You probably already know how unpredictable cryptocurrency markets can be. However, with proper analysis, you can get a good idea of what is likely to happen. One form of analysis you can use is fundamental analysis.
Fundamental analysis is an approach used by cryptocurrency investors to establish the intrinsic value of a crypto asset. Investors examine several internal and external factors to determine whether the asset is undervalued or overvalued. With this information, a trader can strategically enter or exit a position.
Here are two instances where this concept is referenced in mainstream media:
- What Bitcoin traders should know: Fundamental analysis
Coindesk November 30, 2017
- XRP price rallies 91% in a month due to 3 fundamental factors
Cointelegraph November 23, 2020
The Basics of Fundamental Analysis
The concept of fundamental analysis is simple: if you can establish that a desired asset has intrinsic value that is not reflected in its current market price, you can use this knowledge to trade and make a profit.
When using fundamental analysis, your aim should be to identify projects that are likely to succeed. You then invest in such projects, and once the team delivers and proves its capabilities, other investors will notice, and favorable price action will follow.
Since fundamental analysis helps you research an investment to determine its future value, the opposite is also true. If you find out that a crypto asset is highly overvalued, you can still profit through shorting.
How to Do Fundamental Analysis in Crypto
Unlike in traditional companies, you usually don’t have a lot of data to sift through when evaluating crypto projects. However, you can still analyze crypto investments by looking out for the following factors:
Target market- it is vital to consider the assets market size. A large market could mean that it is already over-saturated hence not a good investment. Niche markets, on the other hand, are small but can be highly profitable.
Competition – how much competition does the project have, and is it prepared to beat the competition? If the project is unique, this is a great sign.
Team – the team behind a project determines how likely it is to succeed. A project with skilled and experienced team members is likely to become successful.
Roadmap – most crypto projects have a roadmap, and it can be a great tool to gauge the value of their asset. The roadmap should be ambitious but not too ambitious.
Status – crypto projects don’t start at the same level. It’s better to go for assets from popular projects because they are more likely to gain value.
Whitepaper – whitepapers outline everything about a project. Even though they are mostly technical, you must read them before investing.
Real-world use cases – even if a project has excellent fundamentals, it’s essential to look at the benefits it brings to the real world because this could significantly affect its value.
Price history and age – crypto assets come and go. If a project has been in existence for a while and consistently maintained its value, it is likely to have longevity. That being said, you might get more significant results from smaller coins that break out into the mainstream.
Liquidity and volume – a token with high demand is likely to have high trading volumes.
Market cap – market capitalization considers a crypto asset’s supply and derives its actual value based on this. A project with a low market cap is likely to have more growth potential than one with a higher market cap.
Regulation- if a project is not following the stipulated rules and regulations, it will likely adversely affect its future value.
These are just a few of the factors you should consider when doing fundamental analysis for a crypto asset. Remember that the crypto industry is different from other traditional industries, so you might want to tweak your approach. As a long-term trader, fundamental analysis is a tool you must have in your trading arsenal.