Before investing in any cryptocurrency it’s important to first analyse and evaluate its fundamentals to determine its economic viability.
Fundamental analysis reveals the intrinsic value of a cryptocurrency project through a holistic evaluation of various internal and external factors.
It helps you to understand the investment viability of a cryptocurrency and whether it has what it takes to survive and thrive in the long term.
In this post, I will be sharing with you the key things to look for when performing the fundamental analysis of any cryptocurrency project, and how to interpret them.
But first, let’s examine what a cryptocurrency fundamental analysis really means.
What is a cryptocurrency fundamental analysis?
A cryptocurrency fundamental analysis is a method of evaluating the intrinsic value of a cryptocurrency project for investment consideration.
It examines the technological, human, and economic strengths or weaknesses of a crypto project and other internal and external factors in order to assess its value and potential.
A cryptocurrency fundamental analysis should not be confused with a technical analysis.
The technical analysis seeks to understand a cryptocurrency’s price action over time in order to predict its potential future price direction for trading purposes.
Though it can also be employed in combination with fundamental analysis to provide more robust data, it is not necessary for a useful cryptocurrency fundamental analysis.
9 things to look for when performing a cryptocurrency fundamental analysis
Here are the key factors to consider when analysing the fundamentals of any cryptocurrency project.
- The problem the project is solving and its competitive edge
- Its market size and revenue model
- The use cases or utility of the token
- Tokenomics
- The quality of the team behind it
- Security and transparency
- Its whitepaper and roadmap
- Community and ecosystem
- The laws and regulations relating to and affecting its operation
A project needs to score well on all these factors, not just one or a few, for its fundamentals to be considered solid.
Let’s discuss each of them below.
1. The problem the project is solving and its competitive edge
The most important business factor to consider when analysing the fundamentals of any cryptocurrency project is the problem it’s solving and its competitive edge.
What is the purpose of the project and how well is it fulfilling that purpose compared to its competitors?
This is what will keep it relevant in the market.
Make sure you get verifiable answers to the following or similar questions about the project:
- What problem is it solving or planning to solve?
- Is the problem even relevant enough that people will pay for a solution?
- Are there free alternative solutions available for the problem?
- Are people actually using the project’s solution right now or more likely to use it?
- Is this a recurring or one-time problem that people have?
If a project is not solving any tangible problem and it’s just another cryptocurrency, then it’s useless and not worth investing in.
Furthermore, you need to find out how the project is different or better than its competitors.
Does it have unique features and other differentiating factors that set it apart from the competition?
Also, ask yourself, why will people use this project instead of its competitors?
One piece of (NOT financial) advice I always give people is that “always invest in the projects that you are using and paying for”.
It’s a no-brainer, right?
2. Its market size and revenue model
You know, it’s not all problems that are profitable enough to build a successful business around.
The problem the project is solving needs to be relevant to enough people for it to be worth it or profitable.
Therefore, you need to try and gauge how many people (are likely to) find the project useful and are capable of paying to use it.
For example, Brave is solving the major problems in the digital advertising market which is worth $602 billion as of 2022 and is projected to reach $517 billion by 2026.
Every day, new businesses all over the world are signing up to advertise on Brave Browser and subsequently its search engine.
Furthermore, Presearch (PRE) is targeting the global search advertising market worth $260 billion as of 2022 and is projected to reach $435 billion by 2027.
Both retail and institutional marketers are buying PRE to stake against keywords on Presearch among other revenue-generating uses.
The larger the size of the market available to be captured, the greater the potential revenue the project can generate, and the more profitable it can be.
But remember, how much of the market share the project can capture depends on its competitive strength.
Furthermore, a small market size may also be profitable if the project can establish its dominance and capture a majority share.
So, it all depends on how much of the total market share the project can capture, and having a sustainable revenue model.
Below are some questions you need to be answered regarding the project’s market size:
- Are there enough people who need or use this project consistently?
- How many people are currently using the project?
- How is the project generating revenue or what is its revenue model?
- How much is the project generating or capable of generating every day, week, or month?
- Is the revenue sustainable or scaleable?
3. The use cases or utility of the token
You want to invest in a token with genuine use cases and backed by a project with sustainable revenue in a profitable market.
If you’re to pick just two factors to consider before investing in any cryptocurrency, then it should be revenue and utility.
The more uses a token can be put into, the greater the demand pressure on it will be.
And assuming the project has a good userbase, its price is almost guaranteed to increase over time, due to the consistent demand.
The problem is that most cryptocurrencies are money grabs or outright Ponzi schemes with zero to no meaningful use cases.
You should avoid such shitcoins, except you just want to gamble. Because, 9 out of 10, you’ll lose money on them.
If people do not need a token or coin to use the services of the project in any way, like Ripple (XRP), then it’s useless and a money grab.
You can speculate in such shitcoins, but don’t try to HODL them as long-term investments.
A token with genuine use cases and backed by a project with a sustainable revenue model will survive even the worst market crashes and come out stronger.
Of course, that’s assuming other factors discussed in this article are in place.
4. Tokenomics
Tokenomics (token economics) refers to the economic design of a token, including its supply, distribution, or applications within a project’s ecosystem (economy).
The most important questions you need to ask regarding a project’s tokenomics include:
- What is the token’s maximum, total, and circulating supply? If you can, avoid tokens with an unlimited supply or projects with multiple tokens. I consider them money grabs.
- Furthermore, the more of the token is already in circulation, the better. But if a lot of it is yet to be released into the market, I’ll find a way to accumulate as much of the inflation as I can through staking or farming.
- How much of the token is held by the team, private investors or insiders, and how much goes to the public through presales and community or ecosystem development? The more decentralised the token distribution is, the better.
- What is the current market capitalization of the token? I love to invest in projects that satisfy other criteria in this article and have an extremely low marketcap ($5,000 to $10,000,000). These are gems with 10x to 1000x profit potentials. You want to get into them before they go mainstream. An example is the CryptoSorted Token (CST).
- What is the token emission or inflation rate? The slower the rate of new token creation, the slower the price is likely to fall and vice versa.
All these may sound like some serious work, they’re not. The above information and more are easily available on cryptocurrency data aggregator websites, the project’s website and social media channels, or through a quick Google search.
5. The quality of the team behind it
A project’s team is the single most critical factor responsible for its success or failure.
When you buy into any project, you’re actually investing in the team behind it, and betting on their competence and commitment to succeed.
In fact, nothing else discussed here can save a project with a lousy team. And even a dead project can be brought back to life with the right team.
That’s how important the team is in the grand scheme of things. They make everything else possible.
You want to invest in a project that’s backed by a team that’s shown innovation, competence, and commitment to its success.
Here’s what to look out for and questions to ask when trying to identify a great team to invest in:
- Is the team anonymous, confidential, or publicly identified? It always feels safer to invest in projects with identifiable teams who can be held accountable. But it doesn’t mean that projects with anonymous teams are bad or scams. They’re just riskier.
- Skilled, experienced, and backed by strong or relevant advisors.
- Passionate and committed to the success of the project. A great team will go to any length to make their project successful. That is the spirit of winners. They love their projects like a parent loves their child.
- Is the team centralised or decentralised? A decentralised team gives you more confidence in the stability of the project. If it’s currently centralised, is there a plan to make it decentralised on the roadmap?
- If it’s a decentralized project, you want to find out how many developers are currently working on it, and what is the governance mechanism.
Furthermore, try reaching out to the team via email or on their various social media channels to get a sense of whether or not they can be trusted.
Or observe their response to questions or discussions in their communities.
Are they responsive and polite like serious business people or they’re the lousy and arrogant type?
Do they appear to know what they’re doing or just leeching and trying to grab as much money as they can from their unsuspecting investors?
Trust your gut and instinct to reveal the character, competence, and commitment of the team when you talk with them.
6. Security and transparency
You don’t need to be a developer or know anything about coding to be able to understand how secure a project is.
You can look at the basic things like whether their code is open source or audited and how well they’ve stood the test of time.
However, note that open source and audited codes are not guarantees that a project can never be exploited or hacked.
But they show the team’s commitment to transparency and security.
You should be suspicious of any project whose team is anonymous and the code is closed source. It just makes it too easy for them to scam you.
Also, are the team willing to answer difficult but legitimate questions and criticisms or are they overly defensive?
Do they try to silence people who ask difficult questions or allow the free flow of communication?
Defensive and passive-aggressive behaviours from a project’s team could be just poor attitude or they don’t want you to know too much.
Either way, it’s something to worry about. Because poor communication is a problem, deliberately withholding important information is also a problem.
7. Its whitepaper and roadmap
A project’s whitepaper and roadmap do not necessarily affect its performance, but they do reveal important information.
This information helps you to effectively do your own research about the project.
For example, the whitepaper and roadmap tell you:
- what the project is all about,
- how it works,
- its business and revenue model,
- what they’ve achieved so far,
- where they are at now,
- and where they aim to be in the next few months or years.
…etc.
Both the quality of the content and the design of the whitepaper speaks volume about the value of the project.
8. Community and ecosystem
Cryptocurrency projects spend a lot of money on community growth and engagement campaigns.
This is because a vibrant community helps a project attract more users, grow revenue, and maintain a positive brand image.
And that makes it one of the important things you should look for when performing the fundamental analysis of a cryptocurrency project.
Because the more active and loyal a project’s community, the more successful the project tends to be.
However, don’t look at the community size and engagement in absolute terms. In fact, it’s not a deal breaker.
Because as I mentioned earlier, crypto projects spend a lot of money to grow and keep their communities engaged.
Some go to the extent of buying fake or bot followers and members.
And most of the active members in these communities are only active because of the potential rewards they stand to win.
There’re some great projects that are just starting out and do not have the marketing budget to pay for such gamed community growth and engagement.
Their community size may be far smaller and less active, but that doesn’t mean the project is bad or will not take off.
That said, regardless of the size and current status of a project, it should be making some effort to grow and maintain an engaged community.
Ask yourself
- What’s the current size of the project’s community? Look for how many followers, subscribers, or group members they have on the various social media networks and the level of engagement.
- Is their community growing and what’s their growth and engagement strategy? Some have the budget to spend to attract and engage community members, others focus exclusively on organic growth and engagement or a mix of both. The most important thing is that the projects must have a place for community growth and engagement.
Another aspect of the community to look at is the number of industry partnerships and collaborations the project has developed.
These partnerships and collaborations prove a project’s value and enhance its brand appeal.
If other projects are partnering or collaborating with them, it means they have something valuable to offer.
However, note that there’re some crypto projects that announce useless and even fake partnerships.
Always verify any partnership claims on both projects’ websites and try to understand the nature and content of the partnership.
Lastly, look at who the private and institutional investors of the project are.
These high-net-worth investors usually would have done their due diligence before investing in the project.
If you find prominent private and institutional investors’ involvement in the project, it’s a clue that it’s probably legit.
But do not blindly follow these investors, because they too can be terribly wrong. Only use their involvement to gauge how legit a project probably is.
Because these guys don’t invest in outright or obvious scams.
9. The laws and regulations relating to and affecting its operation
Most cryptocurrencies are decentralised but they’re not entirely outside the influence of international or local laws and regulations.
Take the Telegram (GRAM) token as an example, the SEC got them to halt the project development and return only 72% of the funds they collected to investors.
The token was considered an illegally issued security, and thus cannot be allowed to launch.
Another example is Ripple (XRP) which is still battling it out with the SEC in court. And many such cases are coming up.
Follow the development of crypto laws in your country closely and make sure you’re not taking blind legal risks.
Some questions you should be asking in this regard include:
- Under what jurisdiction(s) and law(s) does this project operate? What specific regulation(s) govern its operation?
- What are my country’s laws regarding cryptocurrency or this particular project you’re investing in? Some countries will require certain projects to comply with specific regulatory requirements.
- Is this token a security, utility, or currency token? Each token type has legal implications and security tokens are the most complicated.
Conclusion
Fundamental analysis helps you understand the potential of a cryptocurrency project and whether it’s currently undervalued or overvalued.
In this post, we have discussed 9 key factors to consider when performing a fundamental analysis of any cryptocurrency.
With them, you can confidently estimate the likelihood of a project becoming successful or profitable, especially as a long-term investment.
Did I miss any important factors? Join the discussion in our Telegram group let me know.