Different from traditional markets, the crypto market has its own set of key questions to consider when analyzing a project and its assets.
Fundamental analysis is the process of finding the intrinsic value of an asset, with the goal of determining whether the asset is overvalued or undervalued. That information can then be leveraged along with technical analysis to decide whether to invest in or trade an asset.
In cryptocurrency fundamental analysis, the approach is somewhat different than that typically used to evaluate legacy market assets. Crypto assets don’t have the historical data required, as there’s usually no history of earnings reports or profit and loss statements.
For cryptocurrency analysis, all the available information on the asset needs to be sought out through research that includes investigating its use cases, its network, the team behind the project, vesting schedules — the list goes on. By looking at the right set of factors, traders can determine the fundamental value of an underlying project before investing.
Here are the 10 steps found to be most useful:
1. Read the white paper
Especially for long-term, buy-and-hold investing, it is critical to read a token’s white paper. This is the document that gives an intentional, detailed overview of a project. A good white paper explains:
- The project’s goals
- The use cases and distribution
- The team’s vision
- The technology behind the token
- Plans for upgrades and new features
- How the token provides value to users
2. Assess the claims of the white paper
Be skeptical because the people behind projects can bend, or even break, the truth.
This happens more often than most realize. For example, Michael Alan Stollery, the founder and CEO of Titanium Blockchain Infrastructure Services, raised $21 million in an initial coin offering (ICO).
He later admitted to falsifying parts of the project’s white paper.
It’s important to ask some hard questions and get complete answers before putting one’s money into a project.
Some questions to consider:
- Are the tokens really distributed the way they promise?
- Are they meeting the road map expectations?
- Are they inventing a problem just to solve it?
- What are other people saying about it?
- Are there any red flags?
- Do the goals seem realistic?
3. Look at competitors
According to some industry sources, nearly 40% of cryptocurrencies that were listed in 2021 no longer exist.
That serves as an important truth investors need to take into account: A lot of projects — close to half, and it could be even more — fail, and fail miserably.
Graph of deactivated cryptocurrencies on CoinGecko, by year listed. Source: CoinGecko
Scrutinizing a project’s white paper reveals the use case the crypto asset is targeting and the problem it is trying to solve. One should then consider whether or not that use case is, in fact, viable and wanted.
Furthermore, it’s important to identify competing projects and examine existing projects this new one might replace, if successful. The bottom line: Smart investors are looking to see if this project is better than others or not.
4. Look at the team behind the project
A project is only as good as the team behind it.
The people offering the project must have precisely the right skills to make their project work. The white paper should have information about each member of the team, but doing some independent research can be helpful too.
Some questions to consider about the people behind any project:
- Have they worked on other reputable, successful projects in the past?
- What are their credentials? Are they experienced?
- Are they reputable members of the crypto community and blockchain ecosystem?
- Have they been involved in any questionable projects or scams?
What if there is no team? Then look to the developer community.
Find out if the project has a public GitHub. Check to see the number of contributors and activity levels. The more consistent development activity on a project, the better.
5. Look at on-chain metrics
On-chain metrics are available by looking at data on the blockchain.
Exchange inflow and outflow metrics. Source: Cointelegraph Markets Pro
The data can be pulled from websites or APIs — such as on-chain analysis, data charts and project reports — specifically designed to inform investment decisions.
Some of the data worth considering:
- Transaction count: a measure of activity taking place on a network. The more activity, the better.
- Transaction value: how much value has been transacted within a period of time. The higher this number is, the better.
- Active addresses: how many blockchain addresses are active at any point in time. Again, the more active addresses, the better.
- Fees paid: how the demand for block space is growing or shrinking for a token based on fees.
- Hash rate: a measure of the network health in proof-of-work cryptocurrencies. The higher the hash rate, the more difficult it is to successfully mount a 51% attack.
- Staking: the amount staked at a given time shows the interest level, or lack of it, in the project.
6. Look at the tokenomics
Invest in projects that create useful tokens; otherwise, the token may not have utility in the marketplace.
In addition, if the token is useful, it still needs to be determined how the market will embrace it, thereby making sense of the token’s price movements and allowing investors profit opportunities on an ongoing basis.
Some questions to consider:
- Is the token useful?
- How do people get the token?
- What is the inflation or deflation rate?
- Was it an ICO asset?
7. Market cap, trading volume and liquidity
Some of the most important analysis is about the financial metrics of the token associated with a project, including:
- Market capitalization: the network’s value represented by the hypothetical cost to buy every unit of the asset. The “market cap” gives insight into the growth potential of the network, and it is calculated by multiplying the circulating supply by the current price.
- Trading volume: the amount of value that was traded in a certain amount of time (daily, weekly, monthly). It points to whether a token has enough liquidity.
- Liquidity: an indicator that measures how easily a token can be bought and sold. The more liquid a token is, the easier it is to sell it at its current trading price.
When a community is behind a project, it tends to help the project’s token appreciate in value.
Social media, for instance, can have a significant impact on a crypto asset’s price action. Memecoins such as Dogecoin and Shiba Inu
skyrocketed in price due, in part, to social media excitement.
Just recently, Solana’s BONK token got a huge price boost as social media activity pushed interest levels in the asset to new highs.
NewsQuakes™ for BONK as social media excitement ramped up. Source: Cointelegraph Markets Pro
A community that is backing a coin is a powerful catalyst, so here are a few questions to consider:
- Is the community active and excited?
- Are there a lot of shilling accounts?
- Is sentiment good?
- Are there plenty of developers?
Remember, a token’s price goes up only if there is interest and market action. The more people talk about and invest in a token, the more likely its price will appreciate.
Currently, there are about 21,910 cryptocurrencies investors can choose from — that’s a lot of competition!
The team behind a project needs to actively market its token in order to differentiate itself from the crowd, and industry insiders are saying that it is now harder than ever to stand out.
In addition, with the continual advent of new tokens on the market, established cryptocurrencies are struggling to retain market share.
So, the team behind the project must actively build brand awareness, get customers and retain customers to improve sales and profits.
Some questions to consider before investing in a project:
- Is the core team marketing the product well?
- Do they have a dedicated marketing team?
- Are they increasing market share or not?
10. If the core product is available, test it out
This one might be a little tough for someone who is just looking to invest in the underlying token of a project. However, let’s say one is considering an investment in Ethereum’s Ether
Since Ethereum is a decentralized global software platform, a functional, secured digital network technology would demonstrate for certain how the platform actually works.
Knowing this could definitely help inform a potential investing decision.
After all, if the platform is hard to use, time-consuming or otherwise creates more problems than it solves, it may be wise to steer clear of investing in such a platform until these issues are addressed.
So, there it is — 10 steps for sound fundamental analysis to help evaluate the profit potential of any asset before any investing or trading.