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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.

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:

● 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 

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 like those offered by Cabital is a more reasonable option.

 Here's a quick guide to how you can buy crypto using Cabital via SEPA or Faster Payments (FPS).

SEPA is the preferred way of money transfer if you live in the eurozone. In most cases, transfers are quick, although quantities over €2,000 may take 1 or 2 days to reflect.

Meanwhile, FPS enables customers who hold GBP to exchange their GBP for crypto and vice versa through bank transfer. A deposit made through FPS usually arrives almost instantly, although it may take up to 2 hours. 

Both SEPA and FPS are secure transfers that rely on the security systems of their respective banks.

We've also added Plaid, which removes the need to toggle between different apps to deposit funds via bank transfer for selected financial institutions in Europe.

After converting your GBP or euros to cryptocurrency, you can start earning a constant stream of interest on your holdings at a rate of up to 12% APY with Cabital on stablecoins like USDT.

Cabital also maintains industry-standard asset protection, so you won't have to worry about your assets' safety. 

For long-term investors, receiving income on your cryptocurrencies through savings plans with Cabital is an alternative to hodling. Through a holistic review of all available investment alternatives combined with additional checks by experienced specialists, these savings programs allow an investor to earn interest while minimising risk.  

Join Cabital and earn high-interest yields on your crypto assets.

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.

This article does not contain all the information that is or may be material to you and should not be considered as advice or a recommendation to you in respect of the holding, purchasing or selling of digital assets and does not take into account your particular objectives, financial situation or needs. This article has been made to you solely for information purposes. This presentation may be amended and supplemented as the Company sees fit, may not be relied upon for the purpose of entering into any transaction and should not be construed as, nor be relied on in connection with, any offer or invitation to purchase or subscribe for, underwrite or otherwise acquire, hold or dispose of any digital assets, and shall not be regarded as a recommendation in relation to any such transaction whatsoever. The contents of this presentation should not be considered to be legal, tax, investment or other advice, and you  should consult with your own counsel and advisers as to all legal, tax, regulatory, financial and related matters concerning an investment in or a disposal of such digital assets and as to their suitability for you.

This presentation and its contents are proprietary to the Company, and no part of it or its subject matter may be reproduced, redistributed, passed on, or the contents otherwise divulged, directly or indirectly, to any other person (excluding the relevant person’s professional advisers) or published in whole or in part for any purpose without the prior written consent of the Company.

This article contains forward‐looking statements. Such forward‐looking statements involve known and unknown risks, uncertainties and other important factors. Certain forward‐looking statements are based on assumptions or future events which may not prove to be accurate, and no reliance whatsoever should be placed on any forward-looking statements in this article.

The information in this article has not been independently verified. No representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the presentation and the information contained herein and no reliance should be placed on it. Information in this article (including market data and statistical information) has been obtained from various sources (including third party sources) and the Company does not guarantee the accuracy or completeness of such information. 

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