How to Crypto: Fundamental Analysis
This article tells you everything you need to know about basics of fundamental analysis.
What is Fundamental analysis?
In a previous article, we have tackled the topic of technical analysis. Now, in contrast, let’s talk about the other side of speculation spectrum: fundamental analysis (FA).
While technical analysis focuses on charts, historical price data and indicators, FA tries to determine a real price of an asset based on macroeconomic conditions, background data, company analysis and more. Strictly speaking, the goal of FA is to determine whether the asset is under- or over-valued. Many people don’t even realise this, but this is exactly what they are doing even while only reading about the project behind a coin or team behind a company to see if the coin/project/company is worth investing in and has a promising future ahead of it. When you determine an asset is undervalued, it is probably worth investing in because its price will blow up when “others” realise its true value (potential), and vice-versa.
Again, we don’t provide a specific financial advice here, we merely give you the tools you can add to your repertoire to hopefully help you be profitable on your own responsibility.
Areas of focus
So, when doing fundamental analysis, what are the key areas you should focus on? We’ll try and give you a few examples:
Background analysis is a great place to start.
But what does it mean specifically? Before investing into any coin, reading about it, preferably even about the project behind it as a whole, is a very good idea. That can include reading whitepapers, websites, blogs or social media. This simple step can rule out any scams or pump-and-dump schemes which are based solely on speculation, hype and marketing and not on any real qualities or use cases. Even though the Bitcoin founder, Satoshi Nakamoto, remains anonymous to this day, checking whether or not a team behind a project is or isn’t anonymous is also a good way to avoid unnecessary investments into shady assets: good rule of thumb is, if the project is transparent with its team and people behind it, there is a less chance it will be solely a scam. But, don’t rely on this rule 100%, there have definitely been exceptions. This can also help you more precisely determine the future potential of the project by checking whether the team consists of talented and/or prestigious people. Additionally, background analysis can include comparing a project with its competitors and carefully watching its roadmap (and whether or not it is hitting the milestones as planned).
Even in FA, you can look at financial metrics. Generally speaking, you are examining “broader” sets of data (in comparison to technical analysis, which can focus on individual candles of a chart in a very small time period). Here, you are looking at market capitalization (how much is the whole network worth), circulating supply, trading volumes or liquidity. Examining this data, usually over a longer period of time (or on a big time-frames), and combining them can give you a decent idea about the asset’s real progress, worth and potential.
Backtracking a little bit — coin’s or project’s use cases play a huge role in determining its worth. In the end, if nobody will ever use it, why would anyone want to buy it. Simply speculating doesn’t create value over long periods of time. You can often times get a good insight into the mechanics of a project by reading its tokenomics (usually found in whitepapers). Is the coin you are looking at a utility token, is it a meme-token? The verdict and subsequent decision falls on your shoulders and your responsibility.
I personally don’t like investing into unknown, not-proven projects, especially if they are only focusing on building hype. Before buying a coin, I try to find out as much information about it as possible and learn about all above-mentioned areas. So far, this strategy has proven extremely solid and consistent, even though I sometimes miss huge pumps of hyped coins.