Cryptocurrencies are an asset class that is only ten years old. Given their youth and dynamic potential, many believe that cryptocurrencies lack fundamental value. This is mainly because they do not have an underlying physical entity backing them. However, this is not true at all. This new asset class can be valued based on fundamentals, just like all traditional assets. Let’s start with a thumbs up! It is good to see someone digging into this area with an open mind.
To reward you, we will give you what you want. Basic cryptanalysis, just like a boss! Fundamental analysis of any business is an art. Therefore, it requires experience to hone your skills in order to master it and determine the closest fundamental value of an asset. But we can help you on this journey in a way that no one else can. Fasten your seat belts and read on!
What is Crypto Fundamental Analysis
Fundamental analysis is a method used by investors to determine the intrinsic “value” of an asset. Remember that this value does not represent the current market price of the asset.” The price is derived from supply and demand at a given time. However, value can accumulate (or be lost) over time, depending on the core of the business. By comparing price and value, one can conclude that an asset is overvalued or undervalued.
Stock market bullies may wonder how traditional measures such as P/E ratios, book value, and earnings per share can be applied to cryptocurrencies. Well, we don’t do that here.
Fundamental analysis of cryptocurrencies involves using metrics such as activity on the blockchain, demand and utility, and liquidity. If you don’t understand this, don’t worry, we will cover it in detail soon. For now, let’s talk about the need for fundamental analysis.
What Does Fundamental Analysis Have to Do With Crypto?
Fundamental analysis is the backbone of all investing. Even a short-term technical analyst will try to delve into fundamental analysis before trading cryptocurrencies or stocks. Venture capitalists also use fundamental analysis to evaluate various opportunities. In short, it is the foundation of any investment activity.
Fundamental analysis becomes even more important for cryptocurrency stocks because the assets are purely algorithmic. You can evaluate a stock by evaluating a physical product, but with cryptocurrencies you do not have that option.
Another reason to apply fundamental analysis here might be that the price of Bitcoin does not depend on the income/cash flow generated. Instead, it depends on macroeconomic factors, such as the state of the economy.
The icing on the cake is that each cryptocurrency is different from the others. Therefore, prudent investors should use individual objectives when analyzing cryptocurrencies.
What Is the Difference Between Crypto Fundamental Analysis and Technical Analysis?
Technical analysis uses patterns in market data to identify trends and make forecasts. Traders usually rely on technical analysis to invest and make money in a relatively short period of time.
Fundamental analysis, on the other hand, is often conducted from a long-term perspective. It relies on extracting the fundamental value of an asset to determine whether it is overvalued.
Technical analysis of cryptocurrencies often uses the same indicators as commodities, stocks, etc. Fundamental analysis, on the other hand, is very different from traditional measures of financial markets.
Advantages and Disadvantages of Crypto Fundamental Analysis?
As with any other asset class, fundamental analysis should be taken with a grain of salt. It is very difficult to get a holistic view of everything that is happening in a project. So let’s look at some of the positives and negatives of fundamental analysis of cryptocurrencies.
Let us start with the advantages of fundamental analysis:
A. Noise Vs value
The cryptocurrency world is growing by leaps and bounds. Each new project tries to create a buzz about the market. With so much “in-your-face” glamour, it can be difficult to separate the noise from the real value on the surface. That’s why fundamental analysis can really work in this situation.
B. Big picture
Fundamental analysis helps us see the big picture rather than short-term fluctuations. For example, Bitcoin went from $20,000 to almost $70,000 and then back to $20,000 in 15 months. If anyone tried to time the market, they would fail miserably. On the other hand, those who believe in the fundamentals of bitcoin will follow suit.
Also, it prevents your brain from getting trapped in Panic or FOMO.
Here are some drawbacks of fundamental analysis:
A. Learning curve
As mentioned earlier, the learning curve before you start making accurate predictions about a cryptocurrency is very steep. Moreover, your hypothesis will only be tested when you are actually in the medium to long term. Therefore, it is wise to practice as much as possible.
B. Black swan events
Even if you have mastered the art of fundamental analysis, there are some cryptocurrencies that make you forget it. For example, Terra’s ecosystem was healthy in every respect. However, it collapsed when someone exploited the vulnerability.
Such unprecedented events with catastrophic outcomes are called black swan events. Fundamental analysis would not safeguard you against them.
How to Do Fundamental Analysis in Crypto?
The moment (or should I say section) all of you have been waiting for. Let us dive deeper into the ‘how’ aspect of fundamental analysis in crypto.
There are several factors to look at while analyzing a cryptocurrency.
A. TAM and competition
TAM refers to the “total addressable market.” It is the size of the population that a project targets. It is an important indicator of demand for a product. Products need to find the right fit in terms of TAM. A large market size means there is room for more players. A very small market size means there is less demand for the product.
Competitor analysis is also very important. How many competitors are there in the market? How is one project different from another? Is it difficult to replicate their offerings?
Teams can make or break a project. Literally. A good way to assess this is to know the background of key members. For example, Alex Mashinsky, the founder of the failed Celsius protocol, was never actively involved in cryptography. On the other hand, the founders of some very successful blockchains, such as Cardano, Solana, and Polkadot, had people from Ethereum on their teams.
C. Roadmap and adherence
The future plans of a project determine the investor’s future beliefs. It is important to know what the team intends to do in the short and long term.
It is also important to verify that previous milestones have been achieved on schedule. This gives a reasonable idea of the project’s implementation potential.
D. Partnerships and advisory board
The partnership and advisory board provide a good indication of the project’s ties to some of the most important figures in the industry. These associations are reassuring to investors.
E. Community and reviews
Community is the heart of web3. Therefore, it is necessary to monitor activity on all social media platforms and comments on the project.
F. Problems being solved
Many cryptocurrency projects exist for their own sake. Therefore, it is even more important to determine the relevance of the problem you are trying to solve. If there is no real problem to address, it is best to stay away from it.
What Are the Key Indicators of Crypto Fundamental Analysis?
An indicator that combines several measures to provide a quick overview of an asset’s fundamentals. For example, the P/E ratio is the ratio of a stock’s price to its earnings. Instead of examining these measures separately, we look directly at the P/E ratio. Similarly, we examine the ratios of some cryptocurrencies.
A. Network Value to Transactions Ratio (NVT)
NVT is equivalent to the P/E ratio of the cryptocurrency market. It is obtained by dividing the market capitalization by the daily trading volume of cryptocurrencies. It is based on the assumption that higher trading volume means higher usage and thus higher value for the network. NVT tells us whether a project is undervalued relative to other projects.
If NVT has an upward trend, the market capitalization will grow faster than the actual volume. This indicates a bubble situation.
B. Market Value to Realized Value Ratio (MVRV)
Market value or market capitalization is determined by multiplying the coins in circulation by the current price. However, the realized value eliminates from this calculation the coins in the portfolio that are not accessible. It is collected by taking into account the price of the asset at the time of the last move. For example, it is assumed that the value of a bitcoin in a wallet lost before 2016 is $400, rather than the current $20,000 (as it was $400 at the time of the last move).
The MVRV is simply the ratio of these two measures. As an industry standard, a ratio above 3.7 indicates a possible sell-off, as traders profit from currency overvaluation.
Don’t worry, you don’t have to manually calculate this data; it’s readily available on Glassnode.
What are Some Good Fundamental Analysis tools?
Do you think we will leave you with so many measurements? Everything calculated by hand? Of course not. Here are some very useful tools for fundamental analysis.
If you are not an active researcher and want a quick overview of cryptocurrencies, Baserank is the perfect tool. This tool rates cryptocurrencies on a scale of 0 to 100 based on analyst and investor ratings.
These ratings come from a wide range of industry experts, rating agencies, experienced investors, and independent analysts.
According to Baserank, cryptocurrencies rated below 30 fall into the “very high risk” category, those rated >70 are less risky, and those rated between 30 and 69 fall into the “medium risk” category.
B. Glassnode studio
This subscription-based tool is ideal for encrypting data in the evaluation chain. The free version works well for amateurs. So if you are a beginner, get your hands dirty with Glassnode Studio. This tool is known to show a large number of indicators for a project.
The study contains indicators for addresses, derivatives, entities, exchanges, miners, OTC desks, P&L indicators, etc.
You can use these metrics to get details, for example, on the number of users of a cryptocurrency/ecosystem. The bigger the better. Similarly, the more quotes a cryptocurrency has, the more popular it will be. The number of miners gives an idea of the degree of decentralization of a cryptocurrency.
C. Crypto fees
If simplicity had a cousin, it would be this tool. It simply does its job. Not surprisingly, it tracks the amount of gasoline a network earns over a period of time. This helps you measure revenue, usage patterns, and traffic.
However, you cannot use this tool to compare one blockchain with another. For example, if you want to compare Ether and Solana, the latter will always win because it charges only a small percentage for a transaction.
We hope this adds value to your journey into basic cryptanalysis. As we said at the beginning, it is an art. So treat it as an art! May your coins always rise to the moon! And always remember that if the search for individual cryptocurrency market heroes gets you in trouble, there are always the blue chip cryptocurrency coin series you can invest in! Your money is invested in some of the top cryptocurrencies in the cryptocurrency market, which can also be strong from a fundamentals perspective.
What are the fundamentals of cryptocurrency?
The fundamentals of cryptocurrencies are metrics that help us measure the intrinsic value of an object. These metrics can include on-chain resolutions, gas rates paid, and hash rates.
Which crypto is fundamentally strong?
Based on the metrics of the baseline analysis discussed earlier, a fundamentally strong cryptography is one with good real-world use cases, a strong team, a healthy community, and strong mentors and partners.
Does crypto have any fundamental value?
Yes, cryptos do have fundamental value based on their use case. This value can be derived using tools like Glassnode studio and Baserank.
How do you do a fundamental analysis of a cryptocurrency?
As discussed above, the fundamental analysis of cryptocurrency can be done by evaluating metrics like NVT and MVRV.
How do you explain technical analysis vs fundamental analysis in crypto?
Technical analysis of cryptocurrencies is similar to that of traditional markets such as stocks and commodities. However, fundamental analysis is done differently, using a mix of techniques and tools such as Glassnode studio, Baserank etc. to calculate NVT, MVRV etc.