How to do fundamental analysis for cryptos?

Crypto fundamental analysis actually comes directly from thefundamental analysis (FA) used in classical finance.

In fact, very often, we talk about two methods for analyzing financial assets: fundamental analysis (often used by investors) and technical analysis (TA) preferred by traders. That said, combining the two methods can lead to much better results.

Let us point out that while technical analysis is the same for cryptos as for classic financial assets, crypto fundamental analysis differs enormously from classic AF.

For crypto fundamental analysis, this, as its name suggests, focuses more on the fundamental analysis of cryptocurrencies. These are very different types of assets from traditional finance stocks and it would be a mistake to simply copy and paste.

🤓 Even though there are similarities, traditional finance traders and traditional corporate investors must completely readjust to consider crypto investing.

There are particularities for analyzing cryptocurrencies and that is what we will see here in this article.

Overview of Crypto Fundamental Analysis

In traditional finance, fundamental analysis is the tried-and-true method for investors to estimate the value of a crypto.

To evaluate it with (more or less) precision, we will observe precise parameters. In fundamental crypto analysis, we are actually going to observe crypto with the eyes of an investor. We will consider the asset as a company in its own right.

Thus, we will observe the state of the market and the economic and financial viability of the project. We will then question its usefulness, the acquisition strategies, financial incentives, economic models, tokenomics etc. which will help us estimate the value (current and future) of a company.

Can we really adapt the fundamental analysis of classic finance to cryptocurrencies?

This is the question that kills. Indeed, it is really difficult to do a pure copy and paste of the fundamental analysis of classic financial assets.

Bitcoin has no dedicated team, no mission, no financial reporting and it looks more like a commodity than an Amazon stock.

There is therefore a sort of abuse of language and generally, we prefer to talk about tokenomics and tokenmetrics when we talk aboutinvest in cryptocurrencies.

That said, we can nevertheless use certain elements of classic fundamental analysis which can prove very useful when we want to invest according to the rules of the art.

How to carry out fundamental crypto analysis

1/ The indicators of the company behind the crypto project

In a good crypto fundamental analysis, we will instead focus on what makes the intrinsic value of a cryptocurrency by first asking the essential questions:

What technology is used and what type of blockchain.
What is the mission of the company and the token, its usefulness.
The roadmap and future development
The supply system and economic model of the token
The current market and competition
etc

👉 The usefulness and mission of the project

When you are presented with a project, the first question to ask yourself is the reason for creating this token.

This is the basis for your future investigations. Does the token really have a use or is it artificial as is often the case with Yield Farming reward tokens, for example.

Utility will not be the only factor to take into account and will not guarantee you a profitable investment. Some useful projects fail to attract a community and other useless projects instead gain great popularity.

👉 The team and founders

This is just as essential as the question of utility. In fact, a good, competent team has a better chance of implementing a project and developing it in the long term.

A shaky team or one that has rogue or inexperienced members can very poorly manage the activity of the company and even its crypto network. A manager with a bad reputation can destroy a project overnight when it is doxxed...The Wonderland Protocol (TIME) was a good example of this type of disappointment that an investor wants to avoid.

A good team will seek to expand its ecosystem and constantly improve it and increase its popularity within the crypto sphere.

A bad team will do the opposite and will only think about the gains they can amass. This type of project and founders are unfortunately very widespread and increasingly on the market. Generally, these projects do not hold up in the long term.

Projects with great promises and nothing concrete, the ICO craze in 2017 was a good example…

👉 Competing or similar projects

Here, we will rather focus on the market and make financial projections in terms of expansion and market share that the crypto company will be able to have. This is obviously a considerable element when you want to invest in the long term.

Likewise, a competitive analysis tells us the relevance of the project. The more projects there are in the sector, the more interesting the market. We still need to have selected the project most likely to stand out... Analyzing the competitors allows us to have a fairer view of the crypto project that we support.

👉 Tokenomics and the chosen economic model.

It is also part of fundamental analysis to observe the tokenomics. It’s a new, somewhat catch-all term which is the contrition of the words economy and token. In fact, everyone gives their precise meaning here. This brings together all the economic indicators of the token that are generally found on sites like coinmarketcap or CoinGecko, for example.

Total Supply: the maximum quantity of tokens that can be created and issued.
Max supply: This is the quantity of tokens currently in circulation.
Le Fully Diluted Marketcap (FDV): The market cap in a projection where all tokens would be in circulation.

You can find out more about tokenomics here.

👉Supply mechanisms (The broadcast schedule)

This is perhaps one of the points of crypto fundamental analysis that is most interesting to study.

The issuance of tokens: The sum of tokens that will be distributed to the validators of a blockchain in a given time. The quantity of tokens created for each block. And, transaction fees paid to the network. The issuance calendar can also give us good entry points from the perspective of a trader in particular.

Procurement policy (offer) may vary from one project to another. Some investors prefer ceilings set with so-called deflationary tokens. The fear of seeing a token that is no longer used because it is not in sufficient demand. Some investors prefer inflationary tokens because they are more likely to be used and respond to demand.

(You can read the article at max supply and supply structure in cryptocurrencies. Especially if you want a better understanding of the thing)

👉 The distribution and allocation of tokens

Here, we are more interested in the ethical distribution of tokens. Very often it is during an ICO/IDO/IEO that we discover the distribution. This helps us know how decentralized the token and project is. This also tells us the allocation intended for investors. Also, find out if there are crypto whales who will be able to manipulate the market, for example. We can also know if a token is pre-mined or not, etc.

We could also talk about financial incentives as well which can be a good indicator for attracting users.

2/ Technical indicators to estimate technology (and its attraction)

We are not going to ask you to analyze the quality and power of technology like a computer scientist. What we're going to do is more subtle. We will try to see if this technology is practical and if it attracts developers.

This is indeed the success story of a blockchain. It's not so much the power as its ability to attract developers (and therefore users).

A good blockchain that has no users is a dead and useless technology.

Technical indicators are those which make it possible to better estimate the infrastructure as such and the quality of the technology used.. This is valid to carry out a fundamental crypto analysis for a cryptocurrency having its own blockchain, therefore.

Network metrics tell us about the quality of the network and its potential progression in the future. Network data is essential when we want to understand the intensity of the ecosystem in which a crypto evolves.

Here is what to analyze in broad terms.

👉 The number of transactions

The number of transactions is a good measure of the activity taking place on a network. By plotting the number of transactions for specific periods of time (or using the moving averages function), we can see how activity is changing over time.

Note that this measurement should be treated with caution. As with active addresses, we cannot be sure that there is not a single party moving funds between their own wallets to inflate on-chain activity.

With this we can also consider the value of transactions. It is in fact the number of transactions multiplied by the value (indicated in USD for example) of the transactions. This can give us a good estimate not just of volume but precisely of its value.

👉The number of addresses (active)

This is a very important element again because it shows us the number of active addresses and therefore the quality of the network and its popularity in some way.

👉Network fees

What interests us about network fees is that it shows the popularity (and therefore demand) of a network. When the ethereum gas fees explodes, this also indicates that there is a lot of activity on the network.

In fact, the fees increase as in an auction system in fact. It is the one who agrees to pay more who will see their transaction carried out. This can also be a handicap as we have seen on Ethereum. The one who has lost market share to other competitors and the rise of layers 2.

fundamental analysis af — Source: https://etherscan.io/gastracker

👉 Other indicators network specific

For certain blockchains and depending on the consensus mechanisms chosen, we will prefer other indicators. This could be the hash rate for example. The hash rate, for example, indicates the enthusiasm for miners while increasing the difficulty of an attack. The hash rate varies depending on the number of transactions processed, the price of electricity and many other factors.

For Proof-of-stake consensus mechanisms, we will instead focus on indicators such as TVL, the total of locked tokens which indicates the trust granted and the quality of the network members.

We are preparing an article on DeFi indicators.

3/ Financial data of the project

Now, it is good for a fundamental crypto analysis to focus on the financial metrics of the project.

👉 Market capitalization/MarketCap

Obviously, we start with the marketcap. This is the result of equating the price of the token with its circulating supply.

Many novices only look at marketcap, but it alone is not enough. Above all, it can be very misleading. If you create 100 million titled tokens and they trade at 1 euro. So, you would have a Market cap of $100 million. And, tokens that are worth more than they represent (through market manipulation and other things), are commonplace. This is said without bad puns.

However, we always look market capitalization to determine the range and the growth bridge. Some investors prefer to invest in tokens with low market capitalization. The growth can certainly be greater but the risk that the token never evolves is just as great...Others then prefer to invest in the largest market capitalizations. They are more likely to evolve now that they are established…

👉 Volume and liquidity

Liquidity represents the ease of reselling an asset. When the market is not liquid, it is difficult to find buyers. We must therefore wait or lower its price…The volume then shows us the movements of a token.

In fact, this also shows the interest that a token has gained during 24 hours (in general, sites display the volume of the last 24 hours).

Is crypto fundamental analysis enough?

I know this article is rather long. Realize that this is a synthesis of synthesis… There are plenty of other indicators that we haven't mentioned...Carrying out a fundamental analysis can (and should) be personalized depending on the project you are going to study.

Here, we have shown a general fundamental analysis. It may be relevant for the majority of projects (but not all).

So, there is something else to know.

When an investor does a crypto fundamental analysis, he will select specific factors and establish ratios. There are lots and lots of ratios….

There can be as many strategies and ways of doing things as there are investors. Crypto fundamental analysis can be as broad and diverse as the technical analysis used by a trader.

Fundamental crypto analysis can be useful and remains essential for anyone who wants to invest properly and make the right choices.

Only, when the question comes of knowing when to enter, very necessarily, a technical analysis considering indicators like the Stock-to-flow ratio would be welcome.

The contribution of Technical Analysis

For technical analysis, you need some expertise. You don't improvise as a trader overnight. This requires very specific knowledge. Crypto traders nevertheless use tools used in traditional financial markets. Indicators like the RSI or MACD remain relevant. However, this is not enough either.

Traders who use technical analysis believe that prices can be more or less predicted in a market. In absolute terms, they tend to ignore external factors and focus on the chart and prices, chart patterns, patterns and market trends.

What is remarkable about a trader is that he will know when to enter much more than a crypto investor….The investor however is often in the long term and considers growth over a longer period of time.

What you need to remember is that the two types of analyzes are complementary and by combining them, we achieve much more effective results. Even more, you must over time also know what is called market psychology to be even more efficient.

-> Understand market psychology to choose when to invest.

To go further and know how to invest correctly with fundamental analysis

Of course, there is no universal recipe that would give us all the keys to investing properly in the next crypto that will grow x100.

Only, you can build a good, solid crypto portfolio by following fundamental crypto analysis.

However, it takes a lot of time and effort to master all the concepts. It's a new discipline and all the information is distributed everywhere. So, of course, we're lucky that it's free but in reality it can be exhausting and painful to learn this way...

For those who want to learn fundamental crypto analysis, we recommend that you follow dedicated and specific training.

We recommend you Crypto-Exper trainingt from Chantal Lang, a trainer we particularly appreciate on ZoneBitcoin.

You will learn all the essential notions of fundamental and technical analysis to be able to build a profitable crypto portfolio. This is a complete training course suitable for all investor profiles.

Discover the Crypto-Expert training

You can also see the version crypto fundamental analysis on Youtube: