Fundamental analysis is an important aspect of cryptocurrency trading. It is one of the two prongs and technical analyses you should use to invest in a particular currency. This article will describe what fundamental analysis is, after which it will also provide locations where information can be found. The rest of the article will then reveal many pertinent aspects to consider when attempting a fundamental analysis of cryptocurrencies.
What Is Fundamental Analysis?
In stock markets, fundamental analysis is used as a generalised method to evaluate the intrinsic value of an asset. The intrinsic value is assessed by a broad range of factors, from information on the companies themselves to macroeconomic factors, such as the health of the economy in general. This form of analysis can be similarly used when analysing cryptocurrencies. It’s important to note that it often precedes other types of cryptocurrency analysis. The other main type is technical analysis, which follows the data trends on crypto markets to predict the future of a given cryptocurrency better. This type of analysis is purely focused on fluctuations and trends in the market. Fundamental analysis, on the other hand, is an important tool for discerning the actual worth of a cryptocurrency through background research mostly external to the market. This research complements the price trends on the market, thus providing a more robust predictive analysis. Knowing how a cryptocurrency was developed, its scalability, the team behind it, and others should all be considered if a sound investment is to be made. Using fundamental analysis, you can separate the chaff and focus on those cryptocurrencies worth the investment effort. Implicit within this is the fact that this should be a regular task performed by any crypto trader and not solely done in the beginning. The data from this research can then be used to select a trading strategy (or even what to program your trading bot to do on your behalf).
How To Find Information For Fundamental Analysis
Many sources of information can inform the fundamental analysis of a cryptocurrency. Below is a brief list of important go-to’s to remember when analysing a cryptocurrency’s intrinsic worth.
Website Of The Project Itself
An obvious starting point would be to look at the particular project’s website, but don’t always expect objective information there. Regardless of the validity of what is claimed, other sources must be used to glean usable information. They are, however, where you can often find their white paper (see below) and the channels where they communicate to the wider world, such as their social media and others.
White Papers
As explained in the glossary section on cryptocurrencies, a white paper can provide pertinent information on a crypto project’s inner workings and other essential aspects. They are essential for the serious investor in any cryptocurrency. As developers provide white papers as a technical use case for their project, it often comes in highly technical language. Other resources like specialist websites may be needed to extricate relevant and analysable information.
News and Press Channels
As developers wouldn’t want to undermine their chances of success, objective sources of information are vital in the cryptocurrency ecosystem. As cryptocurrencies and blockchain technology have entered the mainstream, journalists now specialise in the topic. If you’re looking to research a particular cryptocurrency or blockchain, it’s worth keeping tabs on their views, but be careful not to enter into an echo chamber.
Specialist Websites
There are also specialist websites that cater to many sources of cryptocurrency information. Knowing which can be trusted as objective resources can be ascertained through crypto community forums and other websites.
Important To Keep In Mind
On that note, knowing which resources to use is important for the correct information to glean. Trusted websites and crypto journalists with integrity are essential when rooting around for fundamental data. Never use one source alone, and remember that some websites may be paid to push a particular project.
A Checklist For Fundamental Analysis
Below we’ll look at a few methods used when undertaking fundamental analysis. Not all of these are used by everyone, and each analysis can be tailored to your particular strategy. There is no single way of analysing a cryptocurrency project in the industry, so this should be kept in mind when determining the worth of an investment.
Market Capitalisation
One of the first fundamental elements of a cryptocurrency that investors tend to analyse is its market capitalisation. On stock exchanges, market capitalisation refers to the inherent value of a company trading on the market. This value is calculated by multiplying the number of shares by their share price. This represents the market value of the company. This calculation can be transposed to the crypto market. You can quite similarly calculate the market worth of a cryptocurrency. You multiply the amount of cryptocurrency circulating by the current market price for its coins. This calculation is a good indicator of the growth potential for the cryptocurrency under review. There are, however, nuances at play which should be taken into account. Looking for a cryptocurrency with a lower market capitalisation may indicate a higher potential for growth, but always research further before taking the plunge.
Developers Of A Project
Research on the development team should always be an essential aspect of your fundamental analysis of a crypto project. Not all developers can create a robust project; at worst, some developers could be knowingly pulling the wool over everyone’s eyes to attract investors. It is advisable to research background information on the investors, within reason, and to pay attention to any interviews or appearances they have made in public. These pertinent sources of information could be the difference between investing in a good bet or a future failure.
Coins In Circulation
As with stocks and other types of markets, supply and demand play a huge part when analysing cryptocurrencies. The price will decrease if there is a low demand for a cryptocurrency but a high amount in circulation. The other side is that high demand and low supply will necessitate an eventual price increase. For real-world effects on the movement of a cryptocurrency in the market, you will need to analyse the supply of a particular coin in circulation. Therefore, coin supply can be a pertinent indicator for future investment in a cryptocurrency.
Trade Volume
The amount of cryptocurrency bought and sold over time is known as the trade volume. This is usually used to gauge a particular cryptocurrency’s popularity. The amount that a particular cryptocurrency moves have implications for investment. High trade volume indicates high demand popularity, with low trade indicating the opposite. Of course, just because something is quickly moving doesn’t always indicate its inherent long-term worth, which is why further analysis is needed for fundamental analysis.
Legality and Regulation
While this may be an obvious criterion to fulfil, discerning the legality of a particular project can anticipate any future problems with a crypto investment. Closely tied to this is the issue of regulation, which could impact the usage of cryptocurrencies in general. As it is a relatively new technology, regulators are still coming to grips with the evolving crypto market. Any regulation, therefore, should be closely followed.
Scalability
At its simplest definition, scalability is a project’s ability to manage the increase in the amount of work done within the system. Resources need to be added to sustain it. A development team can have the best-laid roadmap and a solid use case in their white paper, but the project fails if scalability is not achieved. Even Bitcoin and Ethereum, the two most well-known cryptocurrencies, have had scaling issues for various reasons. So this is a very real factor to consider when investing in a cryptocurrency.
Lack of Information
A company developing a cryptocurrency can hide important information. This could be in the form of a complicated privacy policy, keeping their team anonymous, or perhaps they simply don’t have a relevant roadmap for the project. If you want to invest in a particular cryptocurrency, these factors should send alarm bells. There are other important variables to consider when performing fundamental analysis, but these indicate the extent of the research you should perform.
Conclusion
The above was an overview of fundamental analysis as applied to cryptocurrencies. Investing in cryptocurrencies is often a crucial step in the sound investment process. We looked at what it entails and where to look for objective information. Some major indicators to look out for when performing this analysis were also provided. This was to give a sense of the breadth of variables at play.
