Cryptocurrency fundamental analysis is the arguably the most integral method for evaluating the value and potential profitability of a cryptocurrency; especially when considering it for long-term investment.
In this article we talk about:
- What is cryptocurrency fundamental analysis?
- How do you perform a cryptocurrency fundamental analysis by yourself?
- How do you evaluate the potential profitability of a cryptocurrency based on the information you have gathered from your personal researc?
- What free tool are available for you to use in carrying out a cryptocurrency fundamental analysis?
Afterwards we can apply this relatively universal framework for evaluating the potentials and viability of any cryptocurrency to have a fair understanding of whether it would be a good buy, sell or trash.
So without much ado, let’s get started.
What is Cryptocurrency Fundamental Analysis?
Cryptocurrency fundamental analysis is the evaluation of the technological, human, economic strength — fundamentals — of a crypto project in order to determine its true value for investment considerations.
Fundamental analysis should not be confused with technical analysis.
Technical analysis seeks to understand a cryptocurrency’s price movement over time in order to effectively predict the potential future price direction for trading purposes.
Though it can also be employed in combination with fundamental analysis to provide a more robust data, it is not a “requirement” for a useful cryptocurrency fundamental analysis.
How to Perform a Cryptocurrency Fundamental Analysis
In a previous post we discussed the 5 important factors to consider before investing in any crypto.
These factors are all part of the thing to evaluate when trying to understand the fundamentals of a crypto project.
I highly recommend you also read it up in addition to what we are going to discuss in this article for a much better understanding.
Key Cryptocurrency Fundamental Analysis Checklist
When trying to understand the fundamentals of a cryptocurrency project, several key factors and indicators will need to be fully accounted for:
- The technology
- The team
- The use cases
- The market
- History and Roadmap
- The whitepaper
There’s no point investing in any cryptocurrency if it’s just “another Bitcoin” or simply a clone of any other cryptocurrency with no unique or better technology to justify why anyone will use it, rather than the original.
Key questions to ask and shoukd get satisfying answers to in regard to the quality of the project’s technology include:
- Does the project have a unique or superior technology compared to existing players or it’s just a clone of another?
- Is the project code open-source or its closed-source with possible bugs and malicious codes that could put your investment at risk? Open-source is better.
- Has the project’s code been fully audited by experts and certified safe and free from bugs and malicious tools? You wouldn’t trust your life to an unlicensed or quack doctor, will you? NO!
- How effective and efficient is the solution the project is applying to the identified problem?
- Is this the best known solution currently available?
A cryptocurrency or blockchain project is only as good as the code that it is based on.
Thus the quality of the code and originality of the technology is a strong indicator of the viability of the project and future-proof its success or failure.
The value is in the code.
The team is the most important factor to consider when evaluating the potentials of a cryptocurrency project.
You will want to invest in a project with committed, skilled, and experienced team of developers and entrepreneurs.
A good team can almost always turn any project around.
Even a failed project still has a chance of revival if the right set of people is involved in it.
But then what makes a “good team?”
- A good team has identifiable and verifiable founders. However it doesn’t mean projects with anonymous founders (like Bitcoin) are outright scams but you’re taking a greater risk because there will be nobody to be held responsible if anything goes wrong.
- Has team members with skills and experience that’s relevant to the project. Teams without experience should usually have demonstrable skills and complimentary advisors.
- Is passionate and committed to the success of the project. They will usually give all of their best into the project to make sure its deliverables are met on schedule.
Some of the questions you should have good answers to regarding the project team are:
- Who are the team members or founders?
- Is the project fully decentralized like Bitcoin; in the process of transition to full decentralization like Presearch (PRE); being managed by a DAO — decentralized autonomous organization — like DASH and Ethereum; or wholly centralized like Ripple (XRP)?
- What other projects have the founders been involved in the past? Were they successful or failed? If it’s a fully decentralized project, you will want to find out how many active developers are currently working on it and what is the governance mechanism?.
- Are there investors, advisors for the project? Who are they and what is their level of involvement and contributions? A project backed by prominent investors is a good sign. At least they wouldn’t intentionally back a scam that will potentially ruin their reputation and usually they’ll take all necessary steps to see the project gain traction and thrive.
- What relevant partnerships and collaborations have the project secured to increase its user base and use cases?
- Does the project have a growing and supportive community backing it like the LINK marines, XRP Army, and the AMPL Force ? An active and supportive community is needed to help create more awareness for the project.
So from the above you can see that we have bundled under the team the founders, active developers, investors, advisors and community members.
This is because, cryptocurrency projects, unlike traditional companies are mostly community driven.
Thus every stakeholder is a part of the project and exerts some form of influence in the direction and potential success or failure of the project.
The Use Cases:
Another important key factor to look at is the use cases for the cryptocurrency.
The use cases determine how big or small the demand for the token can be.
A crypto asset with solid and multiple uses cases will enjoy greater and consistent demand, which in turn affects the token price and ultimately the profitability or otherwise of your investment.
And one with limited use cases will have little to no meaningful demand and ultimately a lower market valuation.
Thus the potential upside for such token will be small, to non-existent as the case may be.
If you can’t identify what the coin use cases are, then you can assume the worst — it’s useless.
It’s just a purely speculative crypto asset and you’re better off gambling with Bitcoin rather than some random tokens.
Related to the use cases is the size of the market the project is aiming to serve.
How big is it?
Is the problem being tackled a major one which lots of people and businesses are willing to pay to be taken off of them?
For example, Brave with their Basic Attention Token is aiming to tackle the problems of fraud, transparency and fairness in the digital advertising space which is worth $384bn USD as at 2020 and projected to rise to about $517bn USD by 2023.
The larger the size of the market available to be captured, the greater the potential upside for the cryptocurrency as demand is only as big as the size of the market.
A small, highly targeted market size may also be profitable if the project can establish its dominance and token supply is not too much to dilute any possible price appreciation.
So, it all comes to having a reasonable market for a sustainable growth and a sensible tokenomics to keep demand and supply balanced.
You will want to know:
- What is the total and maximum supply of the token? Excessive supply is a huge turn off, in most cases.
- What is the circulating supply?
- What is the current market capitalization?
- On what exchanges is the coin listed? Cryptocurrencies listed on reputable exchanges are relatively less likely to be outright scams as most of the top exchanges (e.g. Binance, Coinbase, and Gemini etc.) usually verify projects thoroughly before listing. That does not mean you can invest in just any project that are listed on these top exchanges. Nothing can ever replace your own personal due diligence and research here.
- Does the coin have sufficient liquidity and trading volume? A large liquidity and trading volume signifies strong interest in the token.
- What percentage of the token supply is held by the team, investors, advisors and the community? Is the token concentrated in the hands of a few or sufficiently diluted to reduce the influence of whales on market prices?
These all look like some big research work but most of this information you will easily find after a few minutes look around on the project website, cryptocurrency data aggregator websites, offical social media channels, and review websites.
History and Roadmap
Yuo will also want to follow the development and price history of the project and where it plans to be in the next few months and years ahead by studying their road map.
Potential questions to ask here include:
- How long has the project been in existence?
- How much of its initial stated milestones has it achieved?
- At what price was the cryptocurrency listed on exchanges and how has the price faired ever since?
- Does the project have a roadmap? Study to find out what they have outlined and are working on as they work to move the project forward.
If the project is completely new with no history to look into, you will still get relevant information by studying the team (check the team section above).
However, project with no roadmap is just one blind man leading another blind man to possible losses. Avoid them!
However, roadmap means nothing if it doesn’t show real and tangible development milestones with realistic timelines.
The whitepaper contains every thing you want to know about the project for you to satisfy your curiosity.
From the technical specifications to the specific problems the project aims to solve, how it plans to solve it and everything in between.
However, it serves more purpose than just provide you with information about the project.
- A project without a whitepaper should be ignored outright. Either they’re lazy, careless or simply ignorant. The whitepaper should be the first step before seeking money from investors, and projects lacking it should be considered too risky.
- If they can’t dedicate time and resources to create a detailed and clear whitepaper, then they can’t possibly be trusted to give proper attention to your investment.
- A well documented and professionally crafted whitepaper demonstrates that the team is serious and committed to the project.
- It demonstrates the project team’s values, understanding of the problem and solution fit, and how well they can articulate this to potential investors.
Most cryptocurrencies are decentralized but they’re not free from the laws and regulations binding on the issuing company or founders.
Take for instance the Telegram (GRAM) native token sale.
In the end the SEC got them to return 72% of the funds they collected back to GRAM investors as the token was considered an illegally issued securities.
Therefore, if you’re not clear about the regulatory framework in which a cryptocurrency operate you might be taking similar risks.
And in most cases, you may not even be lucky enough to get part of your investment as GRAM investors did.
Some of the questions you may want to ask as regarding laws and regulations include:
- Under what laws does the project operate?
- What are your own country’s laws regarding cryptocurrency or the particular coin you’re considering investing in? Some countries will require especially security tokens to comply with regulatory requirements.
- Is this a security, utility or currency token? Each token type has legal implications and security tokens are the most complicated.
Evaluating a Token’s Potential Profitability
If you have done your research properly you will have answers to the following questions to work with:
- Does the cryptocurrency have good use cases and a sizeable market that will provide for its sustainable growth?
- Is the token currently overvalued or undervalued? It is overvalued if its usefulness does not justify its high price and undervalued if the price is too low compared to its use cases, market potentials and superior technology.
An overvalued cryptocurrency price is a SELL SIGNAL (if you already own some) while an undervalued token price is an obvious BUY SIGNAL (if you’re a new investor or looking to acquire more of the token at cheap prices).
Free Cryptocurrency Fundamental Analysis Tools
Most of the information you will need to conduct a thorough fundamental analysis on any cryptocurrency project can be found in the following resources.
- Official Project websites
- Official project social media accounts
- Crypto data aggregator websites
- News and leading industry data websites such as CoinMarketCal.
- Learn to use Google
All of these resources will help you keep yourself updated with developments, news and events around the target project and the entire cryptocurrency market that might directly or indirectly affect the price.
As a cryptocurrency investor, you will want to know whether you’re investing in the right project or throwing your money down a bottomless pit.
But, there’s no oracle out there that can give you specific and accurate information about the potential future of any cryptocurrency.
That’s where a simple fundamental analysis of the project will be helpful to provide you with all the information you need to make informed investment decisions.
And if you have the skills or resources to employ a professional, you can take it a step further by combining fundamental analysis with technical analysis for a more sophisticated data.
Now over to you…
What methods do you use to decide whether a cryptocurrency is worth investing in or not? Share with us in the comments section below.