Investing in crypto is one of the many ways to generate profits. However, digital currencies are highly volatile and high-risk assets. To make an informed investment decision, it’s essential to know how to analyze these assets.

There are different methods to evaluate crypto projects. Fundamental analysis is among the most popular ones.

Note: All materials described below are presented for educational purposes only. They are not intended as investment advice. Consult with professionals before investing in cryptocurrencies. It is important to remember that investing in digital assets always carries a high level of risk!

Fundamental Analysis: What Is It?

Theory of Fundamental Analysis

Fundamental analysis (FA) is a method of analyzing companies in order to predict their market value over the long term. FA is an analysis of the financial and operating performance of a particular company. FA helps to determine the objective value of an asset regardless of its current market price and to estimate how overvalued or undervalued a certain company or financial instrument is at the moment.

Fundamental analysis is one of the most widely used methods among professional investors to assess the investment attractiveness of assets. It’s aimed at a long-term perspective. FA is commonly practiced in traditional markets, from where it has migrated to the sphere of digital assets.

Benjamin Graham and David Dodd, who published the book “Securities Analysis” in the United States in 1934, are considered the founders of the theory of fundamental analysis. This book is still referred to as the “investor’s Bible.”

Fundamental Analysis: What Is It?

Fundamental Analysis & Technical Analysis

The key difference between the methods used in technical and fundamental analysis lies in their ultimate goals and the information used for investment decisions.

Technical analysis (TA) is most effective for evaluating assets that have been traded in the market for quite some time, as this approach is based on studying patterns of price movements in the past. But it isn’t always possible to get enough data for technical analysis of cryptocurrencies, so it’s better to apply fundamental analysis to such assets. It focuses on examining a company that has released specific tokens.

Fundamental analysis involves studying and evaluating basic information and financial data about a crypto issuer, so it hardly requires any specific technical skills from investors. In contrast, technical analysis requires investors to be proficient in chart and graph analysis, to be able to work with specialized software, and to have mathematical expertise.

While fundamental analysis focuses on “why” you should bank on a cryptocurrency’s potential success, technical analysis centers on “when.” FA directs investments, while TA helps you decide when to trade.

Investors who use fundamental analysis typically follow long-term investment tactics, seeking to find undervalued assets and hold them in their portfolios for an extended period of time. Traders who specialize in scalping, day trading, and swing trading primarily use technical analysis.

In fact, there’s no objectively better method between the two, as both can provide valuable information on different aspects. Experienced investors and traders use a combination of fundamental and technical analysis.

Major Differences Between Technical and Fundamental Analysis

FeatureFundamental analysisTechnical analysis
Basis of analysisBased on general data about a company or an asset, such as financial reports, economic indicators, industry trends, etc.Based on the study of historical data on price changes and trading volumes to identify trends and patterns of market behavior.
Purpose of analysisDetermining the real value of an asset and long-term growth prospects.Predicting future price movements based on analysis of charts and statistics.
InstrumentsFinancial reports, industry analysis, economic indicators, company valuation, etc.Price charts, trading volumes, specific indicators (moving averages, RSI, MACD, etc.).
Analysis horizonLong-term.Short-term or mid-term.
Risk approachThe main focus is on risks associated with competitive pressure and economic and legislative changes.It takes into account support and resistance levels, indicator signals, macroeconomic figures, etc.
ObjectivityMore objective, as it relies on real data and company and market statistics.Less objective, as it depends more on the interpretation of charts and patterns, which can be subjective.
Fundamental Analysis: What Is It?

Essentials of Fundamental Analysis

There’s no all-in-one guide to applying fundamental analysis specifically to cryptocurrency projects. To properly perform FA of digital assets, it’s necessary to understand how exactly they gain value. The goal of an investor using this method is to determine whether the asset under study is overvalued or undervalued.

In the context of the Web3 industry, the main tools of fundamental analysis are:

  • the website and documentation of the selected project, which will help you study its concept, team, program code quality, tokenomics, and roadmap;
  • social networks, which will provide an insight into the project’s community and user sentiment;
  • analytical services, which will give an understanding of the specific token’s trading history.

Fundamental analysis consists of several indicators of different categories of analytics. Let’s look at the most important ones.

Fundamental Analysis: What Is It?

White Paper

Every crypto project must have a white paper, an official document that clearly defines its goals, how to achieve them, and how the project will work. Fundamental analysis starts with studying the white paper.

A quality white paper should include:

  1. A roadmap of updates and new features. After studying the document, an investor should understand two things: what to expect from the project and when to expect it. To evaluate the project’s prospects, look at whether the team has been able to deliver on its promises in past phases and how timely they have been delivered.
  2. A description of the technology being used. The crypto project should be evaluated in terms of its scalability, security, and innovation. As a rule, Web3 projects have open source code that can be explored in a repository on GitHub. However, this requires specific technical skills, so large projects hire third-party specialists to perform technical audits, the results of which are available to everyone. At this stage of FA, you should understand how reliable the project under study is, and whether it offers anything unique that might affect its potential in the future.
  3. Use cases. After studying the white paper, an investor should have a clear idea of how exactly the project is used in practice, what problems it solves, and how its cryptocurrency is utilized in this context. Projects created solely for speculative purposes often lack a use case clause in the white paper.
  4. Schemes for the issuance and distribution of coins. This is called tokenomics. Attention should be paid to the way tokens are planned to be issued and distributed. As part of fundamental analysis, you also need to study the stages of attracting capital and investors to the project that have already taken place.
Fundamental Analysis: What Is It?

Project Team Study

A crucial point within fundamental analysis is to examine the team behind the project. The official website should explicitly state who the founders, managers, and key employees are.

Promising projects usually have a well-structured team that handles development, finance, and marketing. An anonymous team is a red flag, although it’s common among successful Web3 projects, but it’s more of an exception to the rule.

Analyzing the team will help you assess its ability to achieve the stated goals. Investors should study all project representatives in detail and learn about their professional backgrounds. LinkedIn will be the main tool at this stage, where you can find out about each specialist’s work experience. An inexperienced team is a reason for concern.

Fundamental Analysis: What Is It?

Meeting Community

Web3 projects always rely on user support, so analyzing the community will help you assess the prospects of a particular initiative. This is where social networks step in, as no successful crypto project can evolve without an active online presence.

When joining the project’s community channels, it’s important not only to study the content produced by the team but also to get information about the community itself that’s built around the project. Specifically, you should get answers to questions such as:

  1. Has the project developed an active community?
  2. Who exactly is interested in the project?
  3. What feedback are users giving about the project?
  4. Are community members voicing any controversies, problems, conflicts, or concerns?
  5. Does the community find the goals realistic?

The key point here is to assess the general sentiment of the community and its activities. Consideration should be given to how the project team stimulates community development and engagement. The project’s reputation often depends on those who are willing to invest in it, so look for support from public figures and opinion leaders. An essential aspect of community research is assessing the project’s interaction with other members of the Web3 ecosystem.

Fundamental Analysis: What Is It?

Assessing Market Dynamics and Competitive Environment

Understanding the market dynamics and key features of the studied cryptocurrency is crucial to effective fundamental analysis. Here’s what you should pay attention to:

  • Demand and its growth prospects. It’s important to assess the current level of demand for the cryptocurrency and the factors that might affect its growth in the future. This can be done by analyzing the asset’s use cases, ongoing community activity, and prospects for potential user growth.
  • Competitor analysis. Investors should study and analyze the niche and main competitors. This will help determine the project’s position in the market, assess the limits of growth and development options, and understand how feasible the stated plans are. Moreover, taking into account the current market conditions in general and the factors that influence them is necessary.
  • Regulatory environment. You should assess the regulatory sentiment of the jurisdictions in which products and platforms related to a particular cryptocurrency will operate, as regulatory requirements can have a significant impact on the project’s success. Both the current situation and possible future changes in regulatory rules should be analyzed.
Fundamental Analysis: What Is It?

On-Chain Analytics

One of the final stages of fundamental analysis is estimating the real value of the project’s assets. To do this, investors need to use on-chain metrics and indicators. There are lots of such indicators, and it can be quite difficult for a beginner to understand them, so it’s better to start with the simplest and most popular ones:

  • Network Value to Transactions (NVT) Ratio. To calculate this indicator, you need to divide the market capitalization of the project by the daily trading volume. If the NVT ratio is above 90-95, then the project is overvalued. Basically, the higher the ratio value, the more the project is overvalued and vice versa.
  • Market Value to Realized Value (MVRV) Ratio. The MVRV ratio is calculated by dividing the total market capitalization by the realized capitalization. A ratio of more than 3.7 indicates that the asset is currently overvalued. If the MVRV ratio is less than 1, then the asset is undervalued. This is a good buying moment, as demand will increase and drive the price up.

After studying the above aspects, you can get an idea about the prospects of a particular crypto project and make an investment decision. It’s worth noting that the given list isn’t exhaustive in terms of fundamental analysis, but these points will be enough to assess the potential of the project’s development in the long term.

Author: Nataly Antonenko
#Analysis #Cryptocurrency #Investments