Investing in the cryptocurrency market is not a simple task, but it is also not rocket science. People and institutions that invest in and trade cryptocurrencies use a variety of analytical techniques, including technical analysis, fundamental analysis, and quantitative analysis, among others.
This piece focuses on fundamental analysis in the cryptocurrency market and how investors can use it to better predict trends and thus improve their cryptocurrency investing experience.
While the contents of this piece can come in handy when making investment decisions, it is however not financial advice.
WHAT IS FUNDAMENTAL ANALYSIS?
Fundamental analysis is the approach used by investors to establish the intrinsic value of an asset. This is basically done to ascertain whether the asset is undervalued or overvalued by the market.
Fundamental analysis looks into a different array of data to establish a visionary investment case for an asset.
Fundamental analysis considers different factors for each asset class, for example, factors used in the fundamental analysis for real estate differ from those used in the fundamental analysis for equities, bonds, or commodities. As a result, the factors to consider are specific to the asset.
FUNDAMENTAL ANALYSIS IN CRYPTO-ASSET.
Fundamental analysis in the crypto-asset isn’t as synonymous with that of the traditional stock market as people may think. As a matter of fact, to a large extent, they differ.
This is because the underlying driving factors differ, the technology differs, and the mission differs; while knowledge of the fundamentals of fundamental analysis is advantageous, it is not required.
Three major benchmarks must be considered when conducting a thorough crypto-asset fundamental analysis.
- The on-chain analysis
- The project analysis
- The economic analysis.
On-chain analysis is the different range of metrics that are observed by looking at data provided by the blockchain.
There are various on-chain indicators that have been developed to help investors make sound investment decisions; some of them are discussed below.
Active crypto wallet addresses
This is justified by looking at Metcalfe’s law, which states that “the value or utility of a network is proportional to the number of users of the network.”
This is known as the network effect. Active wallet addresses are similar to bank account numbers in the traditional financial or banking system, and they provide an imprecise representation of the number of people using the cryptocurrency network and the rate of growth in its users.
This by the basics of economics, supply and demand, would in adversely improve the price of the crypto-asset.
As a result, when the number of active addresses on a particular cryptocurrency increases, investors pay attention to this metric and look for investment opportunities.
Exchange inflow and outflow.
This is another important metric to consider when making investment decisions in cryptocurrency, both short and long-term.
This metric essentially depicts the rate of cryptocurrency inflow and outflow on exchanges. Cryptocurrency exchanges are places where you can buy and sell crypto assets.
Investors deposits anytime they want to sell and withdraw when they want to hold for the long term on their cold or hot wallets.
This metric is important as the volatility of assets are basically resulting from the buying and selling of that asset.
The more the buying the higher the price the more the selling the lower the price. Thus, since exchange inflow basically indicates that investors are looking to sell and outflow indicates investors are willing to hold, traders and investors capitalize on this metric and are with the herd if they can’t be ahead.
However, there is a caveat associated with this metric as not all crypto inflow suggests a drop in price.
In recent times, stablecoins have been introduced, which are essentially pegged to a traditional currency and used to purchase other crypto-assets
Thus, inflows of stablecoins have generally been said to be bullish, while inflows of other crypto-assets have been said to be bearish, as stablecoins are typically used to purchase other crypto-assets.
Net unrealized profit and loss
This metric examines the difference between net profit and loss on exchanges and wallets to determine whether the market is currently in euphoria or pain.
When the market is in euphoria, it means that the majority of investors are profiting and are likely to take profits soon, implying an impending price drop.
The maximum pain, on the other hand, simply means that the majority of investors are down and thus that the price is about to rise. This is also crucial in chain analytics and can be found on glassnode.
This metric provides information about network congestion or network demand.
Transactions on a blockchain necessitate a fee for validation, and users compete to have their transaction validated first, willing to pay more.
This raises the fee, and an investor can use this information to determine an investment case because it shows the network’s demand and increases in users, which raises the price. Metcalfe’s rule.
These are just a few of the on-chain analysis indicators that can have a positive impact on investment decision-making when used correctly. However, they may not be enough, which brings us to PROJECT ANALYSIS
The intrinsic value of the crypto asset is the primary focus of project analysis. A nice way to look at it is to ask “what,” “who,” and “how.”
The question ‘what’ basically means trying to understand the project, its purpose, mission, and use cases.
The basic and first place to look is the project’s whitepaper, which will outline the project’s overview.
The project’s goals, use cases, and underlying token/coin, the technology behind the project, the project’s road map, and the token/coin allocation
A critical review of the project whitepaper will provide insight into the overall gist of the project and whether it will stand the test of time.
It is said that no matter how good a car is, it still relies on the skill of a good driver to keep it from being wrecked.
It means that no matter how solid a crypto project appears to be when evaluating its white paper, it still relies on its team for delivery because the white-paper cannot perform on its own.
The first step is to identify the team and examine their track records to determine their ability to complete the project.
Their previous project history, if any, and how successful it was; do they have the technical and commercial expertise to meet their projected milestone?
Also, integrity should be investigated; you don’t want to invest in a project led by someone who has a history of fraudulent activities.
the project advisors, if any, should be evaluated as well, this is relatively important because a good advisor can positively affect the project and vice versa.
This question delves deeply into the project methodology of completion, specifically how realistic the process of getting the job done is.
However, a more pressing question is how they intend to allocate or distribute the project’s native token.
Is the project funded through an initial coin offering? If so, how many tokens are set aside for the team or developer?
If this is a large proportion of the total supply, the team will be able to easily manipulate the price of the assent, which is a red flag.
Are the people in the private sale visionary long-term investors, or will they dump the token as soon as it is publicly listed?
If the token distribution is being mined, one has to ascertain if there were any pre-mine tokens or networks.
This metric is also useful in fundamental analysis because it presents the asset from an economic standpoint. It takes into account the asset’s market capitalization, liquidity, and volume.
Market capitalization is basically used in the crypto world to ascertain the growth potential and legitimacy of the asset.
it is basically calculated by multiplying the circulating supply of the coin with its current price.
Higher market capitalization has less growth potential but much more legitimacy as it is presumed that many investors are investors and going by Metcalfe’s law the higher the user the higher the value.
Liquidity is the measure of how easily an asset can be bought or sold. In conducting fundamental analysis, liquidity is an important metric to be checked as in the case of an illiquid market, one cannot be able to sell at the desired market price.
Liquidity can be checked by the volume on exchanges, low volume may signify less liquidity while a higher volume may signify a liquid market.
The drivers of the market are people, and people act emotionally. As a result, it is important to assess the sentiments of market participants. Legendary traditional investor Warren Buffet once said, “Be fearful when others are greedy and greedy when others are fearful.” This is another aspect of cryptocurrency fundamental analysis.
In conclusion, it is important to emphasize that fundamental analysis in the context of cryptocurrencies is a very useful instrument for market analysis. When combined with other tools, such as technical analysis, it can produce extremely favourable investment results.