An Introduction to Fundamental Analysis in Cryptocurrency
When choosing cryptocurrency, two common approaches are technical analysis and fundamental analysis. Both methods use different metrics, but they share the same goal: to measure potential profits and risks.
In the following article, we’ll explain fundamental analysis for cryptocurrency. We’ll cover what it is, why it’s important, and how to do it.
What is Fundamental Analysis for Cryptocurrency?
Fundamental analysis for cryptocurrency is a way to evaluate a crypto project based on its “fundamentals.” These fundamentals can include financial performance, transaction and user activity, community and developer support, and the potential value of its use case.
By looking at these fundamental aspects, investors can figure out the intrinsic value of a cryptocurrency. This value can then be compared to other cryptocurrency to see its potential in the market. Knowing the intrinsic value helps us estimate if an asset has reached its true potential or not.
Why is Fundamental Analysis Important?
Fundamental analysis is a crucial part of investing in cryptocurrency. Crypto projects often come with new technologies and ideas that aim to bring innovation. To avoid being swayed only by these ideas, investors need to measure various metrics to understand the intrinsic value of the cryptocurrency.
Through fundamental analysis, investors can identify the problems that a technology aims to solve. They can also see its performance through metrics like user count, transaction speed, revenue, and more. Additionally, fundamental analysis can be used to evaluate the development team behind the cryptocurrency and its tokenomics.
By understanding these metrics and the background of a cryptocurrency, investors can identify projects with long-term potential. The hope is that fundamental analysis will help investors make more informed investment decisions in the crypto market.
How to Do Fundamental Analysis for cryptocurrency
When you do fundamental analysis for cryptocurrency, you’ll usually look at and compare several different things. Here are some of the key areas often used:
1. Project Metrics
Looking at project metrics helps you understand a cryptocurrency’s potential based on its goals and how it plans to develop.
- Whitepaper
This is a document with full details about a cryptocurrency. Reading the whitepaper helps you learn why the asset was created, what problems it aims to solve, how its technology works, who the development team is, and what their future plans are. A good whitepaper is well-organized, detailed, and complete.
- Developers Team
Checking the developers team helps you judge the project’s quality based on the people behind it. You can do this by looking at their past work. A strong development team has experience, good skills in their field, and no history of fraud or other legal issues.
- Roadmap
Every cryptocurrency should have a clear plan for its future technology. As we know, blockchain technology is always changing, so every cryptocurrency needs to adapt and keep improving. A good cryptocurrency will have a clear timeline for new updates and technology developments.
2. Financial Metrics
Here are some financial metrics you should consider when doing your analysis:
- Tokenomics
This refers to information about how tokens are given out, how they circulate in the market, what they can be used for, and how new tokens are created. All these things can affect a cryptocurrency’s price. Try to avoid cryptocurrencies where the token distribution isn’t fair between investors and the public. Also, be careful of cryptocurrencies with short token lockup periods
- Market Capitalization
This metric tells you about the size and popularity of a cryptocurrency’s price. A higher market capitalization usually means more investors are interested in the project.
- Trading Volume
This metric shows how often a cryptocurrency is bought and sold in the market. High trading volume indicates that many investors are interested in those cryptocurrency.
3. On-Chain Metrics
Looking at on-chain metrics, or activity on a cryptocurrency’s blockchain network, gives you an idea of how much the cryptocurrency is actually being used. While financial metrics measure trading value, on-chain metrics measure how useful or used the asset.
- Number of Active Users
You can see how many active users a blockchain has over a certain period. A growing number of active users suggests that a cryptocurrency is being adopted more and more.
- Number of Transactions
The number of transactions on a cryptocurrency’s network can also show how active it is. More transactions mean that users are not just active, but also willing to make trades or use the asset.
Conclusion
Fundamental analysis is a key way for investors to figure out a cryptocurrency’s true value and its potential for long-term growth. By looking at its technology, the development team, the roadmap, and both financial and on-chain metrics, investors can make informed investment decisions.