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How to Analyze a Crypto Using Fundamental Analysis?

How to Analyze a Crypto Using Fundamental Analysis

Fundamental analysis is one of the key processes to evaluating an asset’s value. It is conducted to assess the assets’ roots microscopically and also to analyze the value of the asset. To put it simply, fundamentally analyzing a project can help one in highlighting the factors that sum up as the intrinsic value of the asset.  

TL;DR 

In the fundamental analysis of a crypto asset one needs to do a thorough research of the crypto asset. Right from digging through the asset’s history, to understanding the purpose of the asset, the team behind the project, the whitepaper, and the tokenomics of the asset, the whole deal. This intensive search is set in place as the sole purpose of the fundamental analysis of any crypto asset is to assess if the asset is overvalued or undervalued.  The result of these readings will prove pertinent for taking the right trading positions. 

Also Read: Decentralized Finance vs. Traditional Finance

What is Fundamental Analysis in Crypto?

Crypto assets are volatile and it is always to be dived into, after intensive and thorough research. One of the ways in which a crypto asset can be understood is via Fundamental Analysis. It is an approach often used by investors to evaluate the intrinsic value of a crypto asset. By analyzing and investigating a crypto asset’s graph with a fine-tooth comb an investor can determine the nature of the asset’s value.

There are several factors that one has to consider before conducting a Fundamental Analysis; like

  • Target market Competitor comparison, 
  • Team Roadmap, 
  • Releases and development Partnerships, 
  • Tokenomics, 
  • Utility Status, and active users
  •  Whitepaper,  
  • Community and reviews,  
  • Real-world use case, 
  • Price history 
  • Token metrics. 

Fundamental analysis of crypto is far different from traditional finance. Unlike traditional finance, a crypto asset’s value is derived from the number of wallets created, the number of transactions made, and the volume and frequency of these transactions. 

Analyzing the chain metrics 

By analyzing the activity of a blockchain investors can derive the value of a certain coin. The number of wallets created, the volume of coins available on an exchange and no of investors. Companies like CryptoQuant and Glassnode do the heavy weightlifting by offering analytical data of cryptocurrencies for investors and traders.  

Read the blueprint of the project: The Whitepaper 

By reading the whitepaper anyone will be able to understand the potential use cases of the project, the technical infrastructure used, the team leading the project and the advisors who step in to extend their expertise in a certain area. The whitepaper also showcases the ultimate mission and vision of the asset or the product.

The team talk 

Some crypto projects may be orchestrated by a team, while some may not. If a crypto project is being analyzed one should look into the team’s background and their potential to scale the project. This is also measured because crypto projects require experts in the field or individuals who understand the domain and the market well.

Understand the project’s token utility

Often it is hard to determine the project’s utility. Most of the time investors impulsively buy a crypto asset based on their gut feeling. 

Regulation 

Not all countries have regularized cryptocurrencies. Make sure to read the regulations and familiarize yourself with the legal status of crypto assets. For example, there will be a flat 30% tax on crypto assets from FY’ 2022 as announced by the government. If you are sending or receiving crypto from a country make sure to abide by the regulations set by the government. Also, these regulations may change from time to time so it’s always best to keep a close tab on the policy changes around cryptocurrencies. 

Additional Read: Which is the best crypto to invest in?

How to Perform Fundamental Analysis? 

One thing to keep in mind is that performing fundamental analysis in crypto is different from analyzing the various traditional assets. Since the crypto space is still new compared to the other assets available and given its volatile nature, the process of FA for crypto requires a lot in-depth research.   

Following are some metrics to fully understand the value of crypto-assets

Project Metrics: Evaluating a project’s metrics is the first step to analyzing a crypto asset from a qualitative standpoint. These metrics are linked to the project and makeup to be the primary source of the project’s identity.  

The team is everything: Believe it or not but the team behind a crypto project says a lot. Each member of the team must have a background closely related to the kind of project they are leading or their bio must reflect what they handle within the ecosystem as a leader. 

Whitepaper – the blueprint of the crypto project: The whitepaper of the project defines the purpose of the project. It includes the technology stack, the problem it solves, market opportunity, the ask, the roadmap of the product, and the reach and technology drivers of the project.

Tokenomics and distribution: Tokenomics of a crypto project defines the business model of the crypto project. The distribution of tokens and the participants of the token ecosystem gives a subtle hint of the sustainability of the project. The market cap, total supply, mint and burn equilibrium hashes out the lineage the crypto project will create after it goes public. 

The road less taken: By quoting Robert Frost we mean the roadmap of the crypto project. The advancements the project will make in the quarters. From testnet to mainnet production everything is covered under this. The roadmap is the timeline of the project that records all major milestones through which investors can analyze the development and valuation of the project. 

Additional Read: 5 Things to Keep in Mind before investing in Crypto

Competitor analysis

  • Analyzing the competitor of the crypto project one is interested in gives more leverage as the analysis offers more leverage to the investor before making the investment call. 
  • This exercise will also give an investor some provision of creating a  Margin Safety bar to analyze the bull and near market times. 

Financial Metrics 

While project metrics offer a qualitative outline of a crypto project, the financials is quantifiable research put together by analyzing numbers on the crypto asset graph. Following are the two financial metrics to analyze:

Market Capitalization:  Market cap of a crypto asset showcases the demand v/s supply of the asset. The market cap is calculated with the current market price of the asset into the total number of tokens in circulation. 

Liquidity and volume: Liquidity is one of the key indicators of the crypto project. These metrics indicate the assets’ overall standing in the market as any individual investor can gauge the buyer and seller flow in the market. 

Fundamental analysis indicators, metrics, and tools 

While Fundamental analysis of a crypto set’s the ground for valuation of a crypto asset, indicators linked to the crypto asset also maneuver the value of the asset. Do not get caught up, assuming that a preliminary analysis of crypto is enough to declare the value of the asset. The various indicators also make the market oscillate.      

Indicators like the number of wallets, and transactions can get one through the network’s explorer. To get molecular data on the crypto, the active number of wallets can be linked to the circulating supply of the asset. This statistical data can help analysts measure the force of the crypto asset. The frequency of the transactions on a blockchain explorer between addresses also adds up as an important data source for evaluating the asset. 

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Combining metrics and creating FA indicators

Now that we have read about analyzing the fundamentals of a crypto asset and its various indicators of it. Here’s how this analysis acts as a folio to the indicator to assess the crypto’s value with real-time metrics. 

We gather all the fundamental information but often get sold out on the face value of a token. The quantifiable information is often overlooked. Let’s compare two coins and underline the overlooked aspect of FA. 

Tokenomics Soul Coin  Bond Coin
Market Cap $ 200,000,000 $10,000,000
Transaction count (6 months) 20,000,000 40,000,000
Avg. transaction value (6 months) $ 60 $ 120
Active addresses (6 months) 30,000 2,000

Looking at the figures above, the market cap and the transaction amounts differ.  Also, there are instances where the average transaction amount of a certain token (eg Bond Coin) is higher than other tokens. Not to forget the market cap of the token. As compared within the table above the number of transactions and the average amount of transactions are rarely considered while laying down the true potential of a token. When they say ’Don’t judge a book by its cover’ that’s the phrase one might tell after diving deep into the sea of crypto markets. 

Additional Read: How to start investing in Crypto?

Network Value to Transactions Ratio (NVT) 

Those who have heard the ‘Price to Earnings’ ratio in traditional finance will be able to comprehend NVT easily, as both parameters are designed in a similar fashion. NVT is calculated by dividing a coin’s market cap by its average transaction volume.  The average of daily transactions is considered to analyze the inherent value of the asset. 

The concept is pretty simple, more transactions, more the volume. 

When the value exceeds a certain threshold it is measured on a ratio and when the NVT exceeds a ratio above 90-95; the option of buying more presents itself on the cards. 

Market Value to Realized Value Ratio (MVRV) 

It is pertinent to check if the asset’s value is realized or not. By realized asset, we mean the coins that are gone forever due to an individual losing his or her private key. For example, Eth left in a wallet will not be calculated in the value proposition of the asset. 

Stock-to-flow model 

The Stock-to-flow model is the most common and effective way to determine the value of an asset. This model fits well with crypto coins that have a limited supply in the market. For example, Bitcoin has 21 million coins in total. Due to its limited supply, these assets are often compared to precious stones and metals. BTC has often been called the digital gold. 

These coins have a distribution chart. The volume of coins that are bought by pre-sale investors and retailers is one of the indicators. Apart from understanding how many holders are holding the asset, it is important to assess the scarcity of the asset as the liquidity if the asset also drives its value. 

Examples of Fundamental Analysis tools 

BaseRank 

BaseRank is a platform that offers research-based information and reviews for investors and analysts. The crypto asset is measured on a scale of 0 to 100 based on the average reviews it has received. The platform has some premium reviews available to subscribers only. But, the free version offers a fair number of reviews for users who opt for the free version. If you a bullish investor or have less time to perform research on a particular asset BaseRank is a great platform to get all information in one place. 

Crypto Fees 

As the name suggests, this platform tracks the network fees for major crypto networks. An individual visiting the site can check the network fees for the last 7 days to the present day. With the network fees, one can gauge the demand on the blockchain network which apparently also adds up to the asset value. While network fees are one aspect of an asset, one must not forget that some networks like Cardano are built to keep the network fee low. Hence, while comparing network fees one must know that blockchain architectures are different from each other as their proof of concept design may differ. For example, the Algorand blockchain has a proof of delegated stake while Bitcoin is purely proof of work which is why their network fees differ. 

The Bottom Line 

Crypto assets are still in their infancy which is why fundamental analysis of an asset can offer unknown insights and the behavior of the token. The fundamental analysis offers two things: Store of value and store of exchange of the asset. Fundamental analysis seldom cannot outline the true value of the crypto asset but when aligned with technical analysis, anyone can analyze the value of an asset even though the crypto market is highly volatile and unpredictable. 

Additional Read: How to do Technical Analysis in Crypto

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