How to have Fun with Fundamental Analysis
The Basics III — Continues with Fundamental Analysis (FA) of Crypto Assets
This is the first of two articles on how to have FUNdamental analysis done somewhat right. This part looks at novel ways to FA!
What da FA? Who needs this?!
[…] it is a method of valuing a firm which takes into account the assets, liabilities, and earnings, plus other factors such as quality of management, competitive landscape, and economic factors.
Eric Steen on Medium
Being able to estimate the true value of any given asset seems a reasonable trait for a trader. Guess we need that ✅
FA sounds simple enough when looking at traditional assets or companies, however is painted in a very different picture when smiling over to crypto assets and their speculative value plastered over their intrinsic value supported and brought forth by the surrounding community.
Network: value from strength
Crypto assets derive value and strength not only from the quality of the code that the protocol is running. Another equally important factor is the community supporting, governing and maintaining this protocol.
This novel influence on the fundamental analysis of assets should be integrated attentively and in cooperation with the whole crypto community, so as to improve the relationship between humans and markets further.
A successful network effect can only occur when protocol and community learn from another and grow together through clear communication.
Don’t blindly trust diagrams, indicators or ratios. Do dig into the stakeholder and the attached communities. Channels are usually quite open and should stir questions and raise flags if they are clogged or closed.
Context is king especially when assessing applicability of Metcalfe law!
Metcalfe Law
The base line idea that emerges out of this law is that, the more peers are connected / actively using the network, the more valuable it will become.
Definitions & Terminology
In order to plug into the sea of information that surrounds crypto assets, it’s necessary to familiarize yourself with a handful of terms and ideas.
- Protocol: a set of rules executed between communicating network participants
- Fat Protocol: Protocol with integrated economic or business models, as opposed to lightweight protocols (e.g. TCP/IP)
- Node: network participant running protocol software (for validation)
- Originals, Forks & Tokens
— Original protocols run on nodes, eg. bitcoin, Monero
— Forks of original protocols (hard forks are incompatible, soft forks compatible with previous versions)
— Tokens are running on top of protocols - Some differentiate between logical and physical networks, the former using tokens to enforce protocols and the latter using (physical) nodes to do so
— Physical network examples: bitcoin or Ethereum.
— Logical network examples: Basic Attention Token , Binance Coin (BNB).
Now let’s see what indicators have been washed ashore
Novel FA Indicators for crypto assets
Below you can find some indicators that can help with analysing the complex fundamentals of a given crypto asset.
However please keep in mind, that together we can find and create more valuable metrics, that add value when shared with others and improved upon.
Network value, infrastructure & resilience
If the asset in questions is being developed open source then it’s highly advised to check the Github repositories on a regular basis and dive deep into the governing structure and execution. Are protocol changes governed on- or off-chain? How are they voted on? How are they executed and enforced? What’s the rate of participation? Is participation increasing or decreasing?
🌟 Here is one open source GitHub commit aggregator, for You since you read this far! 🌟
Indicators Github activity
A) number of daily commits
B) total number of commits
C) total number of contributors
D) average number of commits per contributor (resilience)
E) number of branches
F) number of commits per branch
G) total number of repositories (project complexity vs ineffective structure)
H) average number of contributors per repository (resilience)
I) total number of releases
J) release frequency
…
What will the 🐙racle mind produce with the above indicators? 🔮
Project complexity ratio: G / H
-> the higher the more complex a project
-> red flag < 1
Resilience Factor: D * H
-> the higher the more resilient the code is, since more evenly spread contributions mean better integrated, respectively tested and code that should perform well
Indicators governance activity
A) participation
B) frequency
C) impact
…
Community activity
Many crypto assets are purely community driven, as bitcoin was and still might be. Hence one will attain a great level of insight, if time is attentively spent in the preferred and most active channels. Since the 2017 ICO craze, Slack has been targeted by hackers and scammers and many teams have moved over to Telegram or Discord to facilitate community management. Especially Discord has been getting a lot of attention.
If you’re not already signed up there, I’d advise you do it promptly.
Indicators community activity
A) server / group sizes?
B) number of internal team members?
C) number of community managers?
D) number of messages from internal team?
E) number of messages from extended team / community managers?
F) number of messages from members?
G) total daily messages (activity)
…
You can create your own ratios and feel like a proper 🐙racle data scientist 👩🔬
Ratios
Information permeability ratio: B / C
-> the higher the better the potential for a more effective information flow
-> yellow flag < 0,5
-> red flag < 0,3
Activity ratio: G / A
-> the higher the more active
-> red flag < 0,001
Social Media activity
Most likely it’s superfluous to mention how closely linked social media and crypto assets are, but heck here it goes anyways.
The community that is now driving bitcoin development started aggregating around an open forum called bitcoin talk (formerly BTCtalk). In lieu with the grassroots and cypherpunk mentality that bitcoin emerged out of.
As the crypto space got bigger, so did BTCtalk and also other social platforms like reddit and later also twitter are now swamped with content and discussions revolving around crypto assets. Additionally LinkedIn has been getting more attention, most likely correlated to the ICO boom in 2017 and the huge amount of blockchain experts and specialists entering or emerging in the space.
As of today a lot of formal and informal communication is happening on all of these platforms.
💡Octoracle offers a News and Social Media Scan Bot. They allow you to create triggers, connected to the social networks, that upon activation influence your running strategy settings!
The Octoracle News and Social Media Scan Bots 🤖 would alleviate you of the painstaking work to acquire and process data for all platforms and indicators. Plus you cut costs, since data aggregators can be relatively pricey.
Indicators
A) total number of posts
B) daily volume of posts
C) average likes per post
D) average shares per post
E) number of followers
…
Ratios
Social Media efficiency ratio C * D / E,
-> 0,2 to 1 = neutral
->bullish >1
-> red flag <0,1
This is but a tiny fraction of almost infinite indicators and ratios that can be created & tracked, depending on data and time resources at hand.
Additionally you can draw trend lines of above activity when tracking them over time. If you give it a try and keep your eyes on your goal, you will have fun in no time, promise 😉
Here’s a little bonus for almost finishing the article 🙌- some really entertaining FA!
Show me the data!
Additionally to generating FA data, social media is also great for resources on FA:
DuckDuckGo is your friend, just search for social media or news sentiment data aggregators and find offers such as Solume, CryptoControl or ConcourseQ.io or the all well to known Google Trends.
Sources used for this article
Next blogpost…
Either the long awaited and dearly missed Technical Analysis (TA) pt.2 or the finale of our FA intro. In which we cover the most commonly used indicators and ratios, many of whom have been migrated over from traditional asset FA. Comment here on what you want to read next. And yes, we’ll give it our best to make it fun and worth your while again!
