Trading volatile financial assets such as cryptocurrencies requires a certain level of expertise. To understand the market, a trader must be able to identify what causes prices to fall, rise or stagnate crypto property. It takes time to understand the trading world, find a trading strategy that works, and master technical and fundamental analysis.
Technical analysis is used to predict market momentum in traditional markets such as forex and stock trading. As traditional traders use them, technical tools such as Bollinger Bands and MAs are used in crypto trading to determine buy and sell points.
Fundamental analysis of crypto assets, which is the subject of this article, requires a different approach than in traditional markets. It is important to identify what makes cryptocurrencies valuable when evaluating their fundamentals. This guide will help you identify metrics that are important when conducting fundamental cryptocurrency analysis.
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What is fundamental analysis?
One feature of market research methods that measure cryptocurrencies is fundamental analysis (FA). This involves analyzing crypto assets for their intrinsic value rather than their current market price. This strategy is used by analysts to evaluate all factors that can affect the value and price of a crypto asset, including use cases, management teams, influencers, as well as other facts.
Fundamental analysis is used to determine the true value of an asset in order to determine its under or overvalue. A trader can take the following steps if a crypto asset is found to be undervalued: buy and sell it.
Fundamental indicators are used in traditional markets, but they don't work well when it comes to cryptocurrency analysis. The next step is to look at other dominant metrics that are unique to cryptocurrencies. These metrics cannot be changed without affecting the entire blockchain. While there are many metrics that can be used to analyze crypto asset fundamentals, there are only three key elements to building a foundation for analysis. These metrics include intra-chain metrics and project metrics.
Measurement data in the chain
On-chain metrics refer to data that is visible on the blockchain. While it can be time-consuming and expensive for analysts to verify networks that export data, it is not a viable option. There are two possibilities. You can use cryptocurrency exchanges or application programming interfaces (APIs), which provide all the information and tools needed to make financial decisions. CoinMarketCap, for example, provides valuable information about Bitcoin and offers on-chain analysis. Binance Research, Coinmetrics and other sources are also available.
These are important factors to consider when analyzing on-chain metrics for crypto assets.
Hash Rate
Each blockchain has its own mechanism and uses different consensus algorithms to protect it. Analysts see it as a way of conducting fundamental analysis. The ability of a machine to efficiently and effectively perform hash calculations in proof-of-work blockchains is measured by the hash rate.
The hash rate of mining is directly related to the rewards and security that miners receive for their work. Higher hash rates indicate the probability of creating new blocks and getting a reward for each one. Higher hash rates increase the likelihood that the blockchain is secure and prevent attacks. This is also a profit making opportunity for miners. Mining with a lower hash rate is less promising. This could lead to miners abandoning mining and securing the network. The current asset price, fees and number of transactions affect the cost of mining.
Transaction value
Fundamental analysis of crypto assets is incomplete without insight into transaction values. This indicates whether the asset can be used for transactions. The value of a transaction is the sum of all transactions performed on the blockchain at one point in time. If there are 100 Bitcoin transactions per day each with a value of $1000, then the daily transaction value would be $100,000. Transaction value can be measured using the network's native currency (BTC) or fiat such as USD.
Number of transactions
The number of transactions is a measure of the number of activities taking place on the network. Different time frames can show the evolution of activity over time. This metric should be treated with caution as it is not certain if an individual is transferring funds to other wallets to increase the numbers on the chain.
fees
We can use the fees merchants pay to perform transactions to inform us of how many people are trying to add orders to the Blockchain. It is similar to an auction. People who bid higher get their transactions added to the blockchain faster than those who bid lower.
Users pay a fee over time to gain access to information about the security and integrity of the underlying crypto asset. Proof of Work/ (PoW) blocks give miners block rewards. Transaction fees tend to increase while block rewards decrease. Transaction costs can rise and frustrate miners if they are not paid in full.
Active addresses
The number of active wallet addresses indicates the number and availability of crypto addresses at any given time. To calculate active addresses, you can combine receiving and transmitting addresses for a certain period to approximate the growth of activity on a crypto asset. You can also add unique addresses to get the same results and then compare them by their time periods.
Project metrics
Project metrics are not focused on data in the chain and favor a qualitative approach. It looks at characteristics such as team performance, competition and operations, as well as all the details behind the project.
White book
Before investing, it is important to read the whitepaper of the crypto project. A whitepaper is a technical document that contains all the information you need about a crypto project. Outlines goals, information about the team, and a plan to achieve the goals.
Team
Many cryptocurrency projects include details of the team members involved in the development of the project. To find out if the team members have the skills needed to deliver on their promises, we could track the details. It is possible to conduct surveys on whether team members have been successful in past projects and whether they are competent enough to achieve their goals.
Look for a community of developers of crypto projects without a known team or anonymous developers. If they have a public GitHub, look for activity and number of contributors. An updated profile will be more attractive than one that hasn't been updated in a while.
Competition
The whitepaper provides details on the use cases the crypto project is targeting. It is essential to compare the projects with which it is being compared and the system that is intended to be changed. This will help you identify projects that are long-term and those that add little or nothing to the growing number of cryptocurrencies.
Utility, tokenomics and demand
Tokenomics is the study of the economics behind the supply and demand of tokens. The value of cryptocurrency is driven by supply and demand. High price values are associated with cryptocurrencies that have high demand and low supply. Utility is a key factor in determining the price of a token. To determine the market demand and value of a token, you need to discover its market recognition. Before investing in any crypto asset, determine its utility whether it solves any problem or is not sustainable and/or valuable.
Consider the initial stage token distribution. You should also check if the initial distribution was done through Initial Coin Offering (ICO), Initial Exchange Offering (IEO), Initial DEX Offering (IDO), or Mining Tokens and Coins. The whitepaper should detail the amount of coins that investors will mine and the percentage that will be kept for developers. It is important to be aware of pre-mined on the testnet. It is important to take the time to review these procedures in cases involving risks such as a small number of addresses with a large supply of cryptocurrency.
Financial metrics
Fundamental analysis uses financial metrics to calculate the value of crypto assets. Potential investors can financially approach a cryptocurrency project by looking at trading conditions such as information about the current crypto asset being traded and liquidity, market reactions, market reactions and other variables.
Market capitalization
Market capitalization is the first thing that investors should pay attention to before investing in cryptocurrencies. Market capitalization (also known as net worth) is calculated by multiplying the current price of the asset by the circulating stock. Multiplying gives you a hypothetical value that can be used to buy individual units of the underlying asset. Market capitalization can mislead investors. It is important to consider other factors as well. Many investors will choose cryptocurrencies with a low market cap over cryptocurrencies with a large market cap because they believe that cryptocurrencies with a lower market cap have more growth potential in the short and long term.
Trade volume and liquidity
Liquidity is the ability to quickly buy and sell assets. Liquid assets can be bought and sold at the current trading price, without affecting their market value. Illiquid assets are difficult to trade at low prices. Investors crave liquid assets. Since there are no buyers, traders who want to sell in an illiquid market will be forced to lower their asking price. The bid-ask spread is the competition for trade orders. Sellers and buyers reduce the bid-ask to ensure liquidity.
The indicator that determines the liquidity of assets at a certain moment is the trading volume. It is used to determine the trading volume of a crypto asset and show its momentum, uptrend or downtrend.
Mechanisms of supply
Investors should be aware of the supply mechanism of crypto assets from an investment perspective. Investors will perceive a crypto asset based on its circulating supply, total supply and inflation. Investors who believe that the value of the underlying asset increases when there is more demand than supply may be attracted to crypto assets that limit the amount of units that can be easily mined.
Fundamental analysis: advantages and disadvantages
Fundamental analysis is like any other cryptocurrency analysis strategy. It has its positive and negative sides.
Avg |
Against |
| Investors can use fundamental analysis to help them get crypto assets at a fair price, even if they are not at fair value. | The results of fundamental analysis are not conducive to making short-term decisions. Technical analysis can be the best option for traders to predict short-term market opportunities. |
| Access to underlying asset information enables users to make informed trading decisions. | Because of the many processes involved in fundamentals market analysis, it takes a lot of time. |
| Traders have the ability to make long-term estimates about market growth. Investors can use the value they generate to determine the market value to assess the current price and decide whether it is too high or too low. | Fundamental analysis can provide a more detailed view of the market, but it is possible for negative fundamentals to break down. Positive growth can occur in a very short time. |
Conclusion: Fundamental analysis
Fundamental analysis is a method of determining the market value of crypto assets. Fundamental analysis can provide traders with rare insights into the cryptocurrency markets if done correctly. A trader should be able to identify the optimal value of a cryptocurrency asset from its market price. A combination of technical and fundamental analysis is strongly recommended because there are certain things that only fundamental analysis can predict.
