Cryptocurrency Fundamental Analysis Guide
Cryptocurrency fundamental analysis delves into existing information about financial assets. For example, you can research the use case of a financial asset, the number of people using it, or the team behind the project.
The goal of conducting research is to determine whether assets are overvalued or undervalued. Afterwards, positions can be traded based on personal insights.
Introduction:
Trading highly volatile assets like cryptocurrencies requires some skill. Choosing a strategy , knowing the whole picture of trading , and mastering technical analysis and fundamental analysis are all practical means of continuously accumulating experience.
Technical analysis can borrow certain expertise from traditional financial markets. Many cryptocurrency traders use the same technical indicators as they trade forex , stocks, and commodities. Regardless of the asset being traded , tools such as the relative strength index (RSI) , smoothed exponential moving average (MACD) and Bollinger Bands can be used to predict market behavior. Therefore, these technical analysis tools are also extremely popular in the cryptocurrency field.
While cryptocurrency fundamental analysis uses methods similar to traditional markets, these time-tested tools are not necessarily ideal for evaluating cryptocurrency assets. In order to practice sound fundamental analysis (FA) in the cryptocurrency space, we should understand its value.
we will explain how to carefully select the indicators that are suitable for you.
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What is Fundamental Analysis (FA)?
Fundamental analysis (FA) is a method for investors to determine the "intrinsic value" of an asset or business. By studying a range of internal and external factors, an investor's primary goal is to determine whether an asset or business is overvalued or undervalued, and then develop a buy or sell strategy based on this information.
Technical analysis can also provide valuable trading data, but its analysis results vary from person to person.
Technical analysis (TA) users believe that future price movements can be predicted based on an asset's past performance. by observing candlestick charts and studying common indicators .
Traditional fundamental analysts generally use business metrics to determine what they perceive to be true value.
Metrics used include earnings per share (i.e. how much profit a company can earn per share with shares issued), or price -to-book ratio (how investors value a company based on book value). For example: analysts will analyze and compare multiple companies in a niche market, and select which company has more investment prospects.
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Problems with fundamental analysis of cryptocurrencies:
We cannot accurately evaluate cryptocurrency networks from the perspective of traditional businesses. A decentralized product like Bitcoin (BTC) is closer to a commodity. However, even for centralized cryptocurrencies such as those issued by organizations, traditional fundamental analysis (FA) metrics are not sufficiently informative.
Therefore, we should turn our attention to other frameworks. The first step is to identify strong indicators. "Robust" means that the indicator is not easily manipulated. For example, Twitter followers or Telegram/Reddit users are not good indicators, after all, it is easy to create fake accounts or buy followers on social media.
It is important to note that it is impossible to get a complete picture of the network being assessed with one measure alone. We can look to see on the blockchain if the number of active addresses continues to explode, but that in itself does not provide much more valuable information. From what we can tell, this is likely the same person sending money back and forth to themselves each time using a new address.
In the following sections, we’ll explore three categories of cryptocurrency fundamental analysis (FA) metrics: on-chain metrics , project metrics , and financial metrics . The above list of indicators is not comprehensive, but it is enough to lay a solid foundation for subsequent creation of indicators.
On-chain indicators:
On-chain metrics illustration:
On-chain metrics are metrics that are observable based on data provided by the blockchain. We could run the nodes ourselves for the desired network and then export the data, but this process can be expensive and time-consuming. If you only consider investment and don't want to waste time or resources, the above method is even more inappropriate.
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A more direct solution is to extract information from professional investment decision information websites or APIs . For example, CoinMarketCap’s Bitcoin on-chain analysis provides a wealth of information. Other sources of information include data charts from Coinmetrics or project reports from Binance Research .
Number of transactions :
The number of transactions is a good way to measure network activity. Look at the volume over time graphically (or use a moving average ) to see how activity has changed over time.
However, it should be noted that caution should be exercised when referring to this indicator. As with active addresses, we can't be sure if the same people are just transferring money between wallets, causing the amount of on-chain activity to fluctuate.
transaction value:
Not to be confused with transaction count, transaction value represents the total value of transactions over a period of time. Example: A total of 10 Ethereum transactions are sent on the same day, each worth $50, so the daily volume is $500. The unit of measure can be a fiat currency like the US dollar, or the native unit of the protocol - ether (ETH).
active address:
Active addresses are blockchain addresses that have remained active for a specified timeframe. There are many ways to calculate active addresses. The common method is to calculate the number of senders and receivers for each transaction within a certain period of time (such as days, weeks or months). Some methods track the entire time range, that is, calculate cumulative values over time.
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Fee paid:
In contrast, the paid fees of some cryptocurrency assets are more telling, from which users can see the demand for block space. We can think of this as auction bidding: users bid against each other to get their transactions into a block in time. Transactions with high bids will be confirmed first ( mined ), and those with low bids need to continue to wait.
For a cryptocurrency whose issuance continues to decline as planned, this is an indicator worth looking at. The mainstream proof-of-work (PoW) blockchains provide block rewards . Part of the block reward consists of block subsidies and transaction fees. The block subsidy decreases periodically (for events such as the Bitcoin halving ).
As time goes by, mining costs continue to increase, while block subsidies gradually decrease, and transaction fees increase as a matter of course. Otherwise, miners will withdraw from the network due to operating losses, which will affect the security of the blockchain.
Hash Rate and Stake Amount:
Today, blockchains employ a variety of consensus algorithms, each with its own proprietary mechanism. These algorithms play an indispensable role in ensuring network security, and in-depth research on relevant data can optimize the results of fundamental analysis.
In proof-of-work cryptocurrencies, the hash rate is often used to measure whether the network is functioning properly. The higher the hash rate, to launch a 51% attack the harder it is . Attracted by low overhead and high returns, miners flock to mining. The hash rate continues to increase over time. Conversely, if it is not profitable to secure the network, miners go offline (“miner capitulation”), causing the hash rate to drop.
Factors that affect the total cost of mining include the current price of the asset, the number of transactions processed, and the fees paid. Of course, the direct cost of mining (electricity and computing power) is also an important consideration.
Staking (e.g. in Proof similar to Proof of Work (PoW) mining of Stake) is another game theory related concept .
However, the two mechanisms work differently. The basic idea of staking is that users participate in block verification by staking their assets. Thus, we can look at the amount of staking over a given period of time and determine whether there is a surge in investment interest (or a lack thereof).
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Project indicators:
Project metrics illustration:
On-chain metrics focus on observable blockchain data, while project metrics take a qualitative approach, looking at factors such as team (if any) performance, white papers, and upcoming roadmaps.
white paper:
It is strongly recommended that you read the project white paper before investing. This technical document gives us an overview of the cryptocurrency project. A good white paper clarifies the goals of the network and ideally gives us insight into the following:
- Technology used (is it open source ?).
- Use Cases Designed to Satisfy.
- Roadmap for upgrades and new features.
- Currency or Token Supply and Release Schedule .
In addition to referring to this information, it is best to also develop a discussion around the project. What do others think? Are there any red flags? Are the goals realistic? .
Team:
If there is a specific team behind a cryptocurrency network, the track record of its members can reveal whether the team has the necessary skills to carry out the project.
- Have members participated in successful investment projects in the industry before?
- Is their expertise sufficient to achieve the stated goals?
- Have they been involved in any shady projects or scams ?
- What would the developer community be like without the team?
If the project has a public GitHub , check its number of contributors and activity. A coin that continues to evolve is certainly more attractive than a coin that hasn't updated its repository for two years.
Competitors:
A detailed and authoritative white paper can give us an understanding of the target use case of a cryptocurrency asset. An important task at this stage is to identify the project's competitors and the legacy infrastructure it seeks to replace.
Ideally, this information should be carefully and fundamentally analyzed. Some assets appear to be extremely attractive, but when measured by the same metrics as crypto assets, are likely to reveal weaknesses compared to others.
Token Economics and Initial Distribution:
Some projects create tokens to find solutions to problems. That’s not to say the project itself isn’t viable, just that the tokens associated with it might be useless. Therefore, it is important to clarify the actual utility of the token. This raises questions about whether such utility will be widely accepted by the market, and how valuable it is perceived by the market.
In this regard, another important factor to consider is how the funds are initially distributed: via an Initial Coin Offering (ICO) or Initial Exchange Offering (IEO) , or through user mining ? If the former, the white paper should spell out how much capital is being retained by the founders and team, and how much is available to investors. If the latter, we can look at evidence of asset creator pre-mining (mining the network before the asset comes out).
Pay attention to how funds are allocated to understand whether there is risk . For example: If the vast majority of funds come from only a small number of individuals and organizations, we may determine that these individuals and organizations will eventually manipulate the market, and therefore determine that this investment is risky.
financial indicator:
Financial metrics illustration :
In fundamental analysis, information such as the current trading method of assets, past transaction prices, and liquidity can be used as the basis. However, there may be other metrics to watch in this category that relate to economics and incentives for crypto asset protocols.
Market value:
Market cap (or network value ) equals the circulating supply multiplied by the current price. Market capitalization essentially represents the hypothetical cost per unit of buying a crypto asset (provided there is no slippage).
Market capitalization itself is somewhat misleading. In theory, it is very easy to issue 10 million units of useless tokens. If one of the tokens trades at $1 each, the market cap is as high as $10 million. This valuation method is clearly distorted. Without a strong value proposition, a token simply cannot gain widespread acceptance in the market.
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It should also be noted that we cannot determine the actual circulating supply of a particular cryptocurrency or token. Tokens are burned , keys are lost, and funds are forgotten. On the contrary, if tokens that are no longer in circulation can be screened out, the circulation can be roughly estimated.
Even so, market capitalization remains a widely used indicator of network growth potential. Some cryptocurrency investors believe that the growth potential of "small-cap" coins is better than that of "large-cap" coins. Other investors believe that large-cap tokens have stronger network effects and a higher chance of success than smaller-cap tokens with less established footing.
Liquidity and Volume:
Liquidity is a measure of how easy it is to buy or sell an asset. Liquid assets can be easily sold at desired transaction prices. A related concept is also a liquid market many asks and offers , that is, a market in which there is intense competition between tight bid- ask spreads . , resulting in extremely
In illiquid markets, we may not be able to sell assets at a "fair" price. This shows that there is currently no buyer willing to trade, and there are only two choices: lower the asking price or wait for market liquidity to increase.
Volume is an indicator that helps determine liquidity. This metric can be measured in a number of ways, showing the value of transactions over a specific period of time. Charts typically show daily volume (in native currency units or in USD).
Familiarity with the concept of liquidity is helpful in fundamental analysis. Ultimately, liquidity serves as a gauge of market interest in a potential investment.
Supply mechanism:
From an investment perspective, the supply mechanism of a currency or token is a very interesting attribute in the eyes of some. Models such as the stock-to-flow (S2F) ratio are indeed gaining favor among Bitcoin fans.
The maximum supply , circulating supply, and inflation rate can be used as the basis for decision-making. Over time, some tokens will reduce the production of new coins, further attracting investors who believe that the supply of new tokens will exceed demand.
On the other hand, many investors believe that strict supply caps actually do more harm than good in the long run. They worry about users hoarding tokens and hindering the circulation and use of tokens. Another voice of criticism believes that the reward ratio for early users is unbalanced. After all, only a stable inflation policy can protect the rights and interests of new users.
Fundamental Analysis Indicators, Metrics & Tools:
We think of metrics as quantitative data in fundamental analysis, and sometimes as qualitative data. These metrics alone often don't give the full picture of the problem. To gain insight into the fundamentals of a coin, one should also look into indicators.
Indicators usually refer to the combination of multiple measurement indicators through statistical formulas in order to analyze the relationship between items. However, there are many intersections between metrics and indicators, so the definitions of the two are not rigorous.
While the number of active wallets has data value, it needs to be combined with other data to gain deeper insights. According to the number of active wallets, it can be calculated as a percentage of the total number of wallets, or by dividing the market value of tokens by the number of active wallets, and the calculated value is the average amount held by each active wallet. Both data can reflect network activity and the confidence of users to hold assets. We will explore this issue in depth in the next chapter.
Fundamental analysis tools can easily combine metrics and indicators. While raw data can be viewed using a blockchain explorer, an aggregator or dashboard can help save query time. Some tools allow users to select the required metrics and create their own metrics.
Combine metrics and create fundamental analysis (FA) indicators:
Now that we understand the difference between metrics and indicators, let’s discuss how to combine the two to gain insight into the financial health of the asset under study. Why did you do this? As stated in the previous chapters, each metric has shortcomings.
Additionally, if you focus only on the series of numbers behind each cryptocurrency project, you risk missing a lot of critical information. Consider the following scenarios:
Taken alone, comparing the active addresses of the two products does not reveal any substantive information. We can only conclude that Token A has more active addresses than Token B in the past six months , but this is not a comprehensive analysis at all. How does this number relate to market capitalization or transaction volume?
A more rigorous approach would be to create some kind of ratio, apply it to of token A some stats of token B , and then compare to the statistics with the same ratio applied. In this way, instead of blindly comparing each token to a single metric, we create a set of criteria for independently evaluating tokens.
For example: studying the relationship between market capitalization and transaction volume can yield more information than looking at market capitalization alone. We divide the market cap by the number of transactions, token A giving a ratio of 5 for token B. and 0.125 for Looking at the ratio alone, Token B is numerically lower and appears to have a higher intrinsic value than Token A. This means that, using the market capitalization as a reference value, the number of transactions of token B is much higher.
Therefore, the utility of token B appears to be greater, or token A is overvalued.
Please note: The above observations are simple examples of how the details can be used to judge the big picture and should not be taken as investment advice. Without understanding the goals of the project and the function of the token, it is difficult to judge whether of Token A is a positive development or a negative development. the low number of transactions.
Another commonly used similar ratio in the cryptocurrency market is the NVT ratio . The network value-to-transactions ratio was coined by analyst Willy Woo and is considered the “price-to-earnings ratio of the crypto world.” In simple terms, it is calculated as market capitalization (or network value) divided by the number of transactions (usually shown on a daily chart).
Here is just a brief introduction to various practical indicators. Fundamental analysis should be a complete system for comprehensively evaluating projects. The more detailed data used, the more reliable the findings.
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Key Indicators and Measures of Fundamental Analysis (FA):
The market is full of indicators and metrics that are available for analysis. For beginners, we have selected some of the most popular indicators to introduce. Each indicator can reflect limited problems, so it should be combined with multiple indicators for comprehensive analysis.
Network Value to Number of Transactions Ratio (NVT) :
If you've heard of the stock analysis metric "P/E Ratio," it's not hard to understand the Network Value to Volume (Daily) Ratio metric that provides similar analysis. The calculation is very simple, just divide the token market cap by the daily trading volume.
We use daily transaction volume as a proxy for the underlying intrinsic value of the token. The concept is based on the assumption that a project appreciates if the liquid transaction volume in the market increases. If the token market cap rises while the daily trading volume is low, the market may enter a bubble phase. Prices increased without a corresponding increase in underlying value. Conversely, if the token price remains stable while the daily trading volume increases, the situation signals a potential buying opportunity.
The higher the value of the ratio, the greater the chance of foaming. When the NVT is higher than 90-95, it is the critical point of the bubble. If the ratio falls, it indicates that the cryptocurrency is becoming less overvalued.
Market Value to Realized Market Value Ratio (MVRV):
Before diving into this statistic, it is important to first understand what the realized value of a crypto asset is. Market value (also called "market cap"), which is equal to the total supply of tokens multiplied by the current market price. Realized market is minus tokens lost due to wallet inaccessibility.
Tokens held in wallets are valued at the market price at the time of the last transfer. Example: If one bitcoin was lost in a wallet in February 2016, it would be worth approximately $400.
The Market Value to Realized Market Cap Ratio (MVRV) metric can be calculated by simply dividing the market capitalization by the realized market capitalization. If the market capitalization is much higher than the realized market capitalization, the ratio is relatively high. A ratio above 3.7 indicates that the token is overvalued, and traders can benefit from trading, which may trigger a sell-off.
Examples of Fundamental Analysis Tools:
Base rank :
Baserank is a cryptocurrency asset research platform that aggregates information and commentary from analysts and investors. Each review will score the cryptocurrency, and the platform takes the average as the total score of the cryptocurrency (0 to 100 points). While some of the platform's premium reviews are only available to subscribers, free users can still view a comprehensive overview of reviews divided into different sections, including team, utility, and investment risk. An aggregation platform like Baserank is ideal when time is limited and you want a quick overview of a project or token. However, before investing, one must do in-depth research on the project that interests him or her.
Crypto Fees:
As you can guess from the name, this tool will list the fee information for each network in the past 24 hours or 7 days. This information serves as a simple indicator for analyzing blockchain network traffic and usage. Networks that are expensive usually have high demand.
However, we cannot take this indicator at face value. To compete with other networks, some blockchains were initially built with low fees. In this case, it is advisable to combine this data with the number of transactions or other indicators for a comprehensive analysis. For example: coins with higher market caps such as Dogecoin or Cardano have low transaction fees and therefore rank lower in the overall leaderboard.
Glassnode Studio:
Glassnode Studio presents a large number of on-chain metrics and data in the dashboard. Like most other tools, the platform offers a subscription service. However, the free on-chain data it provides is detailed enough for amateur investors. You can easily find all kinds of information here, which is much more convenient than manually collecting information using a blockchain browser.
The main advantage of Glassnode is that it provides a large number of indicator categories and subcategories for users to browse. Of course, if you are interested in the Binance Smart Chain project, the information provided here is very limited.
To facilitate the integration of metrics and technical analysis, Glassnode Studio also has built-in TradingView and all its charting tools. Investors and traders often use a combination of analytical tools when making decisions. The one-stop service of Glassnode is indeed a plus, attracting many users.
Summarize
Done correctly, fundamental analysis can provide insights into cryptocurrencies that technical analysis can hardly match. When trading, it is an excellent skill to accurately distinguish the market price from the "true" value of the network. Of course, technical analysis (TA) also has its advantages, providing information that fundamental analysis (FA) cannot predict. As a result, many traders now use a combination of both methods.
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