Trading and investing in cryptocurrency can be stressful due to the crypto’s notorious volatility. Even Bitcoin and Ethereum, the most established and well-known cryptocurrencies, which have a total crypto Market share of 60%, can experience significant price fluctuations, not to mention the new altcoins that bear even more risks of high volatility.
If you are planning to invest in a cryptocurrency, then you must take into consideration the coin’s future prospects and viability. That is when fundamental Analysis comes in handy. But what comprises fundamental analysis and how do you do it with crypto? Let’s find out!

The roots of Fundamental Analysis

Let’s start from the root and talk about what fundamental analysis in the traditional assets market is.

Fundamental Analysis owes its birth to “Security analysis”, a must-read book for any investor, which was written by Columbia Business School professors Benjamin Graham and David Dodd and published in 1934.
The book came out shortly after the beginning of the Great Depression and the Wall Street Crash, so it was seen as a guide for the investors of that time who needed a new manual on how to invest smart, not hard.
In their work, Graham and Dodd persuade investors to rely not only on quantitative factors (e.g. price, reported earnings per share, number of holders, etc.), but also to estimate the operating business value that lies behind the security as well as to avoid speculative investments.

The main hypothesis of fundamental analysis is that the present stock market price typically does not accurately reflect the company’s value as supported by publicly available information. A second hypothesis is that the value derived from the business’s financial data is more likely to reflect the stock’s genuine value.

As you might’ve guessed, the fundamental analysis method was originally used in stock and bond markets to find out the intrinsic value of a specific stock or bond. To do that, it is crucial to study and analyze the external, internal, as well as both qualitative and quantitative data of a particular business or company (that is, the issuer of a stock or bond). In the end, an investor should be able to find out the “correct” market value. The market can, and quite often does, price a security incorrectly, but over time, this same market will correct this price and show the real value of an asset.

When an investor finds a security’s intrinsic value, he or she can determine if it is undervalued, overvalued, or fairly priced. This kind of information is crucial when deciding whether you should buy, hold, or sell an asset. That is, selling a security when it is overvalued or buying it when it is still undervalued can potentially lead to your financial prosperity. So what kind of data does an investor need to study?

Quantitative data

Quantitative data refers to any kind of data that includes numbers, and not only revenue or income, but also a company’s market share, its debt, and so on. All these hard numbers measure a company’s characteristics and they can also give you an insight on a company’s economic health. So what exactly should an investor look at when deciding to put money on the line?

• Company’s financial statements
• Profit margins
• Company’s revenue and earnings
• Historical data of previous financial performance
• Company’s debt
• Rate of turnover
• Number of company’s trade agreements

Qualitative data

Qualitative data is as important as quantitative one, since with that you can see a full picture of a company’s strengths and weaknesses. This kind of data can refer to management decisions, its operating environment, brand recognition and positive/negative media coverage. Let’s take a look at some of the examples of qualitative data an investor should take into account:

• Company’s governance 
• Press and news releases
• Company’s internal and external politics
• Reputation on the market
• Company’s business model
• Company’s brand management
• Overall economic health of the sector the company participates in

All this data, which is usually publically available, allows an investor to create a method of estimating and calculating a security’s intrinsic value. However, fundamental analysis is in no way limited to stocks and bonds, since it can also be applied to the cryptocurrency market.

Fundamental analysis in crypto. How is it different?

The crypto market is still very young and underdeveloped compared to the stock market.
One of the major differences between stocks and bonds is that in the traditional market, pretty much only established companies issue their stocks in IPOs, and the whole IPO process requires a lot of procedures, audits, and support, so to speak. You can study the financial statements of publicly traded companies as they have to provide these reports, and thus also see their previous history of financial success (or failures) to make a decision if it’s worth it or not.

In the crypto world, it is commonplace to issue a coin or token and list them on crypto exchanges (but yes, to be fair, we should say that serious centralized exchanges are now also doing their due diligence before listing the coin) when the project is still in its early stages of life. Thus, in many ways, you are investing in the future potential and possible success of a project that, in many cases, does not have a lot of market traction just yet.

Besides, studying financial reports and statements is a luxury in the crypto world since this kind of practice is relatively rare, unlike in the traditional market with stocks and bonds.

As for reputation, that also might be an issue to consider, since the crypto space is still going through development and it is far from being settled. In this sense, a lot of crypto projects appear from developer teams without prior experience in crypto, and thus their reputation in crypto is yet to be built. But you should still definitely look at the background of the people behind the project. When looking at the founding and management teams, you should see if they have built other projects before (success or failure, both matter as it is more important that they have had experience creating and running a business before), and the developers team should have the necessary development skills and, ideally, experience with blockchain.

Another thing to be aware of is that some crypto projects’ teams prefer to keep their privacy and never reveal their true names. It might be risky to invest into the project when you don’t know who is behind it, however, if you are willing to take that risk, in some cases it can pay off really well in the future. For instance, Shiba Inu’s team is completely anonymous, and apart from some of their nicknames (Ryoshi, the creator and Shytoshi, the dev/community manager) we know nothing about them. However, that didn’t stop Shiba Inu from conquering the crypto market, and it is now in the Top 15 cryptocurrencies by market capitalization.

Nevertheless, the idea stays the same: investors should be able to look through the projects and be able to find out their intrinsic value, as well as reduce the overall risk of not getting into speculative projects. The only issue is that you need to look at different factors and available data, and you have to look at them from a slightly different angle.
Specifically, the three main categories of crypto fundamental analysis metrics you should take into consideration are on-chain metrics, project metrics, and financial metrics. Let’s take a closer look at them down below.

On-chain metrics

On-chain metrics speak for themselves: this is the data provided by blockchain. However, retrieving this data manually might be exhausting, and that is where different application programming interfaces (APIs) can come in handy, by providing an investor a wide range of tools for retrieving this information. For instance, CoinMarketCap or Binance Research can get you covered and provide all the needed data, such as active addresses, number of holders, transaction fees and more. So what kind of data should an investor look at first? 

Hash rate

Hash rate refers to the overall computational power utilized to execute transactions on a proof-of-work (PoW) cryptocurrency network (e.g. Bitcoin or Ethereum). Investors view it as confirmation of the network’s viability.
The higher the hash rate, the more miners will be motivated to mine currency for profit, and the higher the network’s security will be. Miners can also calculate a personal hash rate to measure their own profitability.
Miners may find the cryptocurrency unprofitable if the hash rate begins to decline, resulting in miner’s exodus. Declining hash rate also signals about investors’ losing their interest in a cryptocurrency.

Active addresses

The name speaks for itself: it is the number of active blockchain addresses in a given period of time. To calculate it, you should count the total number of sending and receiving addresses over a set time period, like days, weeks, etc. When you do that, you’ll be able to see whether the number of active addresses is declining or growing, and thus tell if the interest in a given coin is withering or rising.   

Fees and Transaction Value

Transaction value is used when measuring currency’s circulation: it shows us how much value has been transacted within a given period of time. For example, if we see that a total of twenty Bitcoin transactions each worth of $1000 were sent during a day, then the daily transaction value is equal to $20,000. When we see a consistently increasing dynamic of transaction value, that means a cryptocurrency is in steady circulation. This data can reveal the potential future market movements: that is, if the transaction value decreases, then it indicates a potential bear trend, and vice versa.
Fees, on the other hand, show the demand for block space and how much you have to pay to make your transaction go as fast as possible. That is, the more fees you pay, the faster your transaction will be confirmed.
The fees can grow over time, depending on the conjunction a blockchain is experiencing at the moment. Perhaps a most vivid example would be Ethereum “gas” prices, which sometimes can go ridiculously high.   

Project Metrics

While on-chain metrics are used when conducting quantitative research of a cryptocurrency, project metrics, in turn, take a qualitative approach. They include whitepaper study, the dev team and their previous projects (if there were any), tokenomics, utility and so on. Let’s take a look at the most important  factors an investor should study when deciding whether a project is worth it or not.  

The Whitepaper

Almost every more or less reliable and long-term project has a whitepaper – a technical document that describes operation, technology, utility, and tokenomics of the project. When reading through a whitepaper, you should pay attention to the presence of the following paragraphs:

• The technology it uses
• Use cases and utility
• Tokenomics 
• Future upgrades
• Information about the team 

It is not critical if some of the information is missing, since a whitepaper can be a subject of constant development and improvements. However, after reading a whitepaper you should have a clear vision of what the project is aiming to and whether it is worth investing in.
If the whitepaper is sloppy written, or if it misses most of the crucial information, then this should be a red flag for you, and further investigation from third-party resources is needed. 

Roadmap

Just like a whitepaper, a roadmap is needed to understand the upcoming plans and goals of the project. A good roadmap should give you a clear vision of a project’s future.
It is also important to see how ambitious the team’s plans are. If the roadmap promises are too good to be true, then you should take them with a grain of salt. On the contrary, if the future developments won’t bring much to the project, then you’d probably want to reconsider investing in the project or holding it for a long time.

Utility and Tokenomics

Price is driven by supply and demand, and the higher the demand, the higher the price. This very basic, yet important economic rule should be applied to any crypto project that is willing to thrive in the crypto space.
Tokenomics refers to the economy that is based around the project. Look at how a token is used within the ecosystem and try to answer the following question: will the tokenomics motivate people to buy, hold, sell for profit and then buy the dip later? 

The utility, on the other hand, can also help in driving the demand in the future. A project with a realistic use case has much more chances to be successful, as well as attract more investors and thus grow in price.

Community and social presence

A project can hardly reach financial success without proper social presence and loyal community. It is important to study social accounts of a given project and see for yourself how they are managed: do the team answer all the questions in a clear and friendly manner? What kind of audience are they targeting? What do people have to say about the project?
In case the community does not engage much and do not show any kind of commitment, then it should be seen as a red flag for the project. 

Competition

Researching the competitors can be helpful in determining the potential effectiveness and success of a chosen project. After all, healthy competition is needed to separate losers from winners, so studying the landscape in which your selected project is going to compete with others might tell you if it is capable of standing its ground or not.
If there are a lot of similar projects, then your selected project might face heavy competition. And in case the competitors have much more advanced technology and/or tokenomics, then how is your selected project going to gain attention? Will it survive in the long run?
After evaluating competitors you should be able to tell if your project has any uniquenesses and strong points. In case it doesn’t, then the chances of success are slim to none.

Financial metrics

The financial metrics can provide you an economics’ perspective of a given project. Just like with on-chain metrics, financial metrics involve quantitative approach, and based solely on hard numbers. Market capitalization, trading volume and circulating supply are all equally important when conducting a fundamental analysis in crypto.

Market Capitalization

Market capitalization reflects a coin’s network value. You can calculate it by multiplying the current price with the circulating supply of coins.
When looking at market capitalization, some investors might think projects with lower cap definitely have a huge potential for growth, whilst those coins with already large market cap do not have lots of room to grow any further, thus can be less profitable. That can be a misleading assumption when judging a coin’s economic health only by market cap alone, since liquidity and trading volume also play a huge role here. 

First of all, you can never know how many coins there are in real circulation: that means we would need to exclude burned coins, coins that are stored on lost wallets and so one, and that would be impossible to know for sure.
Secondly, it’s not difficult to issue a useless coin with no developed tokenomics or use cases with a total supply of 1 billion. And in case the coin had a few transactions exchanged at $10, then the market cap would in theory be equal to 10 billion dollars, which is not possible. So this kind of valuation should be applied together with liquidity and trading volume.

Liquidity  

Liquidity refers to the measurement of how easily a coin can be bought or sold. In case if a crypto asset can be bought and sold without an impact on its trading price, then we can say that an asset’s liquidity is strong. A market with high liquidity will have tight bid-ask spreads, allowing you to sell a coin at the current market price. On the other hand, in an illiquid market it is impossible to sell an asset, at least at a current price, since no one is willing to make such a deal. In that case, an investor either has to lower the price or wait when the liquidity will increase.  

Circulating supply

Circulating supply is the total number of coins/tokens that are active and which are accessible to the public supply. It shouldn’t be confused with the total supply, which is static and does not change at all, whilst circulating coins and tokens can be burned, mined, or increased in numbers by the development team.
Decreasing the number of circulating supplies may increase the price of an asset. That is followed by basic economics: the more scarce the product is, the higher value it has. This could also spark investors’ interest, especially those who believe that demand for a specific coin or token can outstrip its supply. 

Fundamental analysis vs. Technical analysis. What is the difference?

Apart from fundamental analysis, there is also technical analysis, another method of analyzing a security’s value. This kind of analysis is mostly used for trading, and it is worth mentioning the crucial details of it so you can get the whole picture and prevent confusion.

While fundamental analysis is used to make a thorough study of a whole range of factors and indicators to understand a coin, token, or stock/bond’s true value, technical analysis focuses on numbers and looks solely at internal market data, such as price movement, trade volume, and the asset’s previous market performance.
Fundamental analysis is about drawing a bigger picture, and technical analysis tends to ignore all the info and specifics that cannot be put in the form of a chart, graph, or numbers. In other words, technical analysis enthusiasts look at websites like TradingView, CoinGecko, Nomics, and so forth, rather than reading whitepapers or studying the community’s spirit on social media.

So the focus of technical analysis is more on finding trends and patterns so traders can capitalize on them. Proponents of this type of analysis believe that price movements alone can reveal information about public sentiment toward a specific coin as well as overall market sentiment.

Despite the fact that fundamental and technical analysis are different, experienced traders often choose to combine the two techniques because each has its own set of advantages and disadvantages.

TradeSanta’s crypto trading bots can be very helpful in your crypto trading routine regardless of your preferences in analysis.

Final thoughts     

It takes a lot of time and patience to conduct a professional fundamental examination of a crypto project or coin. Fundamental analysis, like any other investment strategy or technique, is not always successful, but no analysis or strategy can promise you an absolute guarantee of financial profit.

However, those investors who conduct thorough research and perform fundamental analysis and/or technical analysis have much better chances of being successful in the crypto world. Information and research can help to reduce the risk of investing, so you should always be prepared before you make any investment or trading decisions.