You must conduct your own research before investing in any form of asset. You must be completely aware of the item you are purchasing. While technical analysis is used by the majority of cryptocurrency traders, some also employ fundamental analysis. This article explores various fundamental analysis techniques for both equities and cryptocurrencies.
Gaining proficiency in fundamental research can help you become a more well-rounded investor. Long-term investors employ fundamental research to evaluate whether an asset is likely to increase in value over a longer period of time, but technical analysis is useful for short-term transactions.
Fundamental Analysis: What Is It?
A common method used by investors to determine the inherent worth of potential assets is fundamental analysis, or FA. Fundamental analysts strive to analyze the qualities and performance of companies or cryptocurrency projects to determine whether they are overvalued or undervalued. They get to their conclusion and utilise that knowledge to guide their financial choices. It can be applied to single businesses or to entire sectors.
For instance, fundamental investor Eric decides to invest in Apple because he believes the company has a solid track record. He researched the industry, Apple’s business strategy, management, long-term growth, cash flow, and all other metrics before coming to this decision.
How Is Fundamental Analysis for Crypto Different?
Although technical analysis principles apply to all markets, fundamental analysis for the cryptocurrency market is distinct from that for the stock market. Whereas FA in traditional markets takes into account financial indicators like cash flow or earnings per share, crypto ventures do not provide data in the same way. Therefore, crypto fundamental analysts need to come up with new approaches to researching a project. For instance, one can think about reading the project’s whitepaper and assessing how the team is doing in relation to the roadmap. The basic objective, regardless of the technique, is to ascertain the project’s inherent value.
Fundamental Considerations for Crypto Analysis
As we explained, compared to conventional financial markets, bitcoin financial markets require a distinct strategy. In addition, there are a few additional things to take into account. First off, performing a fundamental analysis is challenging. Anyone can undertake an analysis, but it can be challenging to turn that information into a useful (and successful) investment.
Next, you must choose solid metrics that you can trust. For instance, a lot of investors focus on a network’s transaction volume, yet this indicator is quite susceptible to manipulation. Big players could transfer money back and forth between wallets, especially on blockchains with low transaction costs, to improve the project’s appearance.
Basically, it’s crucial to keep in mind that there can be more to things than first appears.
Check out the three different categories of cryptocurrency fundamentals: financial, project, and blockchain measurements.
Cryptocurrency Metrics (On-Chain Metrics)
In order to assess the chain’s popularity and security, blockchain metrics, sometimes referred to as on-chain metrics, concentrate on the activity on the chain and its cost.
The Hash Rate and the Staked Amount
Consensus processes mainly come in three different categories. The majority of cryptocurrency projects adhere to Proof-of-Stake (PoS), Proof-of-Work (PoW), or Proof-of-Authority (PoA). These methods rely on algorithms to safeguard the blockchain network’s security and validate transactions. The major distinction is in how they function, and understanding this could give fundamental analysts insightful information.
The network’s health is typically assessed using the hash rate for Proof of Work cryptocurrencies like Bitcoin. A network is more secure the greater the rate. Additionally, it indicates a greater interest in cryptocurrency mining.
The aggregate processing power used to complete transactions on the PoW blockchain is expressed by the hash rate. Although there are numerous sources for hash rate information, they are all merely estimates; the actual hash rate is unknown.
The quantity of tokens staked for Proof-of-Stake cryptocurrencies like ETH (post-merge) is seen as a crucial indicator. Staked tokens are used by the network in PoS chains to validate blocks. A greater quantity of staked tokens therefore suggests that the blockchain is more popular and secure.
Examining the active addresses within a specified time period is another method for performing on-chain analysis. There are several methods for calculating this figure. However, the most popular method is to simply add the sum of all transmitting and receiving addresses over time.
For instance, tracking this week to week would give fantastic insight into network activity and whether that activity is increasing or not.
Cost and Transaction Value
Numerous fundamental analysts take the overall transaction value during a specific time period into account. For instance, the daily transaction value would be $50,000 if there were 50 bitcoin transactions of $1,000 apiece on the same day. This value can be compared to those of other blockchains to see which chains are utilised most frequently.
Studying the fees paid over time can also reveal more information about how popular blockchain transactions are. Great fees are a reliable indicator of high demand because transactions are handled in the order of whoever pays the most.
Increased fees also imply greater blockchain security because miners are more likely to remain active. The more money cryptocurrency miners make from collecting transaction fees, the happy they are. A chain is more secure the more miners it has.
Second, financial indicators are an essential component of fundamental analysis for cryptocurrencies. In this kind of statistic, we examine a project’s financials and possibilities for expansion. Some of these figures are:
Capitalization of the Market (Market Cap)
Utilizing both the current price and the circulating supply, the market capitalization of a project is determined. You may obtain a reasonable estimate of the value of the blockchain by multiplying the two, which is comparable to the overall market value of a firm like Apple.
However, market capitalization can be highly deceptive. It is simple to print 5 million tokens, then sell a few of them for $100 each. Technically, the market capitalization of your token has reached $500 million. Market capitalization should therefore be used in conjunction with other financial variables like liquidity, volume, and supply.
However, market capitalization is still used by fundamental analysts to estimate a project’s growth potential. A micro cap initiative, in their opinion, has more room for expansion than a large cap coin like Ethereum. Nevertheless, they contend that Ethereum is too large to fail, whereas a single token can vanish into thin air.
Volume of Trading and Liquidity
Market capitalization alone might be deceptive, as was previously mentioned. However, you can presume the market cap is accurate if the increase in trading volume and liquidity follows.
How quickly you can sell or acquire a token is indicated by its liquidity. You can sell your token at the going rate if it has good liquidity. For instance, compared to a recently released altcoin, the liquidity on Bitcoin and Ethereum is often superior. High liquidity means that other people are eager to purchase and sell the token at any given price, which supports the market cap.
Another such confidence measure is trading volume. It displays the amount of value exchanged during a specific period of time. In particular, the volume to market cap ratio is intriguing since it reveals how much of the overall value is traded in a given day.
Tools, Metrics, and Indicators for Fundamental Analysis
We have covered a wide range of measurements and indicators that you can use in your fundamental research. These measurements won’t give you useful information on their own. To develop a thorough understanding of the project, you must combine a variety of various aspects, and you must then evaluate its results in light of those of other initiatives.
Examples Tools for Fundamental Analysis Tools
You might be wondering where to access all this information once you have a better understanding of the many measurements, indicators, and methodologies of fundamental analysis. Fortunately, there are many crypto research resources available to you to assist with your essential evaluations.
Messari is a data aggregator with a wide range of chart analysis capabilities.
An on-chain data platform called Glassnode monitors network activity and price information.
Santiment is a different on-chain data platform that provides social media data as well as basic analysis on different cryptocurrencies.
Baserank is a research platform that compiles information and evaluations from analysts.
Crypto Fees is a programme that displays network fees for various projects over a predetermined period of time.
It’s intriguing to go down the rabbit hole of fundamental study. If done properly, it can offer excellent insights on projects that technical analysis would not be able to uncover. You can detach from a fluctuating market and concentrate on the underlying worth of the enterprise by making investments based on FA.
There is no fixed method for approaching FA, as usual. It is typically better to experiment with several tools to determine which strategy suits you the most.
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