocurrency attract more users?
Competitive Landscape
Another important fact to understand is how cryptocurrency compares to similar projects. The project’s market position compared to others also needs to be assessed.
Consider factors like:
- Use cases
- Technology
- Market cap
- User base
Examine how it performs in those cases compared to its competitors.
Technology and Use Cases
The technological analysis allows us to assess the project’s scalability, security, and innovation. It’s essential to explore the use cases the cryptocurrency offers, identifying whether those applications meet the real-life challenges.
Community and Ecosystem Analysis
A cryptocurrency’s community and ecosystem demonstrate the health of its growth. Here are some of the things to consider:
Community Sentiment and Size
If a community’s size is large and active, it indicates a higher level of engagement and interest. It’s essential to examine the overall sentiment of community members, as such sentiment can significantly impact the success and adoption of a cryptocurrency project.
Key factors to assess include whether members are supportive, the level of positivity or skepticism within the community, community activity levels, and any governmental involvement. Investors can explore various community channels, such as forums, blogs, and social media, to assess these sentiments and engagement levels. Watch out for bots, as many crypto projects use them to artificially boost their engagement.
Organizational Partnerships and Integrations
Major parentships or integrations with large or trusted companies and organizations are great signs, indicating growth and adoption. Investors can assess which companies are collaborating with the project, what the impact of those collaborations looks like, and whether those relationships fit the project goals and roadmap. It’s crucial to understand the nature of the partnerships to know whether they may drive success and long-term sustainability.
Risk Assessment Framework for Crypto Projects
Discovering long-term risks requires evaluating the fundamentals of cryptocurrency. Simply tracking price movements won’t reveal the bigger picture here. To identify potential risks, you need to assess the underlying technology, development team, use cases, market demand, and more. Carefully identifying possible risks requires both fundamental and technical analysis.
Market Volatility Analysis
Examining past and current volatility presents investors with a better picture of macroeconomic factors and price fluctuations. Comparing price volatility over different periods helps investors identify the risks. Where higher volatility indicates higher uncertainty and risks, lower volatility could mean a lower chance of risks.
Assess Exchange Risks
Investors and traders should examine the protocols, regulatory compliance, and the reputation of exchanges to mitigate exchange risks, including technical feature failures, hacking issues, and regulatory issues.
Monitor News and Developments
News and the latest development updates leave a noticeable impact on market sentiment and investor behavior. That’s why it’s crucial to monitor the news and updates and effectively track the shift in market sentiment. Often, regulatory announcements also provide insights into the ban or legitimacy of cryptocurrencies.
Tools and Resources for Fundamental Analysis
Here are some tools and resources that can help you collect asset data, track trends, and perform fundamental analysis.
1. News Aggregators
News aggregators like CryptoPanic are powerful centralized platforms that provide the latest market trends and project updates for the cryptocurrency industry. These are excellent channels for gathering market insights for fundamental analysis.
2. Crypto Trackers
Crypto trackers are valuable tools for monitoring all cryptocurrency investments from a centralized platform. Some top crypto trackers include CoinMarketCap, CoinStats, Zapper.fi, and Kubera. They give you access to price data as well as portfolio performance, and they help you compare cryptocurrencies based on various factors.
3. Social Listening Tools
Social Listening Tools, such as LunarCrush, Santiment, and CryptoMood, collect and analyze data from social media platforms, offering insights into social media sentiment, discussions, mentions, and community engagement. These tools can be especially useful for crypto trading because engagement is such an important metric in the industry.
4. Blockchain Explorers
Blockchain explorers allow users to view, search, and analyze data, including transactions, addresses, and smart contracts across various blockchains. Every major blockchain has its own explorer, including:
- Etherscan for Ethereum
- Polygonscan for Polygon
- Solana Explorer for Solana
Blockchain explorers are particularly useful for analyzing transaction volumes, network congestion, and token movement.
5. Community Forums and Social Media
Platforms like Reddit, X (formerly Twitter), and Telegram are home to most crypto communities, where users can find fresh updates and valuable insights for fundamental analysis. These platforms are the best places to discover discussions, project updates, and thoughts of crypto experts and influencers.
6. Crypto Websites and Reports
Numerous websites and research organizations share detailed reports, analyses, and investment insights, such as Messari, CoinDesk, and Glassnode. These websites often share helpful news, research, and analysis on the blockchain, cryptocurrency, and decentralized applications.
Putting It All Together: Making Informed Decisions
Combining fundamental and technical analysis allows traders or investors to use the best aspects of both strategies while compensating for their weaknesses.
Fundamental analysis focuses on determining the intrinsic value of cryptocurrencies and allocating your portfolio based on their fundamental strength. Technical analysis, on the other hand, can help you identify potential entry and exit points by examining price charts, patterns, and indicators.
Fundamental analysis allows you to assess risks and is more suitable for long-term investment strategies. In contrast, the technical analysts help identify optimal timing, and their work is often more suited for short-term goals. Combining both methods can yield the strengths of each while supporting both long-term and short-term strategies.
FAQs
How is fundamental analysis different from technical analysis in crypto?
Unlike technical analysis, fundamental analysis doesn't solely focus on price movements and patterns. It helps you assess a cryptocurrency's inherent value by examining various macroeconomic factors, including technology, use cases, and the team behind it.
What are the most important things to look for when researching a cryptocurrency?
During your cryptocurrency research, look for the cryptocurrency's whitepaper and insights on technology, blockchain infrastructure, team and leadership capabilities, a company's financial statements, tokenomics, and token supply mechanism to gain a comprehensive view.
How do I know if a crypto project is a good long-term investment?
Whether a cryptocurrency project is suitable for long-term investment depends on several factors, including its market value, user sentiment, community engagement, and other key considerations. Fundamental analysis is a powerful tool to help you make informed decisions about long-term investments.
References
- Fundamental vs. Technical Analysis: What’s the Difference? – Investopedia
- What are fundamental analysis and technical analysis? – Coinbase
- Crypto Fundamental Analysis: Exploring the Foundation of Crypto Projects – BitDegree
- Introduction to Crypto Trading and Investing – OSL
- What Are the Key Elements of Fundamental Analysis in Crypto Trading? – Kriptomat
- Top 10 Metrics to Consider During Fundamental Analysis – Crypticorn
- Developer Activity in Crypto: What’s Hot and What’s Not – Crypto Robotics
