Fundamental Analysis

The Basics

Fundamental Analysis refers to the qualitative analysis of an asset or market, including cryptocurrencies. The analysis includes assessing the intrinsic worth or value of the asset. Say, in a company's case, the analysis could involve looking at a company’s finances, earnings, liabilities, assets, and expenses to create a comprehensive picture regarding the current health and future prospects of the company’s share value. Furthermore, If the indicators present a favorable picture regarding future projections, the investor can capitalize and bank on the predicted potential by investing in the long-term success of the company. In case of cryptocurrencies, under the fundamental analysis framework, one can look at the currency’s underlying technology and the expertise of the team backing the project to make informed decisions regarding investments. Traders using fundamental analysis usually look for long-term investments that really go into the nitty-gritty of the asset’s background and workings to extract useful information.

Fundamental Analysis Tools

There can be several tools used to carry out this type of analysis, including:

Qualitative Assessment:

The investor can look at qualitative factors impacting the performance of assets, including the leadership and management and the expertise and vision of the team behind a company or a crypto project.

Financials analysis:

The tool includes a thorough investigation and research into a company’s finances, including cash flow, balance sheets, and income statements, which could help one arrive at an informed position regarding the financial health of a company.

Economic Analysis:

This type of analysis looks into economic indicators and policies to evaluate how they can impact businesses and assets while identifying potential opportunities.

Fundamental Analysis in Cryptocurrency Trading

Fundamental analysis involves a comprehensive study of a currency's macro and micro factors when analyzing cryptocurrencies. This includes everything from token economics and market cap to price volatility. Metrics required for crypto fundamental analysis can be categorized into three areas: project metrics, financial metrics, and on-chain metrics.

Project Metrics

Project metrics can involve an analysis of a project's white paper as it provides a technical document with in-depth insights into the project's objectives, technology used, use cases, and more. The project team can be another essential factor to consider in project metrics analysis, as the team's expertise, relevant experience, and public profiles can instill trust and credibility among users and investors. Tokenomics is another essential metric that examines the token's supply, nature, and utility and provides a framework for token mining, supply type, and preliminary token allocation.

Financial Metrics

When evaluating a project's financial performance, it's crucial to consider several factors. Market capitalization is one such factor, as it indicates the maturity of a project's value and its potential for growth. Liquidity and volume are also critical metrics to consider as they help determine the ease with which a currency can be exchanged in the market. Ideally, a project should have a steady trading volume with a minimal bid-ask spread to ensure smooth and efficient transactions.

On-Chain Metrics

On-chain metrics provide insights into trading activity, monetary value of transactions, transaction fees, and more. Transaction counts and transaction value are critical metrics to consider, as they help determine the actual value of a coin. Meanwhile, transaction fees can be a reliable indicator of the demand available in the market for a particular coin.

When carrying out fundamental analysis for cryptocurrencies, it's essential to consider a range of metrics across project, financial, and on-chain categories.

By evaluating these metrics, investors and traders can make better decisions about which coin to buy and hold, particularly given the crypto market's high volatility and long-term growth potential.