Fundamental Analysis: How to Judge a Cryptocurrency’s Intrinsic Value
Up until now speculating the future price of a cryptocurrency has taken a lot of guesswork. Not many people have experience in predicting the economic growth of emerging currencies. There is no other industry whose historical data directly correlates to the cryptocurrency market’s movements. There is no financial metrics like profit and revenue on which to base judgments. Therefore, we must design a new fundamentals methodology based on predictive logic.
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Why Cryptocurrencies Are Superior
Fiat money was first invented in China, thousands of years ago, but only became the dominant international method of trade in the 20th century.
It took thousands of years for fiat to catch on, in comparison cryptocurrencies are making great progress.
Where fiat is intrinsically worthless, cryptocurrencies provide a level of functionality that has never been seen before. Smart contracts can be coded into cryptocurrencies which trigger commands that automate transactions or alter their state.
Smart contracts are very flexible because data can represent many things such as people, products, assets, and specific attributes of all those things.
The programming of a smart contract is only limited by the language of the code and what the data is used to represent.
The potential use cases are limitless and are currently only restricted by the imagination.
More and more developers are stepping beyond their flamboyant dreams, and scaling back expectations to deliver practical solutions that drive real adoption.
The Dangers Ahead
2017 was no doubt a fantastic year for cryptocurrencies; we saw Bitcoin’s market cap rise from $13 billion to $250 billion. We saw the entire cryptocurrency market grow from $16 billion to $600 billion. Needless to say, a lot of people made money.
Surprisingly, many people lost money too.
A study conducted by Bitcoin.com of ICOs held in 2017, found that nearly half of the projects have already died. Of the 902 ICOs that ran, 142 failed before funding was complete, another 276 failed afterwards.
What’s worse is that there are plenty more post-ICO coins in circulation that don’t have practical economic growth strategies and whose development teams are failing to live up to promises made.
Despite warnings by prominent blockchain figureheads that 90% of all cryptocurrencies will fail and we should invest with more caution, we still see the wrong projects receive immense funding.
This careless enthusiasm is cause for concern because it’s a clear sign that most investors and developers believe they can capitalise on the growing hype surrounding cryptocurrencies, without needing to prove utility, adoption and economic demand to match their market valuation.
In essence, they don’t care about the cryptocurrency movements’ original goal to develop solutions to improve society. They just want to make a quick buck.
It is widely believed that once reality sets in, there will be a mass movement of investment from cryptocurrencies with low intrinsic value to those that display strong fundamentals. We are dedicated to finding the latter.
Reminder: cryptocurrencies are still a new and hyper-volatile asset class, and could drop to near-zero at any time. Don’t put in more money than you can afford to lose. If you’re trying to figure out where to store your life savings, traditional assets are still your safest bet.
Fundamental analysis is a method of evaluating an asset in an attempt to measure its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors.
It is imperative that everyone in the crypto community have realistic expectations, strategies and goals for the long-term adoption of cryptocurrencies.
Investors need to demand stricter fiduciary prerequisites to be met in exchange for their investment.
In response, to gain funding, projects will conform to the requirements set by the market, so if the market demands cryptocurrencies to utilise economical models that are conducive to success, the entire community will benefit.
There are four fundamental values which should define the market price of a cryptocurrency
There needs to be a useful purpose for the coin. A functional intrinsic value. If there’s no real reason for users to buy it, the market price will fall as soon as investors lose interest. This is what causes the markets current volatility and talks of a cryptocurrency bubble.
Here are some questions to ask when judging a coins utility potential.
- Is there a real-world problem that the company is trying to solve?
- Will their proposed solution drastically improve the way things are currently done?
- Will the currency attached to this project provide functionality which only a cryptocurrency can deliver?
- Is there a tangible benefit to using a cryptocurrency for this solution as opposed to a cheaper, faster, easier to create non-blockchain technology?
- Does the company have any pre-existing businesses, apps or products that you can review and, if so, are they any good?
If a coin is useful, but only one person needs it, the demand will be too low, and its price will fall to zero. There needs to be a significant market for the currency to flow through, to create enough volume to drive demand, or at the very least allow it to remain stable.
Here are some questions to ask when judging a coins market potential.
- Are there enough potential users of this service to fuel stable demand for its currency?
- Is this company well positioned in its selected industry?
- Is it a growing industry?
- Is this company the one most likely, amongst its competitors, to succeed at creating a blockchain solution for the problem they’ve identified?
- Are you satisfied that there are no foreseeable changes to society or technology that will alter the need for the company’s proposed solution?
Having an idea that can change the lives of 6 billion people doesn’t matter if it’s never finished, or if it’s finished and never heard used. Adoption strategy is the connector between ideas and results. It’s the bridge between dreams and reality.
Here are some questions to ask when judging a coins adoption potential.
- Does the company’s roadmap outline a sound strategy towards gaining users?
- Does the company have a sound marketing strategy?
- Is the company currently on track with their roadmap?
- Do they have a good track record of achieving their milestones on time?
- Based on their experience, do the team demonstrate the ability to achieve their roadmap and market their project?
Room to Grow
At the moment, if a coin goes up or down, it’s purely because of financial investment. Financial investment helps projects develop a functionally beneficial service, it gives them the resources to capture their target market, and it fuels their adoption. But if the first three factors aren’t in place, no amount of financial investment can make a project successful in the long-run.
Here are some questions to ask when judging a coins room to grow.
- Is the currency undervalued? Is its market cap low? Is its trading volume low? Is there room to grow?
- Are the milestones listed on their roadmap newsworthy? Will their successful completion create hype and demand?
- If the company was to solve its selected problem, would the solution be newsworthy, profitable and useful to society?
- Will the solving of this problem create demand for the cryptocurrency?
- Assuming that 90% of projects will fail, do you believe this cryptocurrency will still exist in 5 years time?
You will find that the answers to the above questions are readily available, provided that you are willing to search. Here are 6 places you can find the information you need:
- The company website. Be sure to study their whitepaper, roadmap and team. If any of this information is missing, don’t invest.
- Competitors websites. Compare their whitepapers, roadmaps and teams. Which project is most likely to succeed?
- LinkedIn. Make sure the team has achieved what they say they have.
- Facebook. Search the project name in the search bar and review public perception on the offering. Sometimes the less you find the better, it can be a signal pointing towards a project that is under-hyped, but it can also mean their marketing is weak.
- Google. Search for anything that you can find on the company. Especially articles, news and interviews. Avoid rumours and pay attention instead to tangible data.
- Ask their community. Join their Facebook Group, Telegram Chat or Discord Group and ask questions to fill any knowledge gaps. Take this feedback with a grain of salt, as members of these communities have a vested interest in convincing you to invest.
Disciplined, cautious long-term investing has proven to be the safest way to grow your portfolio, and it benefits the entire cryptocurrency market.
When short-term trading, technical analysis can be beneficial but mastering TA takes time and dedication and we find that market fundamentals can cause volatility that even the best can’t predict.
By thoroughly researching your investments and knowing what’s coming, you will feel more confident as a pragmatic supporter of innovation.
Investors that rush to buy the cryptocurrencies of the moment, usually trade with nervous energy due to the knowledge that they could lose their investment at any time.
Too many people are throwing away money because of careless exuberance.
Too many useless coins are getting funded.
We can’t wait for the SEC or ASIC to step in and force us to make wiser investment decisions.
We may lose too many fellow investors to fraud and foolishness while we wait.
We need to self-regulate immediately.
Please spread this conversation.
Long-term investment without fundamental analysis is no better than gambling.
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