Thoughts On Fundamental Analysis With Crypto Assets
By Kevin Lee on ALTCOIN MAGAZINE
I got a question from an altcoin telegram group chat, asking how important fundamental analysis was for cryptocurrencies.
Fundamental analysis, according to Fidelity Investments, is a method of valuing a security that entails attempting to measure its intrinsic value by examining related economic, financial, and other qualitative and quantitative factors.
Fundamental Analysis And Value Investing
According to legendary stocks investors like Warren Buffet, Bitcoin has no value. This has to do with how people with a background in finance generally calculate the fundamental value of an asset: they look at the cash flow.
Take the example of a famous valuation method for stocks: DCF (Discount Cash Flow) This is a valuation method used to estimate the value of an investment based on its future cash flows, by discounting the future value of cash flow.
Note that the premise here is that the company or asset the individual is analyzing, has a cash flow. Companies generate cash flow, as opposed to bitcoin. Even taking into consideration other famous valuation methods — they don’t apply to crypto assets.
Value investing through fundamental analysis with cryptocurrencies is thus, ineffective, compared to looking at the charts and relying on technical analysis. Although I am a chartist myself, I do think there is something more to price prediction in crypto than just charting.
Examples
To give recent examples for convenience sake, we can take into consideration the following variables: whether the Fed will lower interest rates in the coming months, CME futures expiration, the ‘halvening’, etc, and so on.
Although taking into consideration such variables are part of fundamental analysis, it’s not the whole picture. This is more classified as taking into consideration the news that could affect a single project or the entire market.
Take the example of the bitcoin cash hardfork that created bitcoin cash SV
Right after the hardfork on November 18, 2018, we saw a 88.6% drop in prices. A price drop in a coin after a hardfork or a snapshot for airdrops is expected.
Take another recent example: Vechain’s partnership with Walmart.
Prices shot up by over 50% in a single day due to their partnership announcement with Walmart.
So now, we understand the impact of news on crypto prices. Note that we are looking at news, which is only a small part of fundamental analysis.
If you’re looking to invest in crypto assets for the long term (5–10 years), here are some guidelines to follow.
Criteria
a) Less than 25 million supply in coins: +1
b) Top 25 market cap (excluding stable coins): +1
c) New features added in the last 6 months: +1
d) Trade history going back past March 2015: +1
e) Listed on 5 or more exchanges: +1
f) GUI client for Windows, Mac, Ubuntu: +1
g) Roadmap of future updates with estimated dates or business plan: +1
a) Listed on only one exchange: -1
b) Greater than 249 million coins: -1
c) Market cap lower than $2 million: -1
d) No devs on bitcointalk.org or elsewhere, or latest Github update is over 6 months: -1
e) Google ‘scam’ next to the coin name, and it shows seven or more results in the first two pages: -1
f) Coin with a trade history of 1 year or more, and is at an all-time low: -1
g) A limit on the number of people that can run nodes to support the network: -1
Results
Following the criteria above, this is the results I have gotten. Note that I have conducted research on the following coins in January 2019, so the results may have changed as of now.
If I were to invest in a number of coins for the next 5–10 years, the scorecard for each coin is what I would use as a reference to diversify my portfolio.
However, there aren’t that many people who are willing to invest in a project for the long term. Most of the investors and traders I’ve met in the crypto space were people who were interested in the short term and mid-term profits.
In that case, I would definitely advise them to look for news related to the project they are willing to invest in or trade. News will only provide a general idea in terms of price directions, and in order to minimize risk and maximize potential profits, I recommend that people use technical analysis to have clear entries, targets, and stop losses.
Conclusion
In summary, fundamental analysis can’t be perfectly performed with crypto. The best we can do is look for news and macroeconomic events, and speculate how such events could potentially affect prices. Because this is a completely new market, unlike markets that trade traditional assets, we will eventually find new methods of analysis, and indicators that will allow retail investors to maximize potential profits through thorough analysis.
