Fundamental Analysis for Dummies

This post is a dummies guide for anyone trying to get their heads around Fundamental Analysis in Crypto

The cryptocurrency market is perhaps more widely known than ever before. While more and more people are looking to take their first steps into the market, shilling is perhaps more abundant than ever before, especially on social media sites such as Twitter and Reddit, making it difficult for new investors to know who to trust, and where to put their money.

Shilling, particularly on crypto twitter, often causes investors to believe hype around a certain product, and consequently fall victim to losing their investments by making bad decisions for fear of missing out on what is presented as a great opportunity. To make sure you have the best chance of being successful in the crypto market, it is essential that you have a basic understanding of Fundamental Analysis (FA), as well as the all-important Technical Analysis (TA), especially in a bull market and altseason. Let's take a dummies guide into FA.

What is Fundamental Analysis?

Fundamental Analysis (FA) is a term that encompasses a variety of variables that, when analysed in combination, can usually give a prospective investor a decent idea of whether a project presents a profitable opportunity, or if it is less likely to give a good return on investment (ROI). Some factors that would come under the umbrella term of FA include the intrinsic value of the project, the value of the token associated with the project and whether it is easily influenced by market capitalization, and what the internal/external factors are that might influence the valuation of the token. Metrics to be aware of include on-chain metrics, project metrics and finance metrics.

Now let's go a little deeper in to this dummies guide.

On-chain metrics: On-chain metrics is a term that describes a range of metrics used to evaluate the current state of a blockchain technology, such as transaction count and value, active addresses and staking. Individually, these metrics can be very misleading. For example, a large transaction count could be achieved by the same person moving currency to and from accounts belonging to them. However, when assessed in combination, on-chain metrics can provide a solid foundation on which to build your analysis of a project.

Project metrics: Project metrics can be far more subjective than on-chain metrics but are no less informative. They describe details of the project such as the technology involved, the aims of the project, the roadmap, and the supply and distribution of the coins or tokens the project will use. Good starting places for this kind of information include the project’s whitepaper, GitHub contributions by the developers, and personal social media accounts of the team members to assess their reputation, their area of expertise, and their historical success in the market.

What other factors should I consider?

There are a few more factors we need to look at in this dummies guide to FA. There are a further three elements of a project that you should take into consideration when doing your own research into a project: tokenomics, the market cap, and liquidity.

Tokenomics: When it comes to the token a project is using, there are several elements to consider. What is the purpose of the coin/token associated with the project? Does the token have any real use, and if so, will it be useful for larger opportunities? Also, how is the token valued, and how will it be distributed? A token system that allows for just a handful of people to dominate ownership may be a higher-risk investment because they will be able to manipulate the market more easily than a token system within which many people own tokens. Additionally, how will the tokens be distributed - will the creators and the team take a cut before it is offered to the public for example? Where early coins were usually mined, newer projects are distributing them during ICOs, IEOs, and more recently IDOs.

Market Capitalization: It is always a good idea to consider how a project’s market cap has been calculated too. There is often some exaggeration that can be explained by manipulation of certain metrics, but which in reality presents a poor reflection of the project’s actual potential value. This is often done by considering only the total supply of coins rather than the estimated circulating supply. The total supply is equal to the maximum amount of coins/tokens in existence, whereas the circulating supply is an estimation of the current amount of coins/tokens available to the public i.e. not including burned coins or long-forgotten about funds. Whilst a low market cap may be an exciting project if it could give a huge ROI, if more coins/tokens are released into the circulating supply the value could decrease, making this an important factor to consider when evaluating a potential investment.

Liquidity: Liquidity is another important factor to consider, and understanding it is often a simple but effective way you can determine the risk level of a project, making it an important tool you can use in your FA. The term liquidity refers to the ease with which one can buy a coin/token on an exchange or Decentralised Exchanges (DEX). Reputable projects would have liquidity, meaning buyers and sellers can transact without any issues, however with some projects you may find that it is very difficult to sell or even buy due to illiquidity. Additionally, volume is another key factor that can influence liquidity, and analysing daily volume over a period of time is a tool that can be used to indicate the level of a coin/token's liquidity and can therefore indicate whether a project is generating actual interest.

The most important lesson to take away from this dummies guide to FA is Doing Your Own Research (DYOR). Doing your own research into projects before you invest your hard-earned money is vital to minimise the risk of making a poor investment. As outlined above, understanding what FA is and how you can apply it is a great step in the right direction towards making sound investment choices in the crypto market.

If you've got your head around the dummies guide to FA about, listen to the two part Crypto Unplugged podcast special where Doc and Oz discuss Fundamental Analysis in more detail.