What is Fundamental Analysis in Crypto?
What’s the first thing you envision when you hear the term “crypto trading”? Chances are, you’ll be visualizing price charts and numbers. This is only one part of it all.
When it comes to trading and/or investing, there are two big questions that need to be answered: what to trade, and when to trade. To answer these questions, traders typically employ two methods of research: fundamental and technical analysis.
In this article, we break down why fundamental analysis is important, and how to go about performing a thorough analysis before you decide to trade or invest in a cryptocurrency.
What is fundamental analysis?
Fundamental analysis (FA) is the process of evaluating a cryptocurrency’s intrinsic value by examining various factors that influence its long-term potential. It’s essentially looking beyond the current market price and volatility to assess the underlying health and future prospects of the project behind the cryptocurrency.
While technical analysis (TA) focuses on price charts, looking for patterns in price history to predict future price movements, FA asks “why” — why is this crypto valuable, and why might it be successful in the future? FA gets to the more existential questions about an asset.
Why do fundamental analysis
The cryptocurrency market is known for its volatility and susceptibility to hype. FA helps you see through the noise and make informed decisions by understanding the core value of a crypto project.
Here’s why FA is important for crypto investors:
- Avoid hype and scams: Many crypto projects rely on hype and social media buzz to inflate their prices. FA helps you research the project’s purpose, technology, and team. This can expose red flags and prevent you from investing in empty promises.
- Identify undervalued gems: Not all cryptos with lower prices are bad investments. FA can help you uncover projects with strong fundamentals that might be under the radar and have the potential for significant growth.
- Invest with conviction: Understanding the “why” behind a project can give you confidence in your investment decisions. FA allows you to believe in the long-term potential of a crypto, helping you ride out short-term price fluctuations.
How to do fundamental analysis
While stock investors typically analyze financial statements and assess the company’s management team, competitive landscape, and industry trends before investing, fundamental analysis looks a little different in crypto.
Instead of financial statements, you’d look at on-chain data like transaction volume, active users, and fees collected by the network. This shows how much the crypto is actually being used.
You’d evaluate the project’s team, their experience, and the project’s roadmap (future plans). A strong team with a clear vision inspires confidence. Most importantly, you’d analyze the technology behind the crypto. Is it solving a real-world problem? Does it have a unique advantage over competitors?
Here is a list of sources to check out for conducting fundamental analysis on cryptocurrencies:
- Whitepapers and official documentation: The project’s website, whitepaper and official documentation are crucial primary sources that provide in-depth information about the cryptocurrency’s purpose, technology, roadmap, and tokenomics.Thoroughly studying these documents is essential for understanding the project’s fundamentals (having said this, anyone can put out a whitepaper; if there are multiple typos, or if the content seems incoherent, something’s definitely off.)
- Reputable crypto research firms and analysts: Firms like Messari and CoinMetrics as well as respected crypto analysts and researchers often provide comprehensive reports and analyses on various cryptocurrencies.
- On-chain data and analytics platforms: Platforms like Glassnode, CryptoQuant, and IntoTheBlock provide on-chain data and analytics for various cryptocurrencies. These can help you analyze metrics like network activity, transaction volumes, and token distribution, which are crucial for fundamental analysis.
- Developer communities and code repositories: For more technically savvy investors, engaging with developer communities on platforms like GitHub and monitoring code repositories can give you insights into the project’s development activity, code quality, and community involvement.
- Reputable crypto news sources: While news sources should be taken with a grain of salt, reputable outlets like CoinDesk, Cointelegraph, and Decrypt can provide valuable updates on projects, regulatory developments, and industry trends that may impact your analysis.
In conclusion
Overall, FA equips you to make informed decisions and navigate the exciting, but sometimes tricky, world of cryptocurrencies. However, it’s crucial to remember that FA isn’t a magic formula. The crypto market is young and still evolving, so there may not always be clear-cut metrics to define a project’s value.
Moreover, it’s important to cross-reference information from multiple reliable sources and to be cautious of potential biases or conflicts of interest. Additionally, staying up-to-date with industry developments and regulatory changes is crucial, as they can significantly impact the fundamentals of cryptocurrencies.
