Fundamental analysis is a popular investment approach to gauge the intrinsic value of potential investments. If done correctly, it can provide great insights into projects.
When investing in any kind of asset, you must do your own research. It is crucial that you have a solid understanding of what you are buying. While most crypto traders do this using technical analysis, others use what is called fundamental analysis. This article dives into different methods of fundamental analysis for both stocks and cryptocurrency.
Developing your fundamental analysis skills can make you a more well-rounded investor. While technical analysis is great for short-term trades, long-term investors use fundamental analysis to determine if an asset is likely to go up in value over a longer period of time.
Join us in showcasing the cryptocurrency revolution, one newsletter at a time. Subscribe now to get daily news and market updates right to your inbox, along with our millions of other subscribers (that’s right, millions love us!) — what are you waiting for?
What Is Fundamental Analysis?
Fundamental analysis (or FA) is a popular approach investors use to gauge the intrinsic value of potential investments. Fundamental analysts try to study the performance and characteristics of businesses or crypto projects to determine if it is over or undervalued. After they reach their conclusion, they use that information to make investment decisions. It can be performed on entire industries or on specific companies.
For example, fundamental investor, Eric, concludes that Apple has a strong track record, and therefore, decides to invest in it. To come to this conclusion, he studied the competitive landscape, Apple’s business model, its management, its growth over time, cash flow and all other metrics.
How Is Crypto Fundamental Analysis Different?
While the concepts of technical analysis are the same across different markets, crypto fundamental analysis is different from the stock market. Where FA in traditional markets considers business metrics like earnings per share or cash flow, crypto projects do not offer data in the same manner. Therefore, crypto fundamental analysts must find alternative ways of studying a project. For instance, one may consider studying the whitepaper of the project and checking the performance of the team relative to the roadmap. Whichever method they use, the main goal is to determine the intrinsic value of a project.
Factors to Consider When Analyzing Crypto Fundamentally
As we discussed, cryptocurrency FA requires a different approach than traditional financial markets. On top of that, there are a few other factors to consider. Firstly, fundamental analysis is a difficult process. Sure, anyone can perform an analysis, but converting that analysis into actionable (and profitable) investments is difficult.
Secondly, you need to identify strong and reliable metrics. For example, many investors look at the number of transactions on a network; but this metric can easily be manipulated. Especially on blockchains with a cheap transaction cost, big players could transfer money back and forth between wallets to make the project look better.
Essentially, it is important to remember that there may be more to something than meets the eye.
Let’s check out the three different types of cryptocurrency fundamentals: blockchain metrics, project metrics and financial metrics.
Blockchain Metrics (On-Chain Metrics)
Blockchain metrics, also known as on-chain metrics, focus on the activity on the chain and its cost to gauge its popularity and security.
Hash Rate and the Amount Staked
There are three main types of consensus mechanisms. Most crypto projects follow either Proof-of-Stake (PoS), Proof-of-Work (PoW) and Proof-of-Authority (PoA). These approaches use algorithms to validate transactions on the blockchain network and keep the network secure. The main difference lies in how they operate — and studying this could provide useful insights for fundamental analysts.
For Proof of Work cryptocurrencies like Bitcoin, the hash rate is frequently used to determine the health of the network. The higher the rate is, the more secure a network is. At the same time, it suggests a higher interest in crypto mining.
The hash rate expresses the combined computational power used to perform transactions on the PoW blockchain. While there are several sources to find the hash rate data, all these sources are mere estimations; the true hash rate is unknown.
For Proof-of-Stake cryptocurrencies like ETH (post-merge), the number of tokens staked is viewed as an important metric. In PoS chains, the network relies on staked tokens for block validation. Therefore, a higher number of staked tokens likely points toward better blockchain security and popularity.
Active Addresses
Another approach to on-chain analysis is to study the active addresses in a set time frame. There are various ways to determine this number. Most people use the simple approach though: adding the total number of sending and receiving addresses over a period of time.
Monitoring this week over week, for example, would provide great insights into the network activity, and if that activity is growing or not.
Transaction Value and Cost
Many fundamental analysts consider the total transaction value in a given time frame. For example, if there were 50 bitcoin transactions of $1,000 each on the same day, the daily transaction value would be $50,000. Comparing this number to the ones of other blockchains will help you identify which chains are being used more frequently.
Additionally, studying the fees paid over periods provide further insight into the demand for transactions on a blockchain. Since transactions are processed in order of whoever pays the most, high fees are a solid indication of high demand.
Higher fees also suggest better blockchain security as miners will be more likely to stick around. Crypto miners work to collect transaction fees; and the bigger their paycheck, the happier they will be. The more miners a chain has, the more secure it is.
Financial Metrics
Secondly, financial metrics are another crucial part of crypto fundamental analysis. In this type of metric, we dive into the numbers behind a project and its growth potential. Some of these numbers include:
Market Capitalization (Market Cap)
The market capitalization of a project is calculated using the circulating supply and the current price. By multiplying the two, you will get a rough representation of the value of the blockchain, similar to the total value of a company like Apple.
Market capitalization can be incredibly misleading, though. It is easy to issue 5 million tokens and then trade a few of those at $100 a piece. Technically speaking, your token now has a market cap of half a billion dollars. Therefore, it is important to use market capitalization in combination with other financial metrics such as liquidity, volume and supply.
Despite this, fundamental analysts use market capitalization to determine a project's growth potential. They generally believe that a micro cap project has more room left to grow than a large-cap token like Ethereum. At the same time, they believe Ethereum is too big to fail, whereas a small token can disappear without a trace.
Liquidity and Trading Volume
As discussed, market capitalization alone can be misleading. However, if the growth in the market cap follows liquidity and trading volume, you can assume the market cap is legitimate.
Liquidity tells you how easily you can sell or buy a token. A token with good liquidity allows you to sell your token at the market price. For example, the liquidity on Bitcoin and Ethereum is generally better than on a recently launched altcoin. High liquidity suggests that others are more than happy to buy and sell the token at whatever the traded price is, legitimizing the market cap.
Trading volume is another such measure of confidence. It shows how much value has been traded in a given time frame. Especially the ratio of volume to market cap is interesting, as it shows how much of the total value is transacted in 24 hours.
Also Read: How to Maximize Profits Using Trading Volume?
Supply & Tokenomics
Another fundamental factor to consider is the supply mechanics of the token. Things like the maximum supply, circulating supply, inflation and vesting period can make a huge difference.
For example, due to Bitcoin’s block reward halvings, the issuance of new bitcoin decreases every few years, making Bitcoin scarcer. This reduced supply of new bitcoin has proven to boost prices to higher levels.
Tokenomics is used to determine the distribution of the total supply of tokens. Many new altcoins have token unlocks, where seed investors can access their tokens after months or even years of lockup. This usually adds selling pressure to the market and can cause significant corrections in price.
It is therefore important to consider supply factors, as it plays a vital role in the performance of your investment.
Project Metrics
Finally, it is important to dive into the project and its use case and goals. It takes a more qualitative view to evaluate the performance of the team behind the token, and if there is a solid foundation for growth.
Background Analysis
Most reputable crypto projects will have information about the background of the team, their track record and experience. If the team is credible and has a strong track record, the project is far more likely to succeed. Have these team members been able to meet expectations and plans set out in a roadmap before?
If the project has no team, are there many developers contributing to the project? Study the GitHub page and see how many contributors actively contribute to the project. If the page is stagnant, it might be wise to look elsewhere.
Whitepaper
A whitepaper is what cryptocurrency projects publish when they start working on the project. It outlines the purpose of the project, and how it is intended to be operated. Studying the whitepaper will tell you more about the future of the project, the problem it intends to address (use case), the distribution of the token, and the technology that it will use.
You can also use the whitepaper to measure the performance of a team. Are they making progress in reaching the goals they set out? Are they deviating from the course? Is the project fulfilling the intended use case?
Competitor Analysis
Whenever you study a crypto project, it is important to figure out if there are other projects with similar goals. If you study those competing projects too, you may realize that other projects look better.
Comparing the different solutions will give you the best odds of finding the one that will end up being successful. After all, there can only be one king of the hill.
Roadmap
A cryptocurrency project roadmap is another excellent tool to measure progress. Most crypto projects have a roadmap in which they outline the timeline for updates, releases and new features. Fundamental analysts can use the roadmap to see if things are still on track, or if the project is experiencing delays.
Utility
The utility of a project represents the role it plays or the problem it aims to address. The more real-world use exists for a token, the more attention it will attract. A key factor here is whether the utility is actually picked up on. There are numerous examples of altcoins with promising utility, that never made it to the top of the food chain.
Fundamental Analysis Indicators, Metrics and Tools
We have discussed many different indicators and metrics to consider in your fundamental analysis. On their own, these metrics will not provide you with actionable insights. You must combine multiple different factors to create an in-depth understanding of the project, and then compare these outcomes with other projects.
Key FA indicators and Metrics
There are a few popular indicators that fundamental analysts use in addition to the metrics and tools we discussed earlier. Let’s discuss some of them!
What Is the Network Value to Transactions Ratio (NVT)?
The network value to transactions (NVT) ratio is used to determine if the market is growing in a healthy manner. It is calculated by dividing a token's market cap by its daily transaction volume.
The NVT ratio assumes that the more money moves around the blockchain, the more value it has. With this assumption, analysts can determine if the coin is currently a buy or sell.
For example, when Bitcoin’s value skyrockets without the transaction value increasing as well, it means the market is overvaluing Bitcoin and one should look to exit their positions. At the same time, if Bitcoin’s value drops while the transaction value remains the same, you could consider it a buying opportunity.
What Is the Market Value to Realized Value Ratio (MVRV)?
Another popular ratio is the market value to realized value ratio (MVRV). This ratio compares the market cap to the realized value of a token. To calculate the realized value, all coins in wallets are valued at the price observed at the time of the last transaction rather than the current market price.
The MVRV ratio then simply divides the real market cap by the realized value. The more the market cap exceeds the realized value, the more overvalued the token is assumed to be.
What Is the Stock-to-Flow Model?
The stock-to-flow model aims to predict the future price of Bitcoin using the number of Bitcoin that are left to be mined. The model views cryptocurrency as a scarce resource like silver or gold. Because there is a known limited supply, investors believe Bitcoin is a store of value like precious metals.
Due to the decreasing returns from mining, Bitcoin is becoming scarcer over time. In a world where demand does not change, this will make it more valuable.
While the model has been reasonably accurate in the past, discussions around the use case are frequent. The model has seen numerous updates along the way, where things were adjusted for price developments. As you can tell, the price again is deviating from its course significantly, raising questions about the need for another adjustment.
Examples of Fundamental Analysis Tools
After understanding different metrics, indicators and methods of fundamental analysis, you might wonder where to find all this information. Luckily, there are plenty of crypto research tools that can help you with your fundamental analyses.
- Messari – A data aggregator with many tools to analyze charts.
- Glassnode – An on-chain data platform, tracking network activity and price data.
- Santiment – Another on-chain data platform, which also offers fundamental insights and social-media data on various cryptocurrencies.
- Baserank – A research platform that brings information and reviews from analysts together at one platform.
- Crypto Fees – A tool to show the network fees for different projects over a fixed time frame.
Closing Thoughts
Fundamental analysis is a fascinating rabbit hole to dive into. If done correctly, it can provide great insights into projects that you would not be able to find with technical analysis. Investing based on FA can also help you disconnect from a volatile market and focus on the true value of the project.
As usual, there is no set-in-stone approach to FA. It is usually best to experiment with different tools to find an approach that works best for you.
This article contains links to third-party websites or other content for information purposes only (“Third-Party Sites”). The Third-Party Sites are not under the control of CoinMarketCap, and CoinMarketCap is not responsible for the content of any Third-Party Site, including without limitation any link contained in a Third-Party Site, or any changes or updates to a Third-Party Site. CoinMarketCap is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement, approval or recommendation by CoinMarketCap of the site or any association with its operators. This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice. The views and opinions expressed in this article are the author’s [company’s] own and do not necessarily reflect those of CoinMarketCap. CoinMarketCap is not responsible for the success or authenticity of any project, we aim to act as a neutral informational resource for end-users.
