Conduct a Cryptocurrency Fundamental Analysis | Bitbuy.ca

How to Conduct a Cryptocurrency Fundamental Analysis

The maturity that the cryptocurrency industry has witnessed has been remarkable.

When Bitcoin first started, it was a niche product confined to a few crypto enthusiasts. Digital tokens were shunned by governments and central banks, warning that they were primarily used for illicit activities. Wall Street would not touch the sector with a ten-foot pole.

How times have changed.

Everyone is hopping on the cryptocurrency bandwagon, from Wall Street to Main Street, hoping to take advantage of this booming market and grab a slice of the $1.5 trillion global market.

Indeed, cryptocurrency investing has become serious and legitimate. While pump-and-dump schemes are prevalent among the thousands of virtual currencies, there are still many exceptional tokens to choose from in your trading endeavours. And this involves fundamental analysis, much like what you would do for stocks and forex.

We have compiled a guide on performing a fundamental analysis of the cryptocurrency market.

What Is a Fundamental Analysis?

Fundamental analysis is, well, fundamental to the financial markets. The objective is to determine or measure an asset’s intrinsic value by assessing a broad array of publicly available economic and financial information. This could include news that could impact short-term price movements or changes in crypto markets that could lead to long-term effects.

The primary goal is to determine if the asset is overvalued or undervalued, and if the data you have compiled can help you enter or exit positions.

So, now that you are aware of what fundamental analysis is, here is a list of tactics you could employ to identify the valuations of a cryptocurrency.

  1. Read the Token’s White Paper

The creators behind the digital protocol and the token will release a white paper to explain to the public the project’s goal and the currency’s utility (see below). However, you will need to use greater scrutiny by reading other white papers. It has become common for others to rip off the thoughts and words of some of their peers in the crypto ecosystem.

  1. Learn About the Team Behind the Cryptocurrency

Is this cryptocurrency being developed and supported by big names in the industry or the broader tech community? Are academics behind the project? Are you completely unaware of who these individuals or organizations may be?

Whatever the case, it is imperative that you research the names and groups behind the crypto project to determine its legitimacy.

  1. Utility

Indeed, one of the best measurements of learning, if it is useful to invest or avoid the cryptocurrency, is by finding out if the protocol solves a significant problem. If there are plenty of use cases for the protocol, it can raise the token’s market capitalization.

When you come across the thousands of digital currencies available today, you will inevitably read about solutions to issues within the industry, such as transaction times or smart contracts. Of course, it is important to note that many cryptos are trying to resolve external issues, like supply chains and non-profit contributions.

  1. Conventional Media and Social Media

Bitcoin, Ethereum, Dogecoin, and Shibacoin have captured most of the business news headlines over the last year, be it CNBC or The New York Times. But while this might suggest that it could be too late to get in on the bottom floor, it potentially legitimizes the digital currency and its more expansive goals.

Moreover, social media can also serve as a valuable source since it could tell you if this could be a premier coin or a pump-and-dump meme coin that serves no purpose other than to turn a quick profit (or loss), leaving those late to the party holding the bag.

  1. Stay on Top of Protocol Announcements

Should you partake in the “set it and forget it” investment strategy for cryptocurrencies? Some say that this is not the best strategy – for now. Therefore, it would be prudent to stay on top of any and all announcements from the project creators, giving you the latest developments for the project.

In this case, the adage “no news is good news” does not ring true!

  1. Hash Rate

Do you want to uncover how secure a cryptocurrency is right now? Check out the hash rate. This piece of data gauges the complete computational power that a proof-of-work crypto network utilizes to execute transactions in a blockchain.

The higher the hash rate, the more computing power is necessary to seize control of a network.

As the saying goes, a high hash rate is a good hash rate.

  1. Observe the Technical Details

Here is the part that can get a bit more intricate, a daunting task for beginner traders. When you perform your fundamental analysis, it would be helpful to target some of the more technical details of cryptocurrency investing.

What should you do exactly? Here are a few strategies to incorporate into your trading journey:

  • Active Addresses: This is a gauge of the active addresses that are “open” during your chosen time span. In other words, these addresses are sending and receiving over days, weeks, or months. Let’s say six months is the figure you should keep an eye on throughout your analysis.
  • Market Capitalization: This is the valuation of the complete cryptocurrency (multiplying the circulating supply with the current price). Remember, this could be misleading information because of purposeful distortions, so complement this data with all other information.
  • Maximum Supply: This represents the total number of coins that will be mined and distributed to crypto investors.
  • Stock to Flow (S2F): This is a ratio that emphasizes the amount of a resource held in reserves divided by the amount that is created each year. It could spotlight a coin’s scarcity, highlighting its ability to retain its value over the long term.
  • Transaction Count: Measure how active or busy the cryptocurrency is by monitoring the network and determining over a specific period.
  • Transaction Value: Like the transaction count, the transaction value can convey to you how much money, be it $10 or $1,000, is being transacted during a set timeframe.

Final Thoughts

Like stocks or exchange-traded funds (ETFs), you should never go into a cryptocurrency investment without crucial information that can aid your trading endeavours. By choosing to be unaware of the fundamentals of your digital asset, you could lose out on money. In today’s environment, crypto trading has evolved beyond scanning Reddit or reading Telegram accounts. You need to do your research and gather all the valuable data to make an informed decision and enter into a suitable position.

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