Fundamental Analysis in Crypto

Hey future traders! Do you guys have any idea about what makes a cryptocurrency worth investing in? It is not only associated with the buzz or the price swings. The fundamental analysis goes a little deeper, exploring the core factors that give a digital currency its value. 

This article helps you to unleash the key elements of fundamental analysis in the crypto sector. Here we will discuss what to look for, from the technology behind the coin to market demand and more. Read the entire article to know the essentials of fundamental analysis in crypto trading. 

What is Fundamental Analysis?

‘Fundamental analysis is a method of evaluating the intrinsic value of a security, sector, or economy’. It includes analyzing a company’s financial statements, management, industry position, and market conditions. The analysis aims to determine if the current investment is fairly valued and also to assist investors in making informed decisions. 

Fundamental analysis and technical analysis are the two major methods of market analysis, the former one is often used for long-term investments. 

Some key aspects of fundamental analysis:

• Factors considered: Economic and financial contributions, industry trends, and external events are a few of the factors considered by fundamental analysis.

• Income statements: Profit or loss is calculated by comparing revenue to expenses. Many important fundamental ratios take information derived from the income statement. 

• Qualitative analysis: Concentrates on the qualities that can’t be measured statistically, including public opinion of the company’s brand, or the people on the board of directors. 

• Recommendations: The recommendation is simply the calculation from a fundamental analysis. For more clarity, if the intrinsic value is higher than the market price, purchasing the share is recommended. 

Project Whitepaper and Use Case

A white paper is a marketing tool to impart insights and solutions to a specific industry problem. It is much different from a case study and composed of more technical research. This can be used to create new leads and nurture existing ones.

Whereas the use case is defined as the primary source of information in the Web3 world that assists in determining a project’s value, price, and several other important factors. 

Come let’s get to know how to evaluate a project’s whitepaper to understand its goals and potential.

1. Milestones and timelines: Identify the project’s primary milestones and their related timelines. A well-defined plan should give a logical progression of development. 
2. Technology upgrades: Search for technical upgrades or innovations that the project intends to implement. This comprises protocol improvements, network enhancements, or new features. 
3. Partnerships and integrations: Keep an eye on any partnerships or integrations listed in the plan. The growth potential can be foreseen from the collaborations made with renowned companies or platforms. 
4. User adoption: Get access to how the plan approaches user adoption and community building. A project’s potential to allure and maintain users is often considered a key driver of success. 

Evaluating realistic goals:

1. Feasibility: Evaluate whether the project’s plan comprises goals that are possible with the current technology. If the goal seems unrealistic, the team might face a lack of understanding resulting in keeping promises that can’t be achieved. 
2. Market relevance: Check whether the project goal meets the current market trends. If the projects focus on solving real-world problems, chances are they will be successful.
3. Team capabilities: Evaluate if the team possesses the appropriate skills and expertise to achieve goals. Chance of success is proportional to the team skill. 
4. Resource allocation: Take a look at how the project intends to use its funding and personnel. To be successful, thoughtful allocation of resources is mandatory. 
5. Adaptability: Check if the project plan is flexible, this is vital in the dynamic crypto world. 

Team and Partnerships

A strong team and partnerships are essential for a project’s success. Let’s have a look at what a strong team and partnership can do:

1. Improve creativity: Unique skills and experiences are delivered by the team members to develop new and innovative solutions. 
2. Increase motivation: A team will have one common goal and the members are working towards it, this will increase motivation and engagement.
3. Improve quality: Since everyone is working together, members can review each other’s work and give constructive feedback. 
4. Promote open communication: Opportunity to share ideas, ask questions, and discuss challenges. 
5. Foster a sense of shared responsibility: Every member of the team is a part of the project’s success. 
6. Reduce conflict: If working together as a team, workplace conflicts that could affect the business are reduced.
7. Increased job satisfaction: Increased job satisfaction and encouraged personal growth are assured when working in a team. 
8. Reduce stress: Stress is reduced if you work in a team.
9. Make complex projects more manageable: Complex tasks can be divided among team members.
10. Leverage diverse skill sets: The diverse skill sets of team members can be used to create solutions. 

Successful partnerships are based on mutual understanding and shared principles. Financial, technical, and in-kind contributions are valued by strong partnerships. 

Tokenomics 

Tokenomics is the economic system that governs a cryptocurrency. This plays a vital role in assessing its potential value and sustainability. 

The two inevitable parts of economics are supply and demand, tokenomics is no different from that. Supply is defined as the amount of personnel willing to sell their tokens whereas demand is the amount of personnel who want to purchase. Both terms define the price. If any one of the sides gets reduced, that will reflect in the price. 

Another term you should know is utility. The utility of a token drives its demand, which will affect the token price, market capitalization, and even circulation supply. 

Let’s first discuss the supply side. This side of token economics desks with the categories such as from where the token comes from, the number of tokens, and how these variables change over time. Come let’s check on some of those design trade-offs.

To dissect the supply side of the token as per Nat Eliason’s notes, you need to consider:

1. The existing number of tokens
2. The number of tokens ever exist
3. How fast are new tokens being released?

Do you know how the supply of the token changes over time? It is rare for the whole supply of tokens to be circulating at release. Instead, they are released over time. The tokens are released in several methods such as vesting schedules, staking rewards, and other ecosystem incentives. 

Supply and demand are like two sides of a coin. Now we are moving towards the demand side. 

Every token has different rights which include governance rights, cash flow rights, and other utility. 

Each right will provide users with incentives to hold tokens and strengthen demand. Additionally, to create demand for the token, many projects introduce more complex mechanisms. 

Network Activity and Adoption Rate

Growth rate is defined as the percentage change of a specific variable within a specific period. Depending on the size of the variable changes over time, the growth rate can be positive or negative. 

For investors, growth rate is the compounded annualized rate of growth of an investment, or a company’s revenues, earnings, or dividends. 

The growth rate can be calculated in several ways, depending on what the figure is intended to convey. You can calculate this easily by dividing the difference between the final and initial value by the initial value, otherwise (EV-BV)/BV. 

Economic growth of a country’s GDP = (GDP₂ – GDP₁ )/ GDP₁

Where, GDP = Gross domestic product of the nation

Compound Annual Growth Rate (CAGR):- CAGR is a variation in the growth rate and this is used to assess an investment’s or company’s performance. 

CAGR = (EV/BV)^1/n – 1

Where: 

EV = Ending value 

BV = Beginning value 

n = Number of years 

Do you know what is the normal growth rate for a company?

A good growth rate for a company is determined by several factors such as the industry it is in, whether it is new or well-established, company size, and the overall condition of the company. Generally speaking, the growth rate of a company should exceed the rate of nominal GRP growth and also the rate of inflation. To satisfy investors, new companies in riskier industries need a higher growth rate. 

Market Sentiment and News Analysis

Discuss how news and social sentiment can influence the value of crypto assets.

Market sentiment is defined as the investors’ current attitude towards a company, a sector, or the financial market as a whole. Crowd psychology plays an important role in the mood of the market. This can be seen in buying and selling activity. 

Market sentiment often termed as investor sentiment, doesn’t resemble fundamental changes in the market. Day traders and technical analysts depend on market sentiment measurement since it influences the indicators that are used to measure and profit from short-term price moves which is caused by the crowd psychology of active investors. This is also important for contrarian investors who trade in the opposite direction of the prevailing consensus. 

Market sentiment is often defined as bearish or bullish. Moos is bearish means the prices are going down. If it is bullish it means stock prices are going up. 

Investors use several indicators to measure market sentiment to determine the best stocks to trade that includes CBOE Volatility Index (VIX), the high-low index, the bullish percent index (BPI), and moving averages (MAs). 

Social sentiment is the people’s emotions, opinions, and attitudes towards a topic, product, or brand on social media. This is often termed sentiment analysis or opinion mining. 

This technique involves analyzing text data that includes social media posts, comments, and reviews, to understand how personnel think about a subject. Through this analysis, businesses can understand how consumers observe their products and services, and also methods to improve their social media presence. 

Benefits of social sentiment analysis in businesses

• Gauge brand health
• Track competitors 
• Identify trends
• Develop marketing campaigns

Methods to improve social media sentiment

• Respond to customer feedback
• Act on customer feedback
• Personalize interactions
• Create relevant content