Fundamental analysis is an important aspect of cryptocurrency trading. It is one of the two prongs, along with technical analysis, that you should use if you plan on investing in a particular currency.
This article will describe what fundamental analysis is, after which it will also provide locations where information can be found for it. The rest of the article will then reveal many of the pertinent aspects to consider when attempting fundamental analysis of cryptocurrencies.
What Is Fundamental Analysis?
In stock markets, fundamental analysis is used as a generalized 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 used in a similar fashion when analyzing cryptocurrencies.
It’s important to note that it often precedes other types of cryptocurrency analysis. The other main type being technical analysis, which follows the data trends on crypto markets to better predict the future of a given cryptocurrency. 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.
By using fundamental analysis you can potentially be able to separate the chaff and focus on those cryptocurrencies worth the effort of investment. 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 gleaned from this form of 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
There are many sources of information that can inform fundamental analysis of a cryptocurrency. Below is a brief list of important go-to’s to keep in mind when analyzing the intrinsic worth of a cryptocurrency.
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 on 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.
As explained in the glossary section on cryptocurrencies, a white paper can provide pertinent information on the inner workings and other essential aspects of a crypto project. They are essential for the serious investor in any cryptocurrency.
As white papers are provided by developers as a technical use case for their project, it often comes in highly technical language. Other resources, such as specialist websites, may be needed to extricate relevant and analyzable 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 are now specializing on 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.
There are also specialist websites that cater to many sources of information on a cryptocurrency. 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, being aware of which resources to use is highly important for the correct information to be gleaned. Trusted websites and crypto journalists with integrity are important when rooting around for fundamental data. Never use one source alone, and keep in mind 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 analyzing a cryptocurrency project in the industry, so this should be kept in mind when determining the worth of an investment.
One of the first fundamental elements of a cryptocurrency that investors tend to analyze is its market capitalization. On stock exchanges, market capitalization refers to the inherent value of a company trading on the market. This value is calculated by a simple multiplication of 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 the particular cryptocurrency currently circulating with 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 capitalization 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 important aspect of your fundamental analysis of a crypto project. Not all developers can create a robust project and, 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 analyzing cryptocurrencies. If there is low demand in a cryptocurrency, but a high amount in circulation, the price will decrease. The other side of the coin 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 analyze the supply of a particular coin in circulation. Therefore, coin supply can be a pertinent indicator for future investment in a cryptocurrency.
The amount of cryptocurrency bought and sold over a set amount of time is known as the trade volume. This is usually used as a gauge of the popularity of a particular cryptocurrency.
The amount that a particular cryptocurrency moves has implications for investment. High trade volume indicates a high popularity of demand, with low trade indicating the opposite. Of course, just because something is moving quickly 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 fulfill, 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 on 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.
At its simplest definition, scalability is the ability of a project 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 laid out in their white paper, but if scalability is not achieved the project fails.
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
There is a range of other important variables to consider when performing fundamental analysis, but these indicate the extent of the research you should perform.
The above was an overview of fundamental analysis as applied to cryptocurrencies. When investing in cryptocurrencies, it is often a crucial step in the process of sound investment.
We looked at what it entails as well as where to look for objective information. Some major indicators to look out for when performing this type of analysis were also provided. This was to give a sense of the breadth of variables at play.