Cryptocurrency trading is a task that requires skill and knowledge. To make the most out of it, one must understand how to use different strategies, navigate the vast world of trading, and master both technical and fundamental analysis. Fundamental analysis (FA) in particular has gained traction among crypto traders as it helps them establish an asset’s intrinsic value in order to get the best return on their investment. Let’s take a closer look at what exactly fundamental analysis is and how it can be used for cryptocurrency trading.
How does fundamental analysis work?
Fundamental analysis is a process of analyzing the intrinsic value of an asset, looking at its qualitative and quantitative factors to determine whether or not it is undervalued or overvalued. This analysis examines an asset’s potential and predicts its future performance based on external variables like news events and macroeconomic trends.
While traditional FA focuses on company fundamentals, crypto fundamental analysts look at financial statements (such as balance sheets, income statements, and cash flow statements), economic indicators (like the unemployment rate or inflation rate), industry trends, global news events, etc., to gain a comprehensive understanding of any given coin or token and assess the risk and potential.
One of the key metrics used by fundamental analysts is network activity. Network activity can tell analysts a lot about how well a cryptocurrency is doing, such as transaction fees, number of transactions, active addresses, and more. Social media sentiment can also be a metric used to gauge market opinion on an asset. And blockchain data allows traders to look at key metrics such as hash rate, block size, and difficulty. All of these metrics are important for understanding the current state of a cryptocurrency and predicting its future performance.
On-chain metrics in fundamental analysis
On-chain metrics are used in fundamental crypto analysis to measure the health and strength of a blockchain network. They provide traders with valuable insights into market sentiment, ICO success rate, project risk assessment, and more. On-chain metrics include:
1. Hashrate – This metric measures the computational power of the miners within a network. It is an indicator of how secure or strong a blockchain is and thus affects its price movements.
2. Transaction Volume – This metric shows the number of transactions made on a given blockchain over time, providing insight into usage and adoption trends among users as well as potential pump/dump activity in progress on exchanges connected to that blockchain’s token/coin.
3. Average Transaction Fees – This metric provides useful information about how much money people are willing to spend when using that specific cryptocurrency for transactions regardless of whether they’re buying or selling it (it’s also an indication of how competitive fees are compared to other cryptocurrencies).
4. Network Difficulty – A measure that tells us which coins require more resources (time & computing) than others; this can be useful when trying to find undervalued coins with low difficulty but the high potential returns if one were able to obtain them at lower prices relative to their peers.
Project metrics in fundamental analysis
Project metrics also help in fundamental analysis. This means looking at certain things that will help you understand the project better. Here are some things to look for:
1. Whitepaper- Analysts can read through the whitepaper and see what the team’s goals are for this project and how likely it is that they will be able to achieve them.
2. Tokenomics- They should also check out the tokenomics of a project, which includes details about its tokens such as supply, inflation rate, and reward system.
3. The Team- Analysts should make sure they know who is behind a project and what their vision is for it. Try to research their past projects and successes as well as any potential conflicts of interest they may have with this one.
4. The Community- Fundamental analysts should take a look at how active the community is around a certain project by checking social media platforms or websites dedicated to discussing it online so they can get an idea of user sentiment towards it before publishing their analyses!
5. Roadmap – Also, they should go over the roadmap of a project which outlines planned development stages and milestones that should be reached in order for success.
Understanding these goals can help investors that would read the analyses determine whether or not they want to invest.
Pros
1. Fundamental analysis in crypto provides a comprehensive view of an asset’s health by taking into account both traditional and blockchain-specific metrics.
2. It provides insight into the strength and security of a coin or token’s underlying network, giving traders an idea of its future performance.
3. Fundamental analysis provides traders with a better understanding of the risk and potential reward associated with different coins or tokens, helping them make more informed investment decisions.
4. Fundamental analysis can be used to identify undervalued coins or tokens that have good long-term prospects that can be overlooked by the market.
5. It can also be used to identify cryptocurrencies that are overvalued or prone to pump-and-dump schemes, enabling traders to avoid such investments.
6. By understanding a crypto asset’s underlying fundamentals, traders can better assess its potential for growth in the long term and adjust their strategy accordingly.
Some Cons
1. Fundamental analysis in crypto can be time-consuming and requires a lot of research to accurately assess the risk and potential of different coins or tokens.
2. It is difficult to accurately measure network activity as factors such as user sentiment, blockchain data, and economic indicators can all influence it in unpredictable ways.
3. Fundamental analysis does not take into account technical factors that could also affect the price of a cryptocurrency, leaving traders exposed to potential losses due to sudden price movements caused by market speculation or panic selling.
