Fundamental analysis (FA), is to an investor, what technical analysis is to a trader. Those focused on long-term value appreciation rather than short-term gains should look favorably to a system such as FA, as it teaches you to determine the fair value of a cryptocurrency.
In a market with more than 5,000 assets to choose from, picking the right one might look like a life-long quest. New tokens come and go, and there is never a way to tell which one can stand the test of time. One might think that investing in a cryptocurrency that is not Bitcoin or Ethereum is like betting on the lottery, but is that really the case?
By analyzing the right data, it is possible to figure out whether a cryptocurrency is overvalued or undervalued. A careful review of a project, the team behind it, and its code is nearly all that you need to reach an objective conclusion.
Fundamental analysis is the art of establishing the intrinsic value of a company, asset, commodity, or cryptocurrency. The methods of such analysis rely on the use of internal and external data, primarily those that describe the state of an asset and its potential.
If TA is a system that employs historical market data, then FA is a system that utilizes business metrics that are typically a sign of a healthy project. In the crypto market, this can be boiled down to researching and examining team members, roadmaps, tokenomics, investment rounds, and network statistics (e.g., activity, TPS). To specify, anything having to do with a project that is not related to its performance in the market is considered to be a part of fundamental analysis.
In the following sections, we will carefully inspect each piece of data in order to show you how it helps with determining a project’s value.
Employees are what make a company shine, and the same can be stated for crypto projects. Behind each cryptocurrency lies a technological infrastructure, written in code, that defines its functions and use cases. The quality of that code is naturally determined by the expertise of the developers writing it.
On that account, the number one FA data to look out for is a team’s members. Is the team anonymous? Do they have prior experience in developing blockchain platforms? Have they graduated from a prestigious institution that signifies their knowledge or expertise? Do their members have a LinkedIn profile that you can use to fetch data?
Answering these questions is necessary when inspecting teams as it represents an intuitive method of comparing one project to the rest of the market. If a team stands out before their idea is built, it is normal to invest in them rather than a team that is completely anonymous and has no background data which you can analyze.
A whitepaper is a formal document created by cryptocurrency projects that informs the market about their idea, the problem that they solve, how the project works, and what the estimated roadmap is. Reading a whitepaper is a prerequisite to investing in a project since it is the only high-level document that provides you with an understanding of what to expect.
A whitepaper includes information such as:
No project can be analyzed alone. Cryptocurrencies tend to cater to the same users and use cases, which means that your selected project not only competes with its own limitations, but also with other competitors that target the same use case.
For example, when analyzing a decentralized exchange such as Sushiswap it is important to review other competing DEXs as well. Even if SUSHI looks good on paper, a rival project might be even better within the FA system.
Competitors are especially important to keep in mind when investing in projects that are part of a specific niche. Decentralized oracle platforms are a great example, as history has shown us that both on-chain and off-chain platforms have reached consensus and adopted a single decentralized oracle service. Those who did not outmatch their competitor were left in the dust, having no place in the market.
An active blockchain network is a healthy blockchain network. When analyzing cryptocurrencies, it is worth checking their networks as well.
Why is that so? Because a project claiming to compete for the top spot of a payment network cannot do so if it only processes hundreds of transactions per day. On-chain metrics come in handy in this case as they provide you with access to a myriad of information such as:
These metrics alone help with determining whether a team is overly ambitious or whether its goals are realistic and can be achieved in due time. After all, why invest in a project that boasts milestones that it cannot reach?
We recommend searching for network data by visiting Blockchain.com, Chainalysis, and Dune Analytics
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