If you are not a cryptocurrency expert, you will certainly be overwhelmed by the huge number of coins and tokens that already exist.
You ask yourself:
- How do you rationally evaluate all cryptocurrencies?
- Which ones are worth investing in?
In the early days of cryptocurrencies, it was only possible to buy a few different ones; today, there are several thousand. The fundamental analysis of cryptocurrencies is not only to explore the potential, but also to exclude that it is a fraudulent project. There are already several hundred such fraudulent projects and it can be assumed that this number will continue to grow.
Determining the ‘true’ value of a cryptocurrency is a difficult task, however, as many factors from different forms of analysis play a role.
For this reason, fundamental analysis (FA) is one of three important tools for determining the potential future value of a cryptocurrency. The other two are technical chart analysis and sentiment analysis, with fundamental analysis obviously playing the main role in the long term. In this article, we would like to explain what this consists of and how to do it in 6 steps. But first, let’s consider what fundamental analysis actually is
What is fundamental analysis
Fundamental analysis of cryptocurrencies differs somewhat from stock analysis in that companies focus on specific numbers, such as annual reports, access and capital flow conclusions.
Fundamental analysis is an active process that takes time if done correctly. There are many aspects to consider when determining how the price of a cryptocurrency may change over the long term. However, it differs significantly from the analysis of cryptocurrencies and tokens. Since they are not companies, there are no annual reports with reliable key data.
- The value of a cryptocurrency like Bitcoin is mainly driven by community trust, as with conventional currencies like the dollar or the euro
- The value and usefulness of a token depends largely on its usability and the number of users
- New security tokens (STO), where it can directly participate in the success of a company, are an exception
Cryptocurrencies are a new asset class
As cryptocurrencies are a new asset class at an early stage of development, it is also difficult to compare them with existing projects, as cryptocurrencies themselves are only a few years old and do not allow for reliable comparisons.
If you are now wondering what fundamental analysis should bring to the cryptocurrency field, rest assured. Despite the security differences and difficulties mentioned above, it is possible to gain an advantage over other investors through FA. Those who put a lot of effort into organised research and analysis can expect a higher success rate for their investments.
Below, we will discuss the various factors, organised according to the topics to be considered in the analysis. To achieve results, these topics can be addressed step by step.
Crypto metrics (figures)
Metrics are the first thing to check. This gives an initial idea of the size of the cryptocurrency compared to competing projects. Even if cryptocurrencies are not securities and there is no company behind them, there are still some key figures that are relevant for analysis:
- Market capitalisation: Market capitalisation is formed by the number of coins/tokens in circulation and the current price at which they are traded (number x price = market capitalisation). This key figure is particularly important for new projects, as possible parabolic growth can be determined from it. If there are two similar projects with the same fundamentals, but the market capitalisation of one is one billion euros and the other only ten million euros, it is obvious which one has the greater potential.
- Circulation supply and tota supply: disbursement is divided into exchange and total disbursement. It does not matter whether these figures are high or low. For many projects, it makes sense to have a high total supply to ensure future scalability. It is only important to ensure maximum supply. Bitcoin is 21 million BTC.
- Development of price history: Although this is not an article about the analysis of technical charts, it is necessary to observe the historical development of prices. An investment in a cryptocurrency that has already seen a big rise is potentially riskier than one where a big jump might still be imminent.
- Distribution: cryptocurrencies offer an insight into distribution among investors. In so-called ‘rich lists’, you can see which wallets hold a percentage of the available supply. Ideally, this is distributed fairly evenly. Make sure that several portfolios contain most of the coins and tokens of the project to be analysed.
- Trading volume and order book: Cryptocurrency trading volume alone is not a measure of the quality of a project, but liquidity should be sufficient to build a desired position. In this context, it is also worth examining the trading platforms on which the coin/token is already traded. Check the volume on the different trading platforms and get an idea of the size of the platforms. If none of the big ones (Binance, eToro, …) are already present, the potential will increase significantly with a possible listing in the future.
The idea behind cryptocurrencies
The idea is an important factor in any venture. It is important to have a basic knowledge of the different areas of application.
And is it a currency suitable for payment processing, such as Litecoin?
Or is it something else, like a blockchain platform on which to run other projects like Ethereum or Tezos?
It is important to move gradually from a micro to a macro perspective.
Micro: Suppose it is a cryptocurrency similar to bitcoin. Cloning bitcoin is not a bad thing, but the question to ask is why would someone prefer this currency to bitcoin or why should this particular currency gain value?
As far as utility-token is concerned, one has to ask whether it really makes sense, i.e. whether one is solving a real problem and what role the token plays in the network. Can you run the same platform with Bitcoin, Ethereum or something else?
Macro: If the micro perspective makes sense, you can switch to a macro perspective and go from cryptocurrencies to the ‘real world’: has the common problem been solved? Are there enough potential users to guarantee a stable or growing demand?
- Understand the concept: must have a basic understanding of the concept. For this purpose, it is useful to consult the website of the project in question. It is usually possible to obtain an overview of the project idea and its areas of application.
- Whitepaper: by reading the whitepaper, you can better understand how to do it. The idea must be feasible and the whitepaper explains how each team intends to realise it.
- Roadmap: the roadmap contains several milestones, in most cases defined over a period of at least 12 months. This explains the status of the project in terms of content and what progress is expected in the near future.
- Main competitors: due to the large number of existing cryptocurrencies and tokens, there is sometimes more or less crossover between different competitors. Therefore, we advise you to take a closer look to see if the idea is already established and if competitors already have a working product.
- Market size: market size can be determined by market analysis and is particularly important. This is not only limited to the market for cryptocurrency/blockchain applications, but in many cases also applies to potential in the usual economic sectors. Here, not only the status quo, but also the possible development of these sectors plays an important role.
Evaluating the cryptocurrency technology
When it comes to cryptocurrencies or token technology, there are several issues that take top priority.
It is therefore important to know whether the coin/token uses a Proof of Work (PoW) or a Proof of Stake (PoS) mechanism. In the case of PoW coins, it is advisable to find out the exact algorithm – which coins are mined and whether it is compatible with ASICs and can also be mined on conventional GPUs.
Also, even if you have no technical background, you should carefully examine the white paper:
(a) determine with which technology the project is to be realised
(b) what are the unique advantages of the project and its scalability.
If you would like to delve into the subject, a good place to do so is the bitcointalk.org forum, as there are users who know the technology well and are happy to answer questions.
Analysing cryptocurrencies: Team
The development team is an important factor. As with start-ups, it is not only about a promising idea and its feasibility, but also about a team that has the skills to implement it.
First of all, it is necessary to check the core members of the team, i.e. the founders. It is important to find out what they have done before and whether they have a successful start-up behind them. This is not limited to the cryptocurrency market, many founders of cryptocurrency and blockchain projects come from completely different sectors.
Do a Google search and conduct an analysis
Useful resources include Google search and social networks (especially LinkedIn). If you have doubts about the authenticity of a team member and suspect that their profile picture is fake, you can dispel these doubts by using a reverse Google Image Search.
The same search should be done for other important team members who are largely responsible for the success of the project. Many cryptocurrency projects have an excellent development team, but no one in charge of marketing, or vice versa. There must be a certain balance between the different departments, which ideally complement each other. This is the only way to ensure positive expectations of success.
Cryptocurrency projects with anonymous teams are a special case. Many investors are afraid to invest in these projects and when asked who developed Bitcoin, they cannot give a satisfactory answer. There are also people who work under real names and are guilty of fraud. In our opinion, investing in these projects is justified if several issues are taken into account in the fundamental analysis:
- Are they communicative and easily accessible to community members?
- Is there evidence of the activity of developers, e.g. on GitHub?
- Are they able to concretely explain their idea, technology and long-term vision?
The answers to these questions can minimise the risk of fraud.
Even the best product eventually needs public relations and marketing to get as many people as possible to know about it. Many cryptocurrencies struggle with this, because their founders often only have technical knowledge and rely on their product to speak for itself. Marketing, however, is an important part of success, as the Tron (TRX) project shows.
When analysing this topic, it is important to check what marketing activities have already been undertaken. Have the main platforms issued press releases? Have targeted online advertisements been placed? Are social media channels (Twitter, Reddit, Medium, Slack, Discord…) being used appropriately?
If you cannot find the marketing activities, review the roadmap. It often mentions planned marketing activities.
Evaluating cryptocurrencies: Communities
The value of cryptocurrencies comes from the trust the community places in them. It is therefore important to pay attention to this in more detail in the fundamental analysis. First of all, the most important social media channels must be checked. Besides quantity (number of followers and posts), quality is at least as important. Since many projects like to acquire followers, especially on Twitter, it is advisable to do a quick check to see if the number of followers is genuine.
Further information can be obtained by checking the search for the $ (currency) tag on Twitter, in discussions on Reddit and on Bitcointalk.org. The important thing is not only whether users contribute, but also how the team communicates with them. A good team keeps in touch with the community, answers questions and is ready to help if there are problems with the product.
We hope that you have become familiar with the most important areas of fundamental cryptocurrency analysis and are better able to assess the potential long-term success of cryptocurrencies in the future.
Here are some useful links for the fundamental analysis of cryptocurrencies: Bitcointalk.org – the largest cryptocurrency forum, with discussions on many cryptocurrencies
CoinMarketCap.com – Calendar of coin-related events and news
Author: Gianluca Lombardi
Gianluca is the editor-in-chief of this site. A finance graduate, he is an active trader who has tested all trading platforms and knows all their secrets. Technology is his passion; he spends much of his free time in the metaverse. Gianluca loves learning new things, researching, discussing and writing about technology, especially when it comes to cryptocurrency and blockchain technology.