How do you know if a crypto you’re buying will increase in value in the short or long term? And how sure are you that you won’t lose money investing in Bitcoin or one of the thousands of altcoins out there?
Enter – fundamental analysis. In layman’s terms, it’s a method used to determine if a digital asset is worth buying or not.
Fundamental analysis is a type of investment strategy that evaluates what forces will affect the future price movements of an asset.
It’s one of many techniques used by investors and traders in traditional financial markets. And it has become increasingly popular in cryptocurrency markets as well.
We’ll talk about what is fundamental analysis, how it’s different in the crypto market, the types of fundamental analysis, and what kind of metrics you’ll need to look out for when doing fundamental analysis in crypto.
What is Fundamental Analysis?
Fundamental analysis is the method of studying and identifying the underlying value of a particular cryptocurrency.
Traders in the traditional financial markets like fundamental analysis since it’s based on what is known as “fundamental valuation.” It incorporates a variety of factors, such as company performance or earnings growth.
When investors use fundamentals-based strategies for investing in stocks, they need to understand what other companies are competing with the ones whose stock they’re considering buying. So, looking at competitors’ financial statements can help provide some context.
In the crypto space, investors and traders use fundamental analysis to evaluate whether a particular cryptocurrency has long-term staying power, growth potential and would give them handsome ROIs.
But for crypto, fundamental analysis works quite differently.
How is Fundamental Analysis Different for the Crypto Market
Fundamental analysis in crypto is radically different than traditional investments like stocks since cryptocurrencies don’t have financial statements.
On top of that, most blockchain companies are not as straightforward to analyze. You need to look at multiple complex metrics like on-chain data, market cap, social sentiment, to name a few.
But really, what makes fundamental analysis different from the traditional markets? Here are two main reasons:
1. Cryptocurrencies are not like corporations
Cryptocurrencies have no physical form or tangible utility. They exist as a digital representation of an asset, with their viability stemming from, for example, mining them, trading for goods or services on exchanges, or others.
Each cryptocurrency represents different applications using blockchain technology that’s decentralized and open-source.
2. Cryptocurrencies are still very new
In the cryptocurrency space, most of the cryptocurrencies are still in the development stages. The limited real-world use cases for these cryptos means there is a lack of track record to show for it.
When you perform fundamental analysis on a chosen coin, it should be evaluated with different methods (which we will go through later in this article).
Why Fundamental Analysis is Important in Crypto
With so many scams happening in the crypto world, it’s essential to know how coins work and their fundamentals. Having more data about a coin helps you to make better investment decisions.
Knowing about a cryptocurrency’s basics also helps give you your own opinion on them rather than just following others blindly- but as simple as understanding some of these concepts may be, they can still seem daunting at first glance!
So, you now know what is fundamental analysis and the differences between performing this type of analysis in the traditional markets vs crypto markets.
Now, let’s run through the different types of fundamental analysis and how it works in crypto.
Types of Fundamental Analysis
Fundamental analysis can be broken down into two types: qualitative and quantitative.
Most traditional investment funds use qualitative and quantitative methods when choosing what investments they want to make, but this type of investing is not unique to just stocks.
It can be used for anything from currencies to companies on any exchange where there is sufficient trading volume.
1. Quantitative Fundamental Analysis
This type of fundamental analysis is based on what you can quantify, and what data points exist to make an informed decision about a particular investment.
Quantitative research involves looking at economic factors such as the unemployment rate or the number of people with jobs to predict how those factors may influence stock prices.
Analyzing an item’s supply over time:
How much currency was printed by the issuer?
How many coins exist right now?
What is the maximum number of coins that could exist?
Analyzing an item’s demand over time:
What are people using this currency for?
What do they use it to purchase?
How much has been spent on these purchases in a given period of time?
2. Qualitative Fundamental Analysis
This form of fundamental analysis looks at what people say and what they do, but with less attention paid to numbers or indicators such as stock prices.
For example, in this type of research, the investor will read articles (or social media chatter) to gauge public sentiment towards that company’s prospects going forward.
This type of analysis includes studying news and social media sentiment about a particular company or cryptocurrency.
What are the significant developments happening within the issuing country or company right now, and what does this mean about its prospects?
You can also look at events beyond just those affecting supply and demand as well. Some investors will include social indicators like poverty rates when considering all factors influencing their investment decision.
This type of fundamental analysis is based more on public perception than hard data points, which you see with Quantitative Fundamental Analysis.
Examples of Fundamental Analysis for Crypto
Fundamental analysis is commonly used in traditional markets, like determining the value of a stock issued by a public company.
On the other hand, the cryptocurrency market doesn’t necessarily have the same types of data points that are used in fundamental analysis. So, what do you need to look at when considering what factors might affect a cryptocurrency’s price?
A few examples from among the many types of cryptocurrency fundamental analyses include: calculating how much bitcoin miners earn per day, what the number of bitcoins mined per year is, and what percentage of coins are lost over time.
But there are a lot more than just those few examples.
Here are the most common types of fundamental analysis in cryptocurrency markets:
1. Blockchain Metrics
Hash Rate and Amount Staked (or TLV)
Number (and Growth) of Active Addresses
Transaction Count and Value
2. Financial Metrics
Trading Volume and Liquidity
Circulation Supply (or Scarcity)
3. Project Metrics
Project Team Members and Founders
Tokenomics and Utility
One of the most common methods, arguably a tried-and-true one, is looking at a coin’s supply and demand.
This is very similar to traditional economic principles that are typically applied in those markets, whether we’re talking about Bitcoin or something with a lot more credibility but a lesser total market cap such as Ethereum.
For prices to be stable, both sides (supply and demand) have to be balanced. If there’s too much supply relative to demand, then the price will generally fall. But if there’s more demand than supply (i.e., scarcity), prices usually tend to go up.
Other factors can also influence the price of a cryptocurrency. For example, if a big event is on the horizon (e.g., listing on a major exchange like Coinbase), it may affect demand for that particular cryptocurrency.
Fundamental Analysis vs Technical Analysis
Technical analysis is another method used by investors and traders when buying or selling an asset (i.e., trading). But which is more effective, fundamental analysis or technical analysis?
When comparing the two, you need to understand the purpose behind each type of analysis.
Fundamental analysis has been around a lot longer. It tries to figure out what the fair price of an asset would be based on, such as supply and demand factors, what happens when certain events occur, or new information becomes available.
Technical analysis, on the other hand, relies heavily on past prices in order to predict future price actions.
Investors or traders who use technical analysis also attempt to spot chart patterns. Certain patterns help them predict how a digital asset will perform over time by looking at past performance data.
Which one might work better depends largely on what your goals are with trading or investing in cryptocurrency. If you’re less risk-averse, then fundamental analysis may suit you best.
Given its reliance upon traditional economic theory, fundamentals should provide some level of immunity to what is happening in the rest of the market (usually for the long term).
If you’re more risk-averse, technical analysis may be a better option. Though it doesn’t rely on traditional economic theory, this type of analysis remains a popular option among day traders, institutional investors, and hedge fund managers.
The Importance of Fundamentals in Crypto Trading
Fundamental analysis is probably the best way to determine if a crypto project might be worth risking your hard-earned money. It would give you adequate information as to whether or not your chosen coin has actual value and future growth potential.
Many professional analysts believe that this approach leads to better investment results in the long term. This is because it considers what something is worth rather than what someone else may pay for it.
The main goal of fundamental analysis in any type of market (including crypto) can be defined as making educated guesses about what will happen with supply and demand over time.
If you’re looking to invest in the crypto space, the smart thing to do is to DYOR (Do Your Own Research). And one of the ways to do that is by performing some fundamental analysis.
Only then you’ll know for sure what you’re investing in, why it’s a great project, and feel confident over your chosen crypto’s long-term growth.
After all, that’s the best way to make a healthy profit in the crypto space. Take the guesswork out of the equation and be an informed investor by doing your own fundamental analysis.