What is Fundamental Analysis in crypto?
Definition
Fundamental analysis assesses an asset’s ‘fundamentals’ (market cap, utility, partnerships, etc.) to determine whether it is currently overpriced or undervalued and thus a good investment.
Understanding Fundamental Analysis in Crypto
The goal of fundamental analysis (FA) is to determine an asset’s future value based on whether it is overpriced or undervalued in the market.
Based on a wide range of ‘fundamentals’ such as the utility of the cryptocurrency, its market cap, the potential for growth in that industry, recent news and the team & partnerships the project has (among many others), investors use FA to cut through the noise and identify an asset’s true ‘intrinsic value’.
By finding asset’s that are ‘incorrectly priced’ by the market, investors can make profitable long-term investment decisions, unlike technical analysis, which focuses strictly on historical price data (as opposed to project fundamentals) to identify short-term trading opportunities.
Fundamental Analysis for Crypto
Fundamental analysis has been used for decades in the world of non-crypto investing where investors take a similarly ‘qualitative’ approach, looking at things like the financial performance of the company (revenue, debt structure, etc.) and the way employees are managed.
However, in the world of crypto, there is a lack of historical financial performance of a project. While the primary goal of performing a FA remains the same, different factors need to be assessed to determine a crypto project’s true value.
What are the main factors/fundamentals to consider?
The Utility & Use-case
Ask yourself: What is the purpose of this cryptocurrency? Does it solve a real problem or greatly improve on an existing technology? Will the world adopt its use-case?
A project’s likelihood of success is directly related to whether its technology/use-case is something that people and the crypto ecosystem actually wants and needs.
Market Cap
Market cap (market capitalisation) is a very useful indicator of the stability and growth potential of a cryptocurrency.
It is calculated by multiplying the current price of a coin with the total number of coins in circulation.
In general, the larger the market cap (in comparison to other coins), the safer/lower the risk-reward profile of the investment.
The Community
If a cryptocurrency has real potential, it will likely have a group of people it serves, and thus a solid community around it.
The community (miners, developers, supporters and potential users) add value to a coin by adopting its use-case and increasing its overall legitimacy and popularity.
Social media sites like Twitter are a good place to assess community presence. Most legit projects have strong communities in online forums like Reddit, Telegram and Discord. Check out our article on how to do your own research in crypto for more information.
The Team (developers, advisors, partnerships)
Given the lack of financial history & data of many cryptocurrencies, assessing the core leadership team, the developers, the advisors will play a big role in your decision to invest.
The credibility and the experience of the team behind a project is crucial, and team members should have a solid track record in the industry.
Partnerships with other companies, banks and institutions are also a good indicator of how much potential a crypto has to succeed over its competitors.
The Website, White Paper & Track Record
Not only should the website be well put together and functional, but it should openly share information about the people behind the project.
Additionally, despite a coin’s ‘white paper’ often being technical, it should give a clear explanation of the coin’s utility, future prospects and underlying technology.
While bigger gains come from smaller, lesser-known coins, cryptocurrencies tend come and go. If a project has been around for a long time and has maintained its value, it may have real longevity.
Competition
While several similar projects can all have success, there is usually going to be a handful of industry leaders for any given use-case or sector in the crypto ecosystem.
When investing in a project, assess the utility it brings to the ecosystem and see if there is truly a need for it and if it has what it takes to outdo its competitors.
If there is another similar project that is better or more established, there may be little room for your prospective cryptocurrency to succeed.
Road Map & Vision
A good project will have a strong vision, clear timelines and a well-defined road map.
While short-term gains can be attractive, the best investments will be around for a long time and will grow your portfolio as they develop and evolve.
Without a clear vision, mission and a plan for the future, the project may not be able achieve widespread adoption and compete with other similar projects.
News & Updates
What are media outlets and popular names in the space saying about this crypto? What is the general sentiment around the project and its team?
Does the project have any major updates and developments on the horizon? This could mean a spike in adoption and a big price increase in the near future.
Regulations also have impact – if a project is not adhering to laws and regulations of its country, it may never get the chance to succeed. Controversy with governing bodies like the SEC can be a deterrent for investors.
Financial metrics (volume, liquidity, coin supply)
Trading volume helps analyse a coin in the short term. The 24-hour trading volume of a crypto gives you an idea if there is something substantial behind a recent dip or pump.
Liquidity is a measure of how easily an asset can be bought or sold. This is important to be able to buy/cash out at a good price when you want to.
Circulating supply vs Total supply should give you an idea of how valuable a coin is expected to become – only 21 million Bitcoin will ever exist, meaning a single Bitcoin could be worth a lot more than a coin with a supply of 100 billion (like Ripple).
On-chain Metrics
For a deeper dive, on-chain metrics can be observed by looking at data provided by the crypto’s Blockchain.
By analysing how things like transaction count, transaction value, the amount staked and the active addresses are changing over time, you can gain behind-the-scenes insight into where a project is at.
Note: Keep in mind that there is no one way to perform a FA in crypto, there are dozens of variables which can help you determine a profitable investment. Every person’s analysis will look different – FA is not an exact science, and the order in which you evaluate a coin’s fundamentals will vary according to what you already know or deem to be most important in a particular cryptocurrency.
Technical Analysis vs Fundamental Analysis
Performing a fundamental analysis is best for identifying long-term investments. However, if you are looking at deepening your analysis (especially over a shorter time frame), technical analysis can help.
- Technical analysis is for more experienced traders, and it involves using statistical trends, collected from historical price and volume data, to identify opportunities for trade.
- TA uses things like (support & resistance levels, moving averages, trendlines, Relative Strength Index (RSI), etc.) to predict future price movements and evaluate the strength and weakness of an asset.
- TA is concerned with ‘what’ happens to the price, rather than ‘why’ (like fundamental analysis).
Performing a fundamental analysis
FA includes an analysis of the market, the industry and the project and team itself to determine whether the market has incorrectly priced an asset. If you are new to crypto you might just want to start by looking at the use-case and market cap to get an idea of what kind of investment you are looking at before going deeper into a fundamental analysis.
It’s important to note that there’s no single metric that can give us a full picture of an investment. The more factors your analysis takes into account, the better. Add in some technical analysis to your FA and you’ll really be ahead of the pack.
Check out our example of how to perform a fundamental analysis for a look at what FA actually looks like in practice.
Key Takeaways
- The goal of fundamental analysis (FA) is to determine an asset’s future value based on whether it is overpriced or undervalued
- By finding asset’s that are ‘incorrectly priced’ by the market, investors can make profitable long-term investment decisions
- Fundamental analysis has been used for decades in the world of non-crypto investing
- FA in crypto follows the same principles as in other financial markets, but takes into account different factors
- Technical analysis involves using statistical trends and historical price data to identify short-term trading opportunities
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What are the advantages of fundamental analysis?
Long-term investments
Unless you’re a fearless day trader, most people want to get into crypto for the long-term payoff. The industry is still in its early stages and there is a good chance that some cryptocurrencies will see a huge price increase once mainstream adoption really gets underway. FA is the key to finding cryptocurrencies that have solid fundamentals and will stand the test of time. If you’re new to crypto find out which crypto investin strategy is for you.
External factors matter
FA analyses a variety of external factors which contribute to the internal reality of the market – in crypto, things like news, project updates and even tweets can have a big impact on price. Over time, you will gain an understanding of how the crypto-sphere works and how external factors influence price action, positioning you to be a savvy trader in the long-term.
Less overwhelming than technical analysis
FA doesn’t require the same kind of knowledge and skills of technical analysis. And it’s MUCH less stressful. The buy and hold strategy goes hand in hand with fundamental analysis, and for most investors this is the way to go. Additionally, fundamental analysis will give you a better understanding of crypto as an industry, rather than just looking at the numbers and technical indicators of TA.
What are the disadvantages/drawbacks of fundamental analysis in crypto?
Different to other investments
Cryptocurrencies are a different game to other assets and markets. You can’t use the tried-and-tested lens that traditional investors use for the stock market. While this isn’t much of a disadvantage, keep in mind that if you’re new to crypto you will have to learn a new approach to FA. Thankfully, it’s not so hard to learn, and it can actually be a lot of fun.
Misleading metrics & fundamentals
Certain metrics and fundamentals can be misleading in crypto. Like any new and rapidly evolving space, there is a lot of talk and hype surrounding assets that have not yet proven themselves. Scams and misinformation are also not uncommon. For example, projects have falsely stated that they have celebrity partnerships they don’t really have, and Twitter followers can now be bought, giving false credibility to a project that is merely trying to look legit. Dig a little deeper and get a range of opinions before you make your investment decisions.
Steep learning curve
Like any artform, practice goes a long way. In order to perform an effective fundamental analysis, it helps to have a general understanding of the crypto market. You learn a lot at the start by reading, trading and making mistakes, so if you’re a beginner there is a fairly steep learning curve to be expected. That being said, crypto is far less complicated than it’s often made out to be, and once you have evaluated a few different coins and been around for a while you will be well on your way to making consistently good investment decisions.
Fundamentals can be subjective
What one person sees as a strong team and a solid community may not be what another person sees as a good basis to make an investment. Similarly, there can be a lot of disagreement over how useful a cryptocurrency is – there is a lot of subjectivity in FA (more than in TA), but after being in the space for some time, you’ll get the hang of what works and what doesn’t.
Fundamentals don’t always translate into price action
Although FA provides quite a holistic picture of a cryptocurrency, fundamentals are not an exact science, and they don’t always translate into the actual performance of an asset. For example, a coin could have a great partnership or community but that may not actually have an effect on the price. That being said, nothing in investing is guaranteed, so fundamentals are generally still your best bet.
Long-term profits
FA requires patience. Both to perform and to wait for your investments to grow. If you’re looking for gains on a shorter time frame, look into technical analysis.
Vulnerable to chance factors
This is a drawback found in every type of investing approach, and it’s one that is especially prevalent in crypto. While fundamental analysis offers a broader view of the crypto market, it can be outweighed by anomalous, chance factors. For instance, unexpected political and economic changes, as well as things like shocking news, pandemics and regulatory changes can have a significant impact on an asset’s price, and there’s no real way to anticipate this kind of stuff.
Which is better, fundamental analysis or technical analysis?
Comparing FA and TA is like comparing apples and oranges. They are completely different tools suited for different kinds of traders. FA is great for beginners to the crypto-space and long-term investors, whereas TA is for the risk-tolerant and technically-inclined wanting to make profits in the short-term.
Where sources of information should I use for FA?
Joe wants to send Amy some cryptocurrency. To do this, Joe takes Amy’s public key and encrypts the cryptocurrency, signing it with his private key (ensuring the authenticity of the transaction).
Then, when Amy receives the transaction, she takes her private key (that is known only to her) in order to decrypt and receive the cryptocurrency from Joe.
What are the benefits of public/private key encryption?
There a variety of sources for crypto info, including official websites, reputable news outlets, whitepapers, Reddit and Telegram forums and even social media. Be sure to check out our complete guide on how to do your own research (DYOR) in crypto.
How do I determine what is a trustworthy source of information?
There’s no point spending hours researching if your sources don’t know what they’re talking about. In crypto, everyone, including those with zero authority, seem to have an opinion. It is important to be selective about who you listen to and who you take seriously.
Things to consider when evaluating a source:
- Are they well known in the industry? What does their track record say about them? (Examples of some reliable sources provided later on)
- How big a following do they have? If they have a solid following, chances are their info is more likely to be sound as they have a lot to lose for spreading bad info.
- Is the website you are reading a legit & established source? Sticking to the most popular news sites is a good way to make sure you are getting quality information, but even then, don’t believe EVERYTHING you read (ads are not reliable information)!
- Is the person you are listening to being paid? Never assume paid advice is honest advice. Many crypto personalities are sponsored by exchanges or have stakes in projects – look for people who are upfront & honest about their own bias & opinions.
- Is the person’s advice or opinion balanced? Do they give both sides of the story? Things are rarely black & white, and the best crypto sources will give both pros & cons about any given project.
How does the crypto market work?
Cryptocurrency markets are both extremely lucrative and volatile. Similar to traditional financial markets, the crypto markets move according to supply and demand but are also greatly influenced by the following factors:
- Press: the way the cryptocurrency is portrayed in the media and how much coverage it is getting.
- Mainstream adoption: the extent to which the cryptocurrency fills the market’s demands and how well it integrates into existing infrastructure such as e-commerce payment systems.
- Notable events: major events such as technological improvements, regulatory updates, company announcements, celebrity or institutional adoption, security breaches and economic setbacks.
- Supply: the total number of coins and the rate at which they are released.
- Total market capitalisation: the total value of all the coins in existence and how users perceive the coin to be developing.
Did this answer your question?
Digital Surge is the easiest way for Australians to buy, sell & store over 250+ cryptocurrencies. With extremely low fees, a uniquely user-friendly interface and a customer-support team you can rely on, getting involved in crypto has never been easier. Sign up today and enjoy safe, stress-free trading.
Crypto-curious? The time you spend here will be the best investment you ever make.
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