Fundamental analysis involves taking a dive into the available information about a given asset. This can involve analysing the use cases of a given token, the number of people using it, and the people behind the project. The overall goal of doing this is to determine if a given project is overvalued or undervalued, and this information can be used to take a profitable trade. To trade volatile assets such as cryptocurrencies, you need some skill. You need to select a strategy, understand the vast world of trading, and master technical and fundamental analysis to be successful. The same technical indicators used in Forex, stock, and commodities trading such as RSI, MACO, and Bollinger bands to predict market behavior can be applied in crypto.
In simple terms, fundamental crypto analysis is an approach used by investors to establish the “intrinsic value” of an asset. This information can be used to enter and exit positions strategically.
Also, the technical analysis yields valuable trading data and offers different insights. TA users strongly believe they can predict future price movements based on the past performance of an asset. This is possible by identifying candlestick patterns and studying essential indicators.
On-chain Metrics
These are metrics that can be observed by looking at data that is provided by the blockchain. This can be done by taking information from websites or APls specifically designed to inform your investment decision. An example of this is coinmarketcap on-chain analysis of various assets.
Transaction Count
This is a good measure of the activity that is taking place on a network. By plotting the number of set periods or using moving averages, you can see how things change over time. However, this metric should be treated with caution. Just like It is the case with active addresses, you can never be sure if It is not a single person transferring funds between different wallets to inflate the on- chain activity.
Transaction Value
This shouldn’t be confused with transaction count. This metric measure how much have been transacted within a given period. For example, if 20 Bitcoin transactions worth $30,000 each took place in a day, the daily transaction volume would be $600,000.
Active Addresses
These are the number of blockchain addresses that are active in a given period. How this is calculated varies, but it involves counting both the sender and the receivers of each transaction over set periods, for example, within a day, a week, or a month.
Fees Paid
This can be essential for some assets than others. The fees people are paying can tell us about the demand for block space – if the network is congested in some blockchains, you will need to foot a higher fee if you need your transactions sent quickly.
Hash Rate and The Amount Staked
Various blockchains use different consensus algorithms with their own mechanisms. Since they are vital in securing a network, diving into the data surrounding them can be valuable for fundamental analysis.
Hash rate is used to measure the health of a network in proof of work cryptocurrencies. The higher the hash rate, the more difficult it is to achieve a 51% attack. An increase in hash rate also indicates rising interest in mining and vice versa.
What About Project Metrics?
These involve a qualitative approach that looks at factors such as the performance of the project team, the whitepaper (if there is one), and the project’s upcoming roadmap.
The Whitepaper
This is a technical document that offers an overview of the crypto project. It is highly recommended to read the whitepaper of any project before you invest in it. The document will detail the tech used, the use cases of the project, the road map, coin supply, etc. Also, you need to research what people are saying about the project to be safe.
The Team
It is your duty to research the team members and see the kind of credentials they hold. Also, find out what people with knowledge of the industry have to say about them. A good project will disclose information on its team members. Even in the case of Bitcoin with a pseudonymous creator, there is a team in charge of development.
Competitors
A good whitepaper should indicate the asset’s use cases, the problems it is trying to solve, who it is in competition with, and what legacy infrastructure it is seeking to replace.
Tokenomics and Initial Distribution
It is vital to determine if the project’s tokens offer any value or hold any utility. Also, consider how the funds were initially distributed; how much was kept by the founding team, and how much is available to investors.
Disclaimer: The content in this report is from the open source and for educational purposes only, therefore should not be considered as financial advice. We all know that the cryptocurrency market is highly volatile. Therefore, all the financial decisions should be made after doing your wide spectrum research.
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