What is fundamental analysis?
Fundamental analysis is a vital technique crypto traders use to interrogate the “real value” of any given token and its associated platform. This form of due diligence is very business-like, as it assesses tangible metrics like real-world use cases, tokenomics and the developer’s track record.
The ultimate goal of fundamental analysis is to determine the fair price of a cryptocurrency, which can inform a broader trading strategy. Simply, investors will look for undervalued tokens to buy and overvalued tokens to sell.
There are all sorts of criteria to judge when performing fundamental analysis in crypto. Some are basic – circulating supply figures or social media followers are two easy metrics to understand. Other methods might involve evaluating tokenomics, interpreting on-chain activity data or comparing a coin to its competitors.
Investing in cryptocurrency can be extremely difficult – the market is both young and volatile, meaning even the most experienced traders can occasionally be caught off-guard. Therefore, executing a healthy crypto investment strategy requires a deeper look at whether an asset can gain a long-term foothold in a constantly evolving market.
Learn more about using technical analysis in crypto.
Factors to consider when analysing crypto fundamentally
Nearly every cryptocurrency in circulation is powered by an underlying blockchain protocol. Assessing the token in relation to its native network can provide investors with valuable insight. Most blockchains are public, so this data is easily accessible via a block explorer.
Active wallet addresses
Assessing the active crypto wallet addresses on a blockchain is an easy way to see how popular a crypto network is. This is basically the number of users who have sent or received crypto in a given duration. The more active addresses, the better a cryptocurrency may fare long-term.
Number of transactions
The number of transactions on a blockchain is another simple way to determine network activity. The timeframe of transaction volume can be contorted so investors can observe any trends in the blockchain’s popularity. Be careful with this metric, though – some traders will send tokens back and forth to themselves (wash trading) to inflate the network’s transaction figures.
Proof-of-Stake networks (PoS) like Ethereum and Cardano are powered by validators that lock up (or “stake”) their tokens on the blockchain. This mechanism is required to create new blocks, so the more validators staking tokens, the greater the security and health of a PoS blockchain.
For hundreds of years, financial metrics have been used to analyse traditional instruments like stocks and commodities. They can give a general overview of a cryptocurrency’s ongoing performance and potential for future growth.
Market cap is simply the number of circulating crypto tokens multiplied by their current price. It condenses the value of an entire crypto network into a single, approximate figure. Generally, investors believe high market cap assets are more stable, while lower market cap coins have more growth potential (but also more loss potential).
The circulating supply of a crypto asset is the number of tokens issued to wallet addresses. This figure can be compared to a token’s “max supply” – the number of coins that can ever be released – to help determine scarcity and inflation rates down the track. Deflationary tokens may be more appealing as long-term investments than coins with high circulating and max supply numbers.
A cryptocurrency’s trading volume demonstrates how often an asset has swapped hands via crypto exchanges and brokerages. This metric can give investors insight into a crypto’s liquidity and ongoing market interest.
Although the original cryptocurrency, Bitcoin, was created by an anonymous developer, most modern-day blockchains are backed by high-profile businesses. Assessing their company history, as well as the project’s fundamental purpose, is a great way to further understand a crypto’s standing in the market.
The tokenomics of a cryptocurrency is primarily concerned with an asset’s supply and demand characteristics. This includes its release distribution, burning/deflationary mechanisms (if any) and how it integrates with the underlying blockchain platform. A takeaway might be to remain wary of crypto projects that reserve a large number of tokens for the developers.
The best cryptocurrencies with long-term merit will provide a potential solution to an issue the market (or world) faces. For example, Bitcoin was a viable alternative to the current banking system. Ethereum introduced smart contracts to the decentralized ecosystem. Projects with a well-defined use case in an under-saturated market tend to perform better than those just adding to a tired idea.
Team and community
A development team’s track record can go a long way to generating a sustainable and thriving crypto community. Big industry names (co-creator of Ethereum, Gavin Wood, for example) with proven expertise in the blockchain field tend to produce consistently high-quality crypto projects. Crypto projects with strong community and developer engagement are often more reliable than stagnant projects.
Other things to consider
There are several factors outside the crypto market that can significantly influence a project’s long-term viability and price movements. Government intervention and regulations, as well as the broader economic climate, can play a massive role in how crypto assets are valued.
Cryptocurrencies like Bitcoin are often posited as a hedge against poor conditions in traditional markets like stocks and bonds. However, the crypto market is still largely at the mercy of broader social and economic climates. This is why there remains a fairly observable link between the movement of the stock market and the crypto market. Poor stock performance on a large scale is very often mirrored by poor crypto performance.
Seemingly paradoxically, low unemployment rates can actually cause the economy to run “too hot” and result in worse outcomes for the blockchain sector. This was a feature of the 2020-21 tech bull market, which eventually reversed as inflation ran out of control and supply issues kicked in due to the Russo–Ukranian conflict.
In general, the early 2020s will be remembered for their high-inflation environments, which governments attempted to control by raising interest rates. The offshoot of this is less discretionary spending, and by extension, less institutional investment. The largest interest rate hike in mid-June 2022 correlated with the price of Bitcoin falling 38% in less than a week.
Simply put, tough macroeconomic conditions correlate heavily with weaker performance from blue-chip crypto investments like Bitcoin and Ethereum.
The crypto industry is still in its infancy and governments are still scrambling to determine the best way to regulate the market. A key principle of Satoshi Nakamoto’s vision was to create a financial system disconnected from the government’s oversight – but as the market has matured, such a goal is becoming less and less tenable.
Ideally, project developers and big centralized exchanges will cooperate with governments to find a middle ground that protects consumers while leaving the financial agency in the hands of the investor.
However, efforts to compromise have not always gone smoothly. The Chinese government banned cryptocurrency altogether, while the SEC has launched a full-blown assault on U.S. centralized exchanges. The outcome of big regulatory decisions, if crypto-negative, could impede the market’s development for quite some time. Alternatively, the re-entry of China into the market, alongside European nations like Germany’s progressive crypto infrastructure, could spell a positive run in the coming decade.