Since cryptocurrency (or "crypto") is so recent, new coins appear all the time, and the value of a coin may fluctuate dramatically. Given the uncertainty, keeping track of what's working and what isn't can be difficult. Cryptocurrency trading is dangerous, but with the aid of crypto fundamental analysis, it becomes less so.
The same reasons that deter certain investors are also what make cryptocurrency so appealing to others. In this fast-paced setting, a small investment could yield a large return in a short period of time. Users will learn a thing or two from the stock market when it comes to determining which assets will be attractive investments and which will not.
There are some main differences between cryptocurrency and the conventional stock market, but there are also several parallels. Fundamental analysis, which is useful for conventional investors, may also be applied to cryptocurrency.
Here's a closer look at fundamental analysis and how it can help crypto investors invest more safely.
Fundamental Analysis
The book "Security Analysis," about investing, was published in 1934, and it was the first time fundamental analysis was mentioned. The authors of this paper argued that before investing in a security, investors should consider all of the market fundamentals surrounding it. Following the Great Depression, it was important for investors not to place too much reliance on a small number of variables.
While the Great Depression has passed, the concept of considering all of a security's variables remains vital. It's easy to get caught up in one promising metric and make an investment decision based on that. Single metrics, on the other hand, can be deceiving, leading overly optimistic investors to invest in something with little long-term promise.
The authors of Security Analysis concentrated on stocks and shares, but fundamental analysis was quickly adopted by investors in other areas. Warren Buffet popularized this term, which is at the heart of value investing. So, what is fundamental analysis, exactly?
Fundamental analysis is based on the notion that the market can initially undervalue or overvalue an asset. However, the market will eventually correct itself and come to represent the security's true value. Investors can better inform their decisions by using fundamental analysis to decide whether something is overvalued or undervalued.
Fundamental analysts advise investors to purchase undervalued stocks and avoid overvalued ones. As a result, investors may avoid risky but appealing options in favor of less common but higher-potential investments.
What role does fundamental analysis play in crypto?
Fundamental analysis is a common tool for stock market investment, but what about cryptocurrency? Although cryptocurrencies aren't actually securities, they behave similarly to them, often even more so than traditional currencies. Since cryptocurrency trading resembles stock trading in several ways, users may apply some of the same principles.
When people first begin investing in cryptocurrency, they can decide to put all of their money into currencies that have seen rapid recent development. Although they can produce impressive short-term results, they may easily revert to their previous state. The current market value or output of a cryptocurrency, like conventional stocks, does not reflect its true value.
The same methods for valuing cryptocurrencies are used in crypto fundamental research. A consumer may use these techniques to decide if a cryptocurrency is overvalued and avoid it. Since the cryptocurrency market is so new, some currencies can be undervalued or overvalued. Thousands of cryptocurrencies exist, and more than 1,000 have already failed. Every day, new currencies are developed. In addition, the cryptocurrency industry is unregulated. Because of all of these factors, crypto market movements can be deceiving and dangerous. Fundamental analysis provides more reliable statistics.
Since cryptocurrency values fluctuate so rapidly, purchasing an undervalued currency may result in significant profits. Investing in an overvalued currency, on the other hand, may be catastrophic. Users can tell the difference between the two using crypto fundamental analysis.
What to think about when analyzing cryptography
Users must consider a variety of factors when doing crypto fundamental analysis. Things like a company's sales, interest rates, and the overall condition of the stock market are examples of conventional assets. Not all of these apply to cryptocurrencies, and there are some special considerations to make.
While the basic analysis principle is the same in both crypto and conventional properties, the nuances are not. Since cryptocurrencies are decentralized, finding a reliable source of knowledge may be difficult. While crypto fundamental analysts do not have a single source of truth to refer to, they may examine the factors that influence value.
Some of these driving factors, such as the number of active users, are fairly obvious. Others, such as global sociopolitical developments, are less evident but can have an effect on the value of a cryptocurrency. To conduct a complete fundamental analysis, users must take into account a large number of these, if not all.
These variables may be quantitative or qualitative in nature. Quantitative elements are those that have to do with hard figures and observable characteristics. Qualitative metrics are usually more ambiguous. They are about the essence or quality of something rather than absolute reality.
The sheer number of factors that influence a cryptocurrency's value can be overwhelming at first. They can be made more approachable and understandable by categorizing them. While not every factor can neatly fit into a subset, the majority will be a financial, project, or blockchain metric.
Financial metrics
The economics of a cryptocurrency are linked to financial metrics. Since all of these are quantitative variables, they are easier to identify and quantify. These are always the first items that investors look for, but it's critical not to stop there.
The market capitalization of a coin is the most obvious financial parameter to look at in crypto fundamental research. The cumulative value of all a crypto's available coins is calculated by multiplying its current price by its circulating supply. Low-cap assets are more likely to expand, but high-cap assets are usually more stable.
Liquidity, or how simple it is to buy and sell an asset, is another critical financial metric to consider. The bid-ask spread is a reliable predictor, but it can be difficult to describe. The difference between the highest bid and the lowest ask is known as the bid-ask spread. Lower spreads typically imply more liquidity.
Many crypto fundamental analysts look at a currency's supply management as well. Some cryptos, such as Bitcoin, have a finite supply and gradually reduce the amount generated at once. These restrictions may appeal to some because they reduce inflation, but they may make the currency less attractive to new adopters.
Since some of these variables are subjective, no single metric can accurately predict a cryptocurrency's value. To stop any misinformation, crypto fundamental research looks at all of them together.
Project metrics
Financial metrics are similar to standard stock market indices, but project variables are not. These metrics focus on the growth of cryptocurrency, examining how it operates and how it came to be. While the majority of these variables are qualitative rather than quantitative, they are not always difficult to locate or quantify.
The whitepaper of a cryptocurrency is the most important project metric to consider. Whitepapers are documents written by the creators of a cryptocurrency that describe the project in detail, from its intent to its technology to its objectives. In general, investors are looking for a thorough, insightful whitepaper that isn't overly optimistic, misleading, or impractical.
Another useful project measure is the developer or team behind a cryptocurrency. Although some currencies' developers are unknown, others are well-known and have a long history. The track record of a developer or team will show whether they're reliable or have had previous success with similar technologies.
Many crypto fundamental analysts examine a token's competitors as well. The aim and goals of most assets are described in their whitepapers, which can show which other tokens it will likely compete with. Competition does not deter investors in and of itself, but if other ventures are more valuable, a currency will not last long.
Cryptocurrencies can begin in a variety of ways, and these beginnings provide investors with information about any possible risks. It could be a risky investment if the founders and early investors held the majority of the supply. Early control by a small group of people can enable them to manipulate the market later.
Blockchain metrics
All crypto transactions take place on a blockchain, which can be a valuable source of data. It may disclose information about an asset's operation, as well as the technologies and processes that underpin it. On-chain metrics can seem difficult to locate at first, but many providers and websites track down and publish this data for investors.
The hash rate is an important blockchain element to consider because it indicates the protection of an asset. A hash rate is a measurement of how quickly a user can mine a block on the blockchain. If this number is higher, miners have a greater chance of receiving a block reward, and good hacking is more difficult.
A hash rate can teach investors more than just about security. Miners' disinterest is reflected in a decreasing hash rate, which represents not only declining protection but also increasing disinterest. It could mean a lack of viability if users are no longer involved in mining a cryptocurrency.
The transaction count of a token may indicate how much activity is taking place on a blockchain. This aspect may also show fluctuations in transaction volume over time, indicating growth or lack thereof. However, there is no way of knowing how many parties are interested in this activity, which may be misleading.
Transaction value, which is how much value has passed on a blockchain in a given timeframe, is a similar but distinct metric. Investors can calculate this in their own currency or in a fiat currency equivalent. This can be deceptive as well, but it can aid in determining how much a cryptocurrency's value can fluctuate.
Another useful blockchain measure for crypto fundamental research is fees charged. Users' fees reflect demand, as higher fees mean that they are bidding for their transactions to be confirmed earlier. This isn't true for all cryptocurrencies, but it's especially beneficial for those with declining block rewards, such as Bitcoin.
Considerations for the cryptographic analysis
Of course, these aren't the only considerations for crypto fundamental analysis. Some metrics, such as sociopolitical conditions, do not fit into these categories. Users can become wary as a result of political or important social movements, resulting in lower operation and demand.
Since supply and demand are more influential in a currency's value than in fiat currency, user activities are critical. These are perhaps some of the most difficult to evaluate. External events can affect users' behavior in a variety of ways, but that doesn't mean investors can't understand it.
Crypto investing isn’t a gamble
Fundamental analysis of cryptocurrencies may assist investors in identifying false market prices and determining the true value of a currency. Users can gain interest in an otherwise unpredictable market by taking the time to consider and analyze these metrics. Investing in crypto doesn't have to be a gamble with methods like hourly asset analysis and fundamental analysis techniques.
New investors can be intimidated by cryptocurrency, but with cautious and thoughtful investment, it can be extremely profitable. Following these measures and using available resources will provide someone with the trust they require to invest in cryptocurrency.
