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Руководство по фундаментальному анализу криптовалют - Binaryx

Fundamental Analysis Guide For Cryptocurrencies

To study all the available data about a digital asset, you need to conduct fundamental analysis. For example, you can see the scope of the coin, the number of blockchain users, and meet the developers. All this is extremely important for understanding the potential of a particular coin. According to your trading positions, you can also find out if the coin is overvalued or not. In this article, we’ll look at those indicators that are the most important. But first, let’s find out what fundamental analysis is. 

What is fundamental analysis?

Fundamental analysis is the investors’ unique approach to establishing an individual asset or business’s “true value.” People who plan to invest their funds try to determine the overvalued or underestimated object of investment. And the data obtained can be used for your market strategy.

Technical analysis can also provide a lot of value, but the outcomes from it are somewhat different. Tech analysts believe that this type of analysis provides no less valuable data (e. g., a forecast of coins and other assets’ price behavior). Thus, the critical indicators for this type of analysis are studied.

But fundamental analysis is also fundamental in that it digs deeper. Here, analysts look at the metrics of a business project to estimate its value. For example, they look at the profitability of a coin or the ratio of the asset price to the project’s book value. In this case, you can analyze several projects at once to choose the most promising in terms of investment. 

The problem of fundamental analysis of cryptocurrencies

But there is a small problem – digital currencies cannot be valued in the same way as traditional business. Decentralized projects like Bitcoin or Ethereum are closer to digital goods. However, even when analyzing centralized crypto, traditional indicators will tell us nothing.

That’s why it’s necessary to look for other ways to solve this problem. Next, you need to determine the solid indicators and evaluate them. In this case, we are talking about those that are difficult to manipulate. For example, you shouldn’t focus on the number of subscribers on social networks because it is easy to buy followers or create fake accounts.

It’s necessary to highlight an exciting thing – there is no such indicator or criterion by which one could judge the evaluated project. We can see that the number of active blockchain users is constantly growing. But this fact alone does nothing. Indeed, there may be one and the only person at the other end of the network who has a database of addresses and constantly transfers funds to himself.

Next, we will look at three types of fundamental metrics for digital currencies: on-chain metrics, project metrics, and financial metrics. This list is not exhaustive, but it provides a good basis for further development of indicators. 

On-chain metrics

This category includes all metrics provided by the blockchain network itself. To get them, you can install a node and export the data. But since we are only considering investing, we won’t waste time and money on it.

It is much easier to use unique sites for this. So, on CoinMarketCap, you can conduct a pretty good on-chain analysis because the platform provides a lot of information about the asset.

There are five main metrics in total. Let’s meets them. 

Number of transactions

Its’ quite a good indicator of blockchain activity. If you use the number of transactions for a separate period (or moving averages), you can track activity changes.

But you need to be careful with such data. After all, as we said earlier, one person can cheat on-chain activity. 

Transaction amount

This indicator shows the total amount of transactions with an asset over a while. For example, if 10 Ripple transactions of $100 each have passed in 24 hours, the daily amount will be $1,000. At the same time, both the internal protocol coin and fiat currency (USD, EUR, GBP, etc.) can be used for analysis.

Active addresses

This category includes addresses within the blockchain network that have been in use for some time. It often includes the sum of the senders and recipients of the transactions. But sometimes, investors can only look at unique addresses. 

Commissions

They can show the demand for a place in a block of a specific digital currency. At the same time, the number of commissions can be significant for some assets and less critical for others.

Commissions can be compared to bids in an auction. After all, users are also competing, but for a faster inclusion of transactions in the block. The higher the commission, the faster the transaction will be confirmed.

Simultaneously, this indicator is the most important for crypto with a gradual decrease in emission. So, Bitcoin, after a certain period, reduces the reward for mining by 2 times. But at the same time, the fees grow, otherwise the miners would leave the network.

Computing power and staking amount

Blockchain networks now use different consensus mechanisms. Network security depends very much on them, so this aspect is also worth studying during fundamental analysis.

The health of the crypto network for PoW coins is the hash rate or the total computing power. The larger it is, the more difficult it is to take control of most nodes and carry out a 51% attack. It’s also worth looking at the current trend. The growth of the hash rate may indicate an increase in interest in mining. And conversely, a decrease in power indicates a “surrender” of miners and exit from the network.

Mining costs are influenced by the current value of the coin, the number of operations in 24 hours, and commissions. It’s also worth considering the direct costs, like the cost of electricity and equipment price.

Mining is opposed to staking. The latter is the concept of blockchain networks based on the Proof-of-Stake algorithm. The idea is that users deposit a percentage of their coins to become validators. In this case, the interest is reflected in the collateral amount. 

Project metrics

If on-chain indicators are based on open data about the blockchain, then project metrics relate to other indicators. Here we will look at 4 important metrics – whitepaper, team, competitors, and token economics.

White Paper

Before investing in a crypto startup, you need to familiarize yourself with the White Paper, which describes the project. Ideally, it should reflect the main goals of the network:

  1. Technology innovation.
  2. Open source code.
  3. Spheres of application of coins.
  4. Roadmap (plan for updates and implementation of new functionality).
  5. The scheme by which tokens will be offered and distributed.

At the same time, it is necessary to compare the obtained data with the community’s opinions. It will help to identify concerns and the feasibility of goals.

The team

It’s also a critical point. It is imperative to keep track of what track record is behind the back of each team member. It will help to understand whether they have enough experience and skills to achieve their goals. It’s also worth seeing if the developers are involved in scam projects.

If there is no team behind the cryptocurrency, you need to check the blockchain project’s presence on GitHub and the level of activity on the network. After all, a constantly being developed coin can have much more potential than one whose activity is lower. 

Competitors

A good White Paper should show in which area the cryptocurrency asset will be applied. It’s also vital to know competitors and what the new token wants to replace with itself. That being said, it would also be nice to analyze the competing coins separately. Maybe against their background, the token you are interested in looks much weaker.. 

Tokenomics and initial distribution

Some projects select an actual problem and create a token as its solution. Hence, factors that play a role are:

  • whether the asset is beneficial;
  • whether the community recognizes this benefit;
  • how the crypto market evaluates the usefulness of the coin.

The way the tokens are distributed also plays a role. They can be distributed during the ICO or IEO. Besides, in some cases, developers “mine” the first group of assets during pre-mining.

If it deals with distribution, then the ratio between the team and the users should be spelled out in the White Paper. But be careful; when transferring most of the tokens to certain parties, they can manipulate the market in their favor.

If there was pre-mining, then there should be confirmation of such actions. 

Financial metrics

It’s also helpful to look at the liquidity and historical chart of the cryptocurrency in fundamental analysis. However, there are other equally essential indicators. Let’s take a closer look at them. 

Market capitalization

Market cap is the current turnover multiplied by the value of the asset. It’s the estimated cost of acquiring all the coins of a given coin (if there is no slip). By itself, this indicator creates the wrong impression. It’s pretty easy to issue 10 million tokens and trade them for $5. Then the market capitalization will be $50 million. But these are somewhat incorrect numbers because the asset must first interest the crypto market.

Further, it’s impossible to determine the exact number of assets in circulation. After all, tokens can be “burned,” keys can be lost, and with them, funds. Therefore, the same data provided by CoinMarketCap is only approximate.

However, market cap continues to be used to determine a particular token’s blockchain’s growth potential. Some crypto investors believe that low-cap tokens have more potential. Others argue that large market cap coins have higher odds than less proven assets. 

Liquidity and volume

Liquidity means the indicator of the ease of buying/selling a coin. Any liquid asset can be sold without any problems at the exchange rate. A liquid market is called a site with a high level of competition.

If the market is illiquid, it won’t sell the coin at the required price (since there are no buyers). Here, one of two options remains: to reduce the requested amount or to wait for an increase in liquidity.

By the way, an exciting indicator is used to determine liquidity. It’s called the trading volume. It shows the number of assets traded per day in the particular token or fiat (by default, analytical sites use the US dollar).

Knowledge of digital currencies’ liquidity can help determine the cryptocurrency market’s interest in future investment. 

Offering mechanisms

Some investors pay special attention to this indicator. For example, Bitcoin network users analyze the ratio of current reserves to investment inflows.

The following factors are involved in decision making:

  • the maximum possible number of tokens in circulation;
  • current turnover;
  • inflation rate.

Some coins have a limited emission with a gradual reduction in the number of tokens. This increases their investment attractiveness and shows that over time, demand will exceed the availability of assets.

However, some investors believe that the supply limitation will harm the token in the long run. Such people fear that the coins won’t be used properly due to their drive to accumulate. Besides, critics condemn the volatile inflationary policies of some assets. 

Combining metrics and creating fundamental indicators

So, now we know the leading indicators for fundamental analysis. Now it’s the time to discuss their combination. Why know all this? We said earlier that each indicator has weaknesses. Besides, if you look at a set of numbers, many vital things are lost. Let’s take the following example

Token АToken Б
Market cap$200 000 000$10 000 000
Number of transaction (in 6 months)50 000 00060 000 000
Average transaction amount (in 6 months)$100$200
Number of active addresses(in 6 months)60 0004 000

In this case, we immediately discard active addresses. Of course, we can say that there was more activity in the token A network, but this is not a strong indicator. It’s much more important, for example, to compare the number of active addresses with the market cap or the number of transactions.

It is much better to create a kind of coefficient applied to the data on the token and compare the result with a similar coefficient for token B. There will be no need to make a blind comparison. After all, we’ll get a certain standard for an objective assessment of digital coins.

For example, the ratio of market capitalization to total transactions can be indicative. By dividing the value of the first and second indicators, we get a 5 for token A and 0.166 for token B.

Looking at the data obtained, we conclude that token B has a more accurate value since more transactions were carried out relative to the total value of assets. Therefore, we conclude that the market overvalues the A token.

The thoughts above cannot be considered the ultimate truth. We are just giving an example of getting a small share of the overall market picture. Indeed, without understanding the crypto project goals and the areas of use of the digital currency, it’s impossible to know how the smaller number of transactions for the A token affects.

By the way, a similar coefficient is already used by analysts. It is called NVT (Network Value to Transactions Ratio), and it’s, as the name implies, the ratio of market capitalization to the number of transactions. Or, as NVT developer Willie Wu says, “the price-to-earnings ratio of the crypto industry.”

There are dozens of possible indicators for use in fundamental analysis. But the most critical thing is to create a working system that will allow crypto projects to be evaluated. And the higher the quality of the research, the more valuable data can be obtained for further work.

Conclusion

Now let’s summarize. As we understood, a properly organized and conducted fundamental analysis shows all the information about crypto startups and the potential for investing in them. In this case, you should not rely on only one network cost because the number of transactions, the total hash rate, and much more are just as significant.

Also, one fundamental analysis is not enough to make an accurate forecast. Ideally, it’s combined with technical analysis. Besides, there is no single scenario that covers all possible market situations. This must be kept in mind when planning investments in crypto networks. So try it, and you will succeed. 

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