Cryptocurrency is only a decade-old asset class. Given its young and dynamic outlook, a lot of individuals argue that cryptocurrencies do not have any fundamental value. This is primarily coming from the fact that they are not backed by any underlying physical entity. However, that is barely the truth. This new age asset class can be evaluated on fundamental grounds just like any traditional asset. And we’d like to start with a kudos! It is glad to see someone digging into the realm with an open mind.
To reward you, we will give you exactly what you want. Crypto fundamental analysis, like a boss! Fundamentally analyzing any asset is no less than an art. Therefore, it takes experience to hone your skill to master it and come up with the closest possible underlying value of an asset. However, we can get you started on that journey like no other could. So buckle up and read on!
What Is Crypto Fundamental Analysis?
Fundamental analysis is a method used by investors to determine an asset’s underlying intrinsic ‘value’. Please remember that this value does not imply this asset’s current market price’. Price is derived by supply and demand at a given point. However, value is accrued (or lost) over a period of time, depending on the core of the business. Comparing the price with the value, one can deduce if the asset is overvalued or undervalued.
Now, the stock market bulls would ask how we can apply traditional metrics like price-to-earnings ratio, book value, and earnings per share in crypto. Well, we do not do that here.
Crypto fundamental analysis involves using parameters like on-chain activity, demand and utility, liquidity, etc. If this is going over your head, do not worry, we will cover this in detail shortly. For now, let us jump on to the need for fundamental analysis.
What Does Fundamental Analysis Have to Do With Crypto?
Fundamental analysis forms the backbone of all investments. Even a short-term technical analyst would try to get into some basics of fundamental analysis before aping into any crypto or stock. Venture capitalists also use fundamental analysis to gauge various opportunities. In short, it is the base of every investing activity.
Fundamental analysis becomes more relevant for cryptos because the assets here are purely run on algorithms. You can evaluate a stock by assessing the physical product, but you may not have that option for crypto.
Another reason to apply fundamental analysis here could be that the price of Bitcoin does NOT depend on the revenue/cash flow generated. Instead, it depends on macro factors like economic conditions.
The icing on the cake is that each cryptocurrency is different from the other. Therefore, a prudent investor must deploy individual lenses while analyzing cryptos.
What Is the Difference Between Crypto Fundamental Analysis and Technical Analysis?
Technical analysis uses patterns in market data to identify trends and make predictions. Traders usually rely on technical analysis to invest and make money in a shorter duration.
On the other hand, fundamental analysis is often done from a long-term perspective. It relies on deriving the underlying value of an asset to decide if it is overvalued or not.
Technical analysis in crypto often uses the same indicators as in commodities, stocks, etc. On the flip side, fundamental analysis has quite different metrics than legacy finance markets.
Advantages and Disadvantages of Crypto Fundamental Analysis?
And just like you’d do with any other asset class, take your fundamental analysis with a pinch of salt. Having a holistic picture of everything in a project is very difficult. Therefore, let us evaluate some of the upsides and the downsides of crypto fundamental analysis:
Let us start with the advantages of fundamental analysis:
1. Noise vs value
The world of crypto is constantly amped up with hype. Every new project attempts to create ripples in the market. With so much ‘in your face’ glamor, it is tough to separate noise from the actual value from a surface level. Therefore, fundamental analysis can come in really handy in such situations.
2. Big picture
Fundamental analysis helps us see the big picture instead of short-term swings. For eg., Bitcoin moved from $20K to nearly $70K and back to $20K in 15 odd months. If someone were to time the market, they would have terribly failed. On the other hand, one who believes in the fundamentals of Bitcoin would still stick around.
Also, it prevents your brain from getting trapped in Panic or FOMO.
Here are some drawbacks of fundamental analysis:
1. Learning curve
As mentioned earlier, there is a steep learning curve before you can start making accurate predictions for a crypto. Also, your hypothesis would not be tested until you actually hit the medium/long-term time frame. Therefore, it is prudent to practice as much as possible.
2. Black swan events
Even if you master the art of fundamental analysis, there will be some cryptos that will slip through your radar. For e.g. Terra ecosystem was sound on all metrics. However, it crashed due to someone exploiting the loophole.
Such unprecedented events with catastrophic outcomes are called black swan events. Fundamental analysis would not safeguard you against them.
How to Do Fundamental Analysis in Crypto?
The moment (or should I say section) all of you have been waiting for. Let us dive deeper into the ‘how’ aspect of fundamental analysis in crypto.
There are several factors to look at while analyzing a cryptocurrency.
1. TAM and competition
TAM stands for ‘total addressable market’. It is the size of the population a project caters to. This is an important metric to gauge the need for the product. Products need to strike a sweet spot when it comes to TAM. A large market size means room for more players to exist. A very small market size means lesser demand for the product.
Similarly, competitor analysis is very important. How many competitors are there in the market? How is one project different from the other? Is it hard to replicate their offering?
Teams can make or break a project. Like literally. A great way to gauge this is to find out the history of the core members. For example, Alex Mashinsky, founder of the bankrupt protocol Celsius, has never actively worked in crypto. On the other hand, founders of some very successful blockchains like Cardano, Solana, and Polkadot have people from Ethereum in their teams.
3. Roadmap and adherence
Upcoming plans for a project define the future conviction of an investor. It is important to find out what the team is up to in the near and long-term future.
Similarly, check if the previous milestones have been hit on time. This gives a fair idea of the execution capabilities of the project.
4. Partnerships and advisory board
Partnerships and the advisory board give a fair idea of associations of the project with some of the established names in the industry. These associations are reassuring for the investor.
5. Community and reviews
Community is the core of web3. Therefore, one must check all social media platforms for the activity and comments regarding the project.
6. Problems being solved
A lot of crypto projects exist for the sake of it. Therefore, it is even more important to determine the relevance of the problem they intend to solve. If there isn’t any real-world problem being targeted, it is better to stay away.
What Are the Key Indicators of Fundamental Analysis in crypto?
An indicator combines various metrics into one to give a quick overview of the fundamentals of any asset. For example, P/E ratio is a ratio of price to earnings of a stock. Instead of referring to these metrics individually, one can check P/E directly. Similarly, let us check out some crypto indicators:
1. Network value to transactions ratio (NVT)
NVT is a crypto market equivalent of the P/E ratio. It is derived by dividing market capitalization by the daily transaction volume of crypto. Based on the premise that higher volume means greater usage and hence the greater value of a network. NVT tells us if a project is undervalued or not when comparing it with other projects.
If NVT is trending upwards, the market cap is growing faster than the actual volumes. This signifies a bubble situation.
2. Market value to realized value ratio (MVRV)
Market value or market cap is defined by multiplying coins in circulation with the current price. However, realized value considers the coins in inaccessible wallets from this calculation. This is collected by considering the price of an asset when it was last moved. For eg., the price of any Bitcoin in a lost wallet before 2016 is considered to be $400 rather than the current $20,000 (because when it was last moved, the price was $400).
MVRV is simply the ratio of these two metrics. As an industry standard, a ratio over 3.7 suggests a sell-off may occur as traders take their profits due to the coin’s overvaluation.
Don’t worry, you don’t have to manually calculate this data; it’s readily available on Glassnode.
What Are Some Good Fundamental Analysis Tools?
Did you think that we’ll leave you hanging with so many metrics? All to be calculated manually? Of course not! Here are some tools that can be really handy for fundamental analysis.
If you are not an active researcher and want a quick overview of the coins, Baserank is a perfect tool. This tool scores the cryptos on a scale of 0 to 100 based on reviews from analysts and investors.
These ratings are crowdsourced from industry experts, rating agencies, experienced investors, and independent analysts.
As per Baserank, crypto assets that score less than 30 come under the ‘very risky category’, assets with a rating of >70 are the least risky, and the ones between 30-69 come under the moderate risk category.
2. Glassnode studio
This subscription-based tool is perfect for evaluating on-chain data for cryptos. The free version works absolutely fine for amateurs. So if you are a newbie, get your hands dirty using Glassnode studio. This tool is known for showing a vast number of metrics for a project.
The studio contains metrics for addresses, derivatives, entities, exchanges, miners, OTC desks, profit and loss ratios, etc., with more detailed examples when you click on them.
You can use these metrics to know the details, like the number of users of a crypto/ecosystem. Greater, the better. Similarly, the more the number of exchange listings a crypto has, the greater its popularity. The number of miners gives you a fair idea of the decentralization of a crypto.
3. Crypto fees
If simplicity had a cousin, it would be this tool. It just gets the job done. Well, no surprises here, it tracks the gas fees earned by a network over a period of time. This helps you gauge the revenue, usage pattern and traffic.
However, you cannot use this tool to compare one blockchain to another. For example, if you would try to compare Ethereum with Solana, the latter would always win as it charges a fraction of a dollar for a transaction.
We hope this adds value to your crypto fundamental analysis journey. As we mentioned in the beginning, it is indeed an art. So treat it like one! May your coins always go to the moon! And always remember, if researching individual heroes of the cryptocurrency market gets difficult for you, there is always Crypto Blue Chip Coin Set you can invest in! It puts your money in some of the top cryptocurrencies of the crypto market that are also likely to be fundamentally strong.
1. What are the fundamentals of cryptocurrency?
Fundamentals of cryptocurrency are metrics that help us gauge the intrinsic value of a project. These metrics can be the purpose of the currency, development stages, future prospects, sustainability, etc. They help investors understand the project in a better manner and make smart investments.
2. Which crypto is fundamentally strong?
A fundamentally strong cryptocurrency is one with solid real-world use cases, future prospects, a great team, and a community. Today, coins like Bitcoin, Ethereum, and USDT, which are highly adopted and have real-world applications, are said to be fundamentally strong.
3. Does crypto have any fundamental value?
Yes, cryptos do have fundamental value based on their use case. This value can be derived using tools like Glassnode studio and Baserank.
4. How do you do a fundamental analysis of a cryptocurrency?
Research, Research, and Research! You can start by reading the project’s whitepaper and move to numbers to analyze the currency based on transaction speed/rate, hash rate, gas fees, active addresses, etc. You can also look at metrics like NVT and MVRV
5. How do you explain technical analysis vs fundamental analysis in crypto?
Technical analysis in crypto is similar to the legacy markets like stocks and commodities. However, fundamental analysis is done differently, using a mix of techniques and tools like Glassnode studio, Baserank, etc., to calculate NVT, MVRV, etc.