We are participants in a highly volatile environment, where the situation can change at any time. You can sail on the waves, or you can curb this storm and get benefits. This is exactly what the traders of the WhiteBIT platform do, using various strategies and approaches.
If you are just taking your first steps in trading, you know that the main task is to predict the asset price movement. But for a competent forecast, you need to have a variety of trading tools in your pocket.
In this guide, you’ll learn the details of fundamental analysis, with which you can evaluate cryptocurrencies based on the information about this asset.
General information about fundamental analysis
A trader’s mission in fundamental analysis is to find out if a cryptocurrency is overvalued or undervalued. To do this, you should plunge into the media space and select the necessary information from open sources. Fundamental analysis helps evaluate a digital asset and learn more about the industry in general. This approach also develops excellent character for any trader — with practice, you’ll be able to determine worth assets in a short time.
Fundamental analysis is often used in traditional financial markets by companies and businesses to strategically plan their investments.
Getting real value is the goal of fundamentalists.
Fundamental analysis of cryptocurrencies
Evaluating cryptocurrencies is much more complicated than traditional businesses, as the social blockchain infrastructure is rapidly evolving and scaling every second.
The crypto fundamental analysis essence consists of a unique algorithm of actions and a set of details that a trader should turn to.
Here are the main points to consider in fundamental analysis:
- Manipulation.
Of course, any project must have active social networks. However, don’t forget that audience of thousands isn’t an indicator of a company’s reliability. After all, we know how easy and inexpensive it’s to imitate the popularity nowadays.
2. Complexity.
Fundamental analysis is a collection of data from different sources. The more data you get about an asset, the more effective your forecast will be.
Basic indicators
In the blockchain environment, there are three main categories of fundamental analysis metrics: on-chain metrics, financial metrics, and project metrics. Let’s take a look at each of them.
On-chain metrics include information that you can get directly from the blockchain on which the asset you are looking at is based on. To do this, it’s enough to use such popular resources as CoinMarketCap or Coinmetrics. Pay attention to the number and amount of transactions, which is an indicator of network activity. Using the graph, you can track the change in the number of transactions in different periods.
Also, find out the number of active addresses (senders and receivers) for a certain period of time.
Particular attention should be paid to commissions, processing power, and staking. Depending on the algorithm on which the cryptocurrency operates, this information reflects the real situation with the asset’s popularity.
As for financial metrics, this point cannot be excluded in any way when drawing up fundamental analysis. You need to know about its liquidity, capitalization, trading volume, etc.
Market capitalization can be found on CoinMarketCap, and, based on this indicator, we can conclude about the potential of the cryptocurrency. However, don’t rely only on this figure since the creators of an unreliable project can easily issue their token in the amount of several million units. If this asset costs $1, then the capitalization will be several million dollars. But such an asset can quickly drop in value, as the community will not see the potential in the project. Thus, a trader who opened positions based only on this indicator will quickly lose his funds.
But trading volume can help you achieve success, as it determines the asset’s liquidity. And high liquidity demonstrates how easy it’s to sell the cryptocurrency at its real price.
Financial metrics also include supply mechanisms. That is limited or unlimited emission. Interestingly, while some traders consider limited emission as an excellent indicator of future value appreciation, others believe that it discourages active use of the asset.
In any case, all financial metrics must be analyzed in the aggregate, without highlighting any particular one from the overall picture.
It’s time to look at the project’s metrics. They can be considered the project’s “face” and the basis for your strategy. The project’s metrics include information about the project’s idea, development team, and their plans.
All this data can be found in the project’s WhitePaper. At the same time, beware of projects that have a presentation on a few pages that doesn’t include the following points:
- project goals;
- technology stack (availability of open source code);
- token/coin application;
- step-by-step project implementation plan;
- tokenomics;
- team.
After reading this document, you shouldn’t get the impression that the idea cannot be realized. We also advise you not to pay attention to cryptocurrency if you are promised ultra-high profits in a short time (this is an exact scam indicator).
Learn about the team, their experience, as well as the reputation of the project creators. Take the time to look at GitHub to make sure that development is active.
Deeper fundamental analysis also includes drawing up a comparative description of the project’s competitors because this way, you can see its advantages/disadvantages and assess the potential.
Studying the tokenomics of a crypto startup can also save you from wasting investments. Interestingly, many issue tokens on the ERC20 standard and only then come up with a problem that these tokens can solve. Ideally, the token should have real value and demand for solving the crypto community problem.
Also, pay attention to the distribution of funds: will the majority of the share go to the team or multiple parties, and not the community? If so, then there is a risk of manipulation and loss of your funds.
A few final words
Of course, the fundamental analysis shouldn’t be your only support when choosing a cryptocurrency for trading. However, it is able to provide a complete picture and an understanding of the project’s potential. Having determined the asset’s real price, you can confidently move on to technical analysis and build your ideal trading strategy step by step.
