#BeginnerGuide Cryptocurrency Fundamental Analysis (FA)

Essential Insights and Strategies for Informed Cryptocurrency Trading

Crypto-assets have taken the financial world by storm, presenting fresh investment opportunities and transforming our money and transaction verification approach. 

Venturing into the world of cryptocurrency can be both exciting and challenging, especially when navigating the complexities of this rapidly shifting financial landscape. But rest assured, you're in the right place to begin!

This beginner’s guide dives into cryptocurrency fundamental analysis, a key tool for making informed decisions in the world of digital assets. Whether you’re new to crypto or an experienced investor looking to sharpen your skills, this article offers essential insights, actionable tips, and a solid framework for evaluating various cryptocurrencies.

1. Understanding Different Types of Cryptos

1.1 What is Crypto-Assets?

Crypto-assets, often referred to as cryptocurrencies, are digital forms of currency that rely on cryptography to secure data and use distributed ledger technology, such as blockchain, to record transactions. This technology enables decentralization, immutability, and secure peer-to-peer exchanges.

Unlike traditional fiat currencies, these digital assets are not governed by any central authority or financial institutions. Instead, they operate on decentralized networks, often built on blockchain technology, offering distinctive features that set them apart from conventional financial services.

1.2 Major Crypto Categories

Bitcoin

Bitcoin pioneered the modern crypto movement. It was created in 2009 by someone or a collective (known by the pseudonymous name of Satoshi Nakamoto) who decided to remain anonymous. It’s an appealingly simple concept: bitcoin is digital money that allows for secure peer-to-peer transactions on the Internet.

Bitcoin serves as a decentralized store of wealth and digital currency. It is also seen as a long-term investment and a hedge against inflation. There will only ever be 21 million bitcoin. This is digital money that cannot be inflated or manipulated in any way.

Unlike services like Venmo and PayPal, which rely on the traditional financial system for permission to transfer money and on existing debit/credit accounts, bitcoin is decentralized: any two people, anywhere in the world, can send Bitcoin to each other without the involvement of a bank, government, or other institution.

Every transaction involving Bitcoin is tracked on the blockchain, which is similar to a bank’s ledger, or a log of customers’ funds going in and out of the bank. In simple terms, it’s a record of every transaction ever made using Bitcoin.

It isn’t necessary to buy an entire Bitcoin: you can buy just a fraction of one if that’s all you want or need.

Key Questions

What is BTC?
BTC stands for Bitcoin.

Is Bitcoin a cryptocurrency?
Yes, Bitcoin is the first widely recognized cryptocurrency, essentially a form of digital money.

Can you define Bitcoin simply?
Bitcoin is a decentralized digital currency designed for secure, peer-to-peer transactions without the need for a central authority.

What is the current price of Bitcoin?
You can check the latest price of Bitcoin on Coinbase, CoinMarketCap or Binance's website.

Is Bitcoin a viable investment?
As with any asset, you can profit by buying Bitcoin at a low price and selling it at a higher one, but the opposite is also true, leading to potential losses.

What was the starting price of Bitcoin?
In early 2010, one Bitcoin was worth a fraction of a U.S. penny. By the first quarter of 2011, it surpassed one dollar. Its value surged in late 2017, reaching nearly $20,000, and hit a peak of around $64,899 in November 2021. You can follow Bitcoin's price trends here.

Altcoins and Tokens

An altcoin is any cryptocurrency other than Bitcoin. Many of these are used for smart contracts, privacy features, and utility tokens for certain platforms or services. Examples of popular altcoins include Ethereum (ETH), Ripple (XRP), and Litecoin (LTC).

In the early years of cryptocurrency, this kind of definition made a lot of sense, since Bitcoin occupied most of the market’s attention, and competitors made up dozens or even a few hundred alternative coins. Nowadays, some experts put the estimate of the number of individual cryptocurrencies at about 15,000.

That said, Bitcoin remains the largest cryptocurrency by far, with a market capitalization — the value of the total number of coins in existence — at more than three times the second largest player, Ethereum, according to CoinMarketCap. The size of other players drops quickly from there.

Tokens, on the other hand, are assets created on already-existing blockchains like Ethereum. They can represent diverse physical or digital assets. The success of the project they're linked to often plays a key part in how much value they have, though there are often a broad range of other factors that can determine the value - which, much like company stocks, is often built on speculation. 

Examples of tokens include Uniswap (UNI), which is used for decentralized exchanges, and Chainlink (LINK), which facilitates smart contracts.

Stablecoins

Stablecoins are designed to minimize the extreme volatility typical in the crypto market by pegging their value to stable assets like the US dollar or gold. Notable examples include Tether (USDT), which claims a 1:1 backing with the US dollar, meaning each USDT should be supported by $1 held in reserve. Other popular stablecoins are USD Coin (USDC), Binance’s BUSD, and Gemini’s GUSD.

These coins provide a stable means for traders to transfer funds and safeguard the value of their holdings during market fluctuations. They are essential for smooth market entry and exit, investing in fixed-interest decentralized finance (DeFi) products, and protecting against market downturns.

Stablecoins are widely accessible and can be purchased on most cryptocurrency exchanges, including Binance and Coinbase.

2. Elements To Consider When Performing Crypto Fundamental Analysis (FA)

Crypto trading can be profitable, but beginners should start with a solid understanding of fundamental analysis to mitigate risks and make informed decisions.

2.1 What Is Fundamental Analysis?

Fundamental analysis involves evaluating the underlying factors that influence a crypto asset's value to determine if it is overvalued or undervalued. Here’s how you can begin:

2.2 Three Types of Crypto Fundamental Analysis Metrics

2.2.1 On-Chain Metrics

On-chain metrics provide insights derived from the blockchain’s public ledger, which records all transactions across crypto assets. This data allows us to evaluate economic activity and investor behavior by analyzing trends within the blockchain, offering a window into market sentiment and value determination based on fundamental aspects rather than speculation or technical analysis.

On-chain analysis helps distinguish between a cryptocurrency's speculative and utility values by examining factors like user adoption and miner activity. For instance, it can reveal whether a coin's current price is supported by its underlying fundamentals.

Sources of On-Chain Metrics: Extracting useful information from blockchain data manually can be challenging. However, tools and APIs, such as CoinMarketCap's on-chain analytics for Bitcoin, can facilitate this process.

Key on-chain metrics include:

• Hash Rate: This measures the total computational power used in a blockchain network that employs proof-of-work (PoW). A higher hash rate indicates stronger network security and greater mining interest, while a declining rate might signal reduced mining profitability.

• Active Addresses: These are blockchain addresses engaged in transactions over a specific timeframe. Calculations can include unique addresses over days, weeks, or months.

• Transaction Value and Fees Paid: High transaction values and fees suggest active and healthy network participation. The fluctuation in transaction fees can impact mining activity and network security, particularly around events like Bitcoin halving.

2.2.2 Project Metrics

Project metrics involve qualitative assessments of a cryptocurrency project. This includes evaluating the team behind the project, the whitepaper, competitive landscape, and future roadmap.

• Team & Advisors’s Background: Evaluating the experience and track record of the project’s team members is crucial, as their expertise can significantly influence the project’s success. Look for successful past ventures and active contributions on platforms like GitHub and access how actively they engage with the community.

• Cryptocurrency Whitepaper: What problem is the project addressing, and how does it propose to solve it? Is the project based on robust, innovative technology? Does it offer unique features? The whitepaper is essential for understanding a project’s goals, visions, and technology. A well-crafted whitepaper enhances the project's credibility, while a poorly written one can detract from it.

• Competitor Analysis: This involves assessing the strengths and weaknesses of competing projects to understand how a particular cryptocurrency stands out.

• Upcoming Roadmap: Does the roadmap show a clear plan and commitment from the team? The roadmap outlines the project's planned milestones and goals, offering insights into its development trajectory and potential for future success.

• Token Allocation: Check the distribution of tokens. Excessive allocation to the team or early investors, coupled with short vesting periods, can be risky and might indicate potential “rug pulls.” Longer vesting periods suggest a team’s confidence in the project’s long-term success.

2.2.3 Financial Metrics

Fundamental analysis in the forex market encompasses both quantitative and qualitative elements. Similarly, cryptocurrency fundamental analysis also involves key quantitative factors.

In this section, we’ll explore 5 crucial financial metrics that investors and traders commonly use to assess cryptocurrency investments: market capitalization, supply, and trading volume.

2.2.3.1 Market Capitalization (Market Cap)

A company's market capitalization is the total dollar value of all its shares. In the case of the cryptocurrency market, the market cap refers to the total dollar value of all the coins that have been mined. This is calculated by multiplying the current price of a coin by its total supply.

Market Cap = Current price of digital asset X Current supply in circulation

A larger market cap generally indicates more stability, but even high-cap assets like Bitcoin can be volatile. Market cap helps compare different cryptocurrencies and assess their stability and growth potential. Digital currencies with smaller market capitalizations are more susceptible to market whims – and can experience massive gains or dramatic losses

2.2.3.2 Liquidity and Trading Volume

In the crypto market, liquidity refers to how effortlessly a coin or token can be traded without causing substantial price fluctuations. It measures the availability of buyers and sellers and the capacity to execute trades swiftly and at fair market prices.

Liquidity is shaped by market depth, or the order book depth, which indicates the quantity and size of buy and sell orders in the order book. A deep market suggests a significant number of orders on both the bid (buy) and ask (sell) sides, offering ample liquidity for traders. This depth enables traders to execute larger trades with minimal impact on price stability. For instance, popular cryptocurrency exchanges typically have higher trading volumes and more active participants, which facilitates smoother transactions and quicker trade execution.

A high trading volume signals a robust market and instills investor confidence in a project, as it reflects active buying and selling within the crypto market.

2.2.3.3 Circulating Supply

The circulating supply of a digital asset refers to the total number of coins currently available in the market. Unlike the total supply, this number can fluctuate as new tokens are introduced or removed from circulation over time.

Developers may increase the circulating supply through various means, such as mining operations for mineable cryptocurrencies.

It's essential to understand that the supply figure is not exact. It can be difficult to determine which tokens are still held by long-term investors or which have been lost, burned, or otherwise permanently removed from circulation.

For example, of Bitcoin's 18.9 million current supply, an estimated 3.7 million have been permanently removed, including about 1.1 million held by Satoshi Nakamoto.

When conducting fundamental analysis, examining the supply can help avoid "unit price bias," where investors are attracted to tokens simply because they have a low market price.

2.2.3.4 Max Supply

The maximum supply refers to the total number of coins that will ever exist for a cryptocurrency. For instance, Bitcoin has a maximum supply of 21 million coins. Currently, 18.9 million are in circulation, leaving only 2.1 million left to be mined. However, not all cryptocurrencies have a capped supply.

Investment decisions can be influenced by the maximum supply, circulating supply, and inflation rate. Some cryptocurrencies reduce the number of new units over time, appealing to investors who believe future demand will exceed the available supply.

Here are a few tips:

1. Look for projects with significant growth potential.

2. Evaluate projects based on their network impact.

3. Make decisions based on objective analysis, avoiding bias.

4. Research community sentiment and analyze social media engagement

3. CONCLUSION

As the digital economy rapidly expands, new information about cryptocurrencies emerges daily. In this fast-paced environment, performing fundamental analysis is crucial to gain insights that technical analysis might overlook. While technical analysis helps identify entry and exit price levels, fundamental analysis can provide a clearer picture of a cryptocurrency's "true" value and potential future price movements.

However, while the crypto market offers incredible opportunities for financial diversification, it also comes with inherent risks. Combining technical and fundamental analysis can help traders make more informed decisions, but it's essential to remain cautious and always do your own research.

This article has aimed to provide you with a foundational understanding of the critical factors to consider before making trading decisions. For more insights and updates, feel free to explore our other blogs and join our community on Twitter and Telegram. Remember, our content is educational and should not be taken as financial advice.