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How To Evaluate Cryptocurrencies With Fundamental Analysis

What is fundamental analysis and how to utilise it as part of your investment toolbox.

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Have you ever wondered if a cryptocurrency asset is underpriced or overpriced? You may use a technique called crypto fundamental analysis to discover if it's worth investing in or trading with by looking at its use cases, its community, and the team behind the project to better understand if the token is inherently undervalued or overvalued. In this article, we will give you an in-depth guide on how to analyse cryptocurrencies.

Before you invest in any cryptocurrency, you must remember that evaluating cryptocurrencies differs significantly from evaluating conventional financial assets such as equities because there are no financial statements. Fundamental analysis of stocks entails using financial statements to examine a company's financial health and feasibility.

When evaluating cryptocurrencies, there are no financial statements because:

● Practically almost all cryptocurrencies are still in development stages and have limited real-world applications, there is no track record to present.

● Cryptocurrencies are digital representations of wealth or assets that rely on miners, users, and developers.

crypto fundamental analysis strategy

What is Fundamental Analysis

To see if a cryptocurrency has an intrinsic value that isn't reflected in its current market price, you can employ a fundamental analysis strategy, which is the act of investigating and evaluating an investment to forecast its future worth. As an investor, you can then use this information to tactically buy or sell positions based on whether the coin is overpriced or underpriced, even while bearing in mind that cryptocurrency prices are volatile. After all, even well-known currencies such as Bitcoin and Ethereum are subject to price fluctuations. 

For investors, it's vital to have a fundamental analysis strategy to increase your chances of gaining and realising profit, especially if you aim to do long-term investing — also known as HODLing, where you buy and hold cryptocurrency for the long term. It also allows traders, whether non-technical investors or seasoned traders, to trade with confidence.

How to Apply Fundamental Analysis Strategy to Analyse Cryptocurrencies

Fundamental analysis of cryptocurrencies is usually utilised for long-term investment because it looks at how the asset has performed over time. For an investor to make the best financial decisions, especially long-term performance, gathering knowledge is crucial. Daily fundamental analysis can assist you in developing the finest investment strategies by predicting the future of a cryptocurrency and deciding whether it is a successful investment. 

When an investor employs fundamental analysis, they recognise that when the price of a coin falls below its inherent worth, it is time to buy. On the other hand, you sell when the coin's price exceeds its intrinsic value. 

Fundamental analysis employs quantitative fundamentals, which are typically classified into three categories:

● Financial Feasibility

● Project Potential

● Blockchain/Protocol Used

Quantitative fundamentals are based on numerical data that is back-tested to see if it can outperform the market over time. However, because there may be too much data, it may be difficult to tell what is essential and what isn't.

Financial metrics

Financial indicators include data on the current traded asset, liquidity, external variables, and market reaction.

Market Capitalisation

When contemplating a cryptocurrency, the first thing investors look at is its market capitalisation. It's the total market worth of cryptocurrency in dollars, indicating how much space for growth there is. 

To calculate a cryptocurrency's market capitalisation, multiply the current price per coin by the circulating supply.

Let's look at the market capitalisation of Stellar XLM. As of December 1st, 2021, the market price is $0.34, with a circulating supply of 24.35 B XLM. When you multiply the current price by the circulating supply ($0.34 *24.35 B), you get $8.19 B as the market capitalisation.

However, market capitalisation alone is insufficient. If other indicators, like liquidity, are not considered, market capitalisation can provide deceptive valuations.

Liquidity and Volume

The ease with which an asset can be acquired or sold is referred to as liquidity. A liquid market is competitive and has a smaller bid-ask spread. On the other hand, an illiquid market makes it difficult to trade assets at a reasonable price. Trading volume is used to gauge liquidity because it shows how much money has been exchanged in a specific period.

Supply Mechanisms

One of the metrics traders should pay particular attention to is supply mechanisms. The law of supply and demand states that when supply is low and demand is high, the price rises in all markets.

Most Bitcoin holders, for example, are betting that the price will rise soon as the supply runs out. There are 18.888 M Bitcoins in circulation right now, and only 2.111 M Bitcoins are still to be mined because the maximum supply is 21 M. Given that 900 BTC are mined every day, BTC's supply will be depleted in 6 years. The price of BTC may increase due to rising demand, or vice versa if the supply is increased.

Project metrics

Project metrics are based on a qualitative method that considers the team's performance, the whitepaper, and the competition. They look into how crypto works and how it came about, focusing on the development side.

The Whitepaper

A whitepaper is a technical document that describes the cryptocurrency concept in detail. When conducting fundamental analysis, it's a good idea to cross-reference this material with project conversations. Find out more about the objectives and what other people are pointing out as red flags. 

Whitepapers will typically outline the following information:

● Objectives

● Provides details on the technology's open-source code

● Target Demographic

● Roadmap

● Tokenomics

● Distribution scheme

The Team 

While some currencies' developers, like Bitcoin's Satoshi Nakamoto, prefer to remain anonymous, most cryptos ensure that the team's information is easily accessible. Check whether the team, the people behind the project, has posted information on their official website, social media profiles, or platforms where they can host their open-source projects (developer community) to learn more about them. Github, Bitbucket, GitLab, Google Cloud Source Repositories, Phabricator, and RhodeCode are among these platforms.

Take a look at how the developer community is structured. How many contributors are there, and how active are they? Check to determine if any of the team members have the skills required to execute the task. Have they previously completed any successful projects of this nature? Are they working, or have they been linked to any dubious ventures or con schemes?

The Competitors

A whitepaper should explain the crypto asset's intended use case. It's crucial to figure out the asset's purpose and ambitions, as this will disclose what other tokens it might face.

It's also a good idea to conduct a detailed analysis of your chosen coin's competitors. While an item may appear appealing, if other cryptos are more valuable and widely adopted, a currency may not endure long.

Blockchain Metrics

These are on-chain metrics, which refer to activities on a blockchain and are backed up by data from the network. It can expose details about an asset's behaviours and the technology and processes that allow them to happen. Because manually extracting information from raw data takes time and resources, it is done through application programming interfaces (APIs), which is more efficient. 

On-chain metrics may be difficult to come by at first. Still, major cryptocurrency exchanges have developed reporting systems that provide relevant information, such as total transactions, active users, and transaction value.

To conduct a Bitcoin fundamental analysis, for example, cryptocurrency exchanges such as Coinmetrics, Binance Research, and CoinMarketCap will provide you with a plethora of information.

The three most critical elements to consider when analysing a cryptocurrency using blockchain analytics are hash rate, active addresses, and transaction values and fees.

Let's look at how this information could benefit you as an investor.

Hash Rate

Hash Rate is a measure of a mining machine's ability to conduct hashing computations efficiently and effectively. The profitability of a miner or mining pool is directly proportional to the hash rate.

A higher hash rate indicates a more significant likelihood of mining a block and, as a result, a higher chance of receiving the block reward. A decrease in hash rate, on the other hand, implies that miners are departing the network since it is no longer profitable for them (miner capitulation).

It gets more challenging to mount a 51% attack on a cryptocurrency with a greater hash rate.

When a single individual or group controls most of the hash rate on a blockchain network, a 51 % attack occurs, potentially damaging the network. 

As an investor, you should look for cryptos with a more extensive network because they are more resistant to attacks and data manipulation.

Active Addresses

Active addresses are the number of active blockchain addresses throughout a specific period. They can be measured by tallying up the number of transmitting and receiving addresses over time (days, weeks, or months) and comparing the rise or reduction.

Also, calculating the total number of unique addresses over time and comparing the results is a viable way to get the active addresses.

Transaction Values

Fundamental analysis, like technical analysis, focuses on determining transaction values. The presence of a consistently high transaction value suggests that the cryptocurrency is in regular circulation. The protocol's native unit or fiat currency like USD can be used to measure transaction values.

For example, assume the daily transaction volume for Cardano was $ 20,000, with each transaction worth $100. Because the transaction value indicates how much money has been exchanged in a given period, this signifies that on that particular day, there were 200 (20,000/100) transactions recorded.


Fees show demand on the blockchain: how many transactions are paying to be added to blockchains, or how many users are competing to get their transactions included as soon as possible. A good example of these fees is Ethereum gas.

The amount of fees paid over time provides you with an idea of how safe the coin or token is. With the block subsidy or block reward decreasing in relation to the mining difficulty, transaction costs can naturally rise over time. This is advantageous for those whose block rewards are dropping, such as Bitcoin. Without altering the payout, crypto miners will begin to lose money and will leave the blockchain.

Ultimately, fundamental analysis relies on both quantitative and qualitative metrics to determine the potential of a cryptocurrency. 

Summary of Quantitative and Qualitative metrics
Table 1: Summary of Quantitative and Qualitative metrics

Start Investing in Cryptocurrency with Cabital

You can begin investing now that you know how to perform fundamental analysis on cryptocurrencies.

Because fundamental analysis is better suited to long-term investments, diversifying your crypto investments to include savings plans is a more reasonable option.

This article has been prepared by Cabital Fintech (LT) UAB  (the “Company”) and is general background information about some of the Company’s activities at the date of this presentation.

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