Trading and long-term investing are difficult processes for beginners. The cryptocurrency market in 2023 has high volatility (variability of coin rates). Therefore, beginners need to learn to assess the prospects for growth or decline in the price of tokens and coins. Cryptocurrency fundamental analysis (FA) is an effective forecasting method. It allows you to determine whether the rate of the selected assets will increase.
The essence of FA is to assess the real price and growth prospects of an asset based on economic and financial indicators. The investor's goal is to understand whether it is possible to buy cryptocurrency now.
For this we study:
Methods for using crypto assets.
Number of blockchain network users.
Project development team.
Technical indicators (hashrate, number of transactions).
Economic situation in the world.
User interest in cryptocurrencies.
Also, the news background is of great importance for analysis. Almost every headline in the media can influence the market price of a cryptocurrency. The analyst needs to take into account news and economic forecasts.
Peculiarities
FA in cryptocurrency can be compared with similar research methods in other financial markets. Therefore, this type of analysis is also applicable to traditional assets. However, their volatility is lower than that of coins and tokens. In addition, when evaluating securities, bonds, commodities, fiat currencies, technical details related to processes in the blockchain are not taken into account.
On the other hand, traditional assets are highly dependent on economic processes - trade, production, money issuance.
Problems
The price of crypto assets cannot be predicted only by indicators of traditional financial markets.
The cost of tokens and coins may be affected by:
Financial policies in the USA, Japan, China and other countries.
Global economic growth rates.
Demand for raw materials.
Cost of production of goods and other factors.
However, for digital coins, traditional market indicators still provide little information for an accurate forecast. The analyst needs special metrics that apply only to crypto assets.
The main thing is to find reliable fundamental indicators. The data used in FA must be reliable and objective. For example, the number of followers on social networks or other communities is not a reliable indicator. After all, it can simply be increased artificially.
Analysts' opinions and developers' statements can also be biased. Statistical indicators (trading volume, number of crypto wallets created, laws adopted) are of much greater value.
There is no single fundamental metric that provides a complete picture of a network. For example, an analyst may consider the rapid growth in the number of active wallets on the blockchain. However, their number is increased by several users who simply create new addresses for each transaction. Separately, this indicator provides little useful information. To make a forecast, you need to take into account all factors affecting the rate of a token or coin.
Fundamental Analysis Metrics
For FA, investors use 3 key categories of indicators:
On-chain metrics.
Design indicators.
Financial parameters.
On-chain metrics
Cryptocurrency systems are transparent. People have access to all the information on the network:
Daily active addresses.
Number of large transactions.
Number of existing wallets.
Number of transactions per day.
Commission for trading operations and other fundamental indicators of the system.
You can view on-chain metrics on blockchain monitoring services. They use various APIs (software tools for connecting to cryptocurrency systems and exchanges) and other resources to obtain data from the digital network.
Number of transactions
An increasing number of transfers between wallet addresses on the blockchain usually indicates the growing popularity of a crypto asset. However, this fundamental indicator alone provides the analyst with little useful information. In new projects, only a few users can carry out a large number of transactions if they need it.
You can view the number of transactions through special sites for monitoring cryptocurrency networks like blockchain.com.
Transaction amount
The blockchain contains information about each transfer between wallet addresses. Using APIs, monitoring sites collect data on the total amount of transactions for a period. A rapid increase in this indicator indicates an increase in interest in the coin or token.
Investors are starting to use cryptocurrency more to make digital transfers. Such a fundamental indicator indicates a possible rapid increase in the value of the crypto asset.
Active addresses
A popular fundamental indicator is also the number of working wallets for the selected period. An increase in their number indicates an increase in demand for a coin or token. Analysts count active addresses through monitoring services in 2 ways:
The total number of unique cryptocurrency wallets for all time.
The total number of senders and recipients of each transaction during the specified period.
Commissions
The size of this cryptocurrency fundamental analysis indicator reflects the demand for transfers within the system. The commission for payment transactions increases as the network becomes congested. When this indicator is high, this indicates the active use of the digital asset by investors and traders.
Increasing fees may cause the market price of the asset to decline. For example, on the Ethereum network until December 2017, users paid less than $0.1 per transaction. Subsequently, the average commission increased to $11.
Ethereum developers partially solved the problem by switching to a new algorithm. If this did not happen, many users would abandon the use of the Ethereum network in favor of blockchains with lower fees. This could reduce the capitalization and rate of ETH coins.
Computing power and staking amount
Consensus algorithms are methods for achieving a common point of view among network nodes in a blockchain. Cryptocurrency systems need such mechanisms for continuous operation without errors. When a node adds a new transaction or block to the chain, other nodes synchronize their own copies with the updated network.
PoW systems work thanks to miners - nodes that use the computing power of computer equipment. It is needed to solve cryptographic problems.
The answer is a valid hash, that is, an identifier that contains information about a new link in the chain or transaction that is added to the network.
With the Proof-of-Work consensus mechanism, the main fundamental indicator of the cryptocurrency system is the hashrate (the total amount of computing power of all nodes in the blockchain). A large increase in this metric indicates an increase in interest in mining the coin, which may affect its price.
PoS systems work thanks to validators - nodes that block coins in the blockchain to confirm their own authority. This is called staking. Such nodes perform validation - they check the validity of current transactions. But this does not require significant computing power.
For staking, the number of coins frozen in a special wallet is more important. The size of this parameter determines the number of transactions processed by one node.
For the fundamental analysis of cryptocurrency in a blockchain with the Proof-of-Stake algorithm, the indicator of the total number of assets staked by all nodes of the system is important. The increase in their number also indicates an increase in demand for digital currency validation.
Design metrics
When performing FA, only current on-chain metrics cannot be taken into account. It is required to analyze the complete business model of a cryptocurrency startup. Project metrics speak about the plans and approach of the developers.
The following fundamental indicators are important for analyzing a cryptocurrency project:
Whitepaper (technical documentation).
Developer team and capabilities.
Competitiveness of the cryptocurrency project.
Tokenomics and initial distribution of digital assets.
Whitepaper
Whitepaper - technical documentation of the project (in fact, its overview). Whitepaper is important for fundamental analysis of a business model.
It indicates the important indicators of the project:
Availability of the program code (is it open to developers).
Methods for using the new coin in the blockchain system.
Roadmap with planned major updates and smaller improvements to the cryptocurrency network.
Scheme for the sale of altcoins and the distribution of digital assets.
After reading the whitepaper, it will be useful to read the opinions of other analysts about the digital project. It is important to determine the attitude (positive or negative) of potential investors towards an asset in order to increase the accuracy of price prediction. Special cryptocurrency portals, including Crypto.ru, are great for this.
Tokenomics and initial distribution
Traditional financial markets are subject to inflationary processes. National currencies depreciate due to the rapid issuance of large amounts of money. Crypto assets cannot be subject to inflation due to pre-developed tokenomics. This term means a diagram of the following processes:
Issue (issue) of new coins.
Distribution of coins between participants in the digital network.
Limiting the total possible number of cryptocurrency assets.
Burning virtual money (destruction of some coins to artificially increase their market price) and other processes associated with their use.
For a fundamental analysis of a cryptocurrency, it is important for an investor to know its tokenomics. Evaluating the methods and processes of using a digital asset will allow the trader to determine the prospects for price growth or decline.
In some cases, the release of cryptocurrency assets occurs gradually. For example, BTC coins are obtained through mining. But some startups provide for a one-time preliminary issue.
The generated tokens are subsequently distributed among investors and traders. There are many ways to market pre-issued cryptocurrency. However, there are only 3 main methods for conducting a token sale.
Financial metrics
In FA, taking into account the economic indicators of the project helps make a more accurate forecast of changes in the market rate of a digital asset. An investor can take some financial metrics directly from exchanges.
However, most economic indicators are only available on blockchain monitoring services and cryptocurrency portals.
Analysts often use the following financial indicators:
The value of the cryptocurrency network (market capitalization).
Daily trading volume and liquidity of tokens and coins.
Mechanisms for offering crypto assets.
Capitalization
The value of the network is the number of mined coins or tokens multiplied by the current exchange rate of the asset. Market capitalization is usually calculated with the assumption that they are all purchased by investors. This note is relevant for tokens that have not yet been distributed among users.
Market capitalization depends in part on the practical utility of the cryptocurrency. A digital project must solve a user problem and meet their requirements. Then investors will buy a coin or token and create a shortage of the asset on exchanges, which will push its quotes to grow.
Proposal mechanisms
Many cryptocurrencies have a limited supply. For example, the maximum number of bitcoins is 21 million coins. The last Bitcoin will be mined around 2140.
Supply mechanisms are schemes for issuing new crypto assets.
There are 3 main algorithms:
Gradually slowing cryptocurrency release. Initially there are 0 coins in the blockchain. Miners create blocks and confirm transactions, thereby issuing new crypto-assets. At first, nodes receive a large reward, but the network is designed to systematically reduce it. In the Bitcoin network, this process is called halving.
Periodic burning of tokens. The developers issue currency immediately in the planned quantity, but provide a mechanism that reduces its supply. For example, the creators of the Binance Coin token issued 200 million BNB. On a quarterly basis, the management of the crypto exchange allocates 20% of profits to buy back assets from the market and then burn them. The developers plan to reduce the supply to 100 million tokens. This creates an artificial shortage, which increases the market rate of the cryptocurrency.
Elastic offer. Developers release a fixed number of digital assets, but try to keep the coin price at the same level. This is possible thanks to the relocation mechanism - reducing or expanding the circulating supply (the amount of cryptocurrency on the market) if necessary. This algorithm is used for stablecoins.
The first 2 mechanisms from the list above are designed to stimulate the growth of digital assets over a long period of time. Coins with elastic supply, due to their own specifics, practically cannot bring profit to the investor. Every analyst and trader should take this into account.
Let's sum it up
FA methods assume that the price of a cryptocurrency always tends to the so-called “real” value. In 2021, analysts use about 20 indicators of blockchain metrics, the cryptocurrency project and the coin itself.
In the world of digital assets, there are no perfect rules for performing analysis. There are only patterns and key indicators. Their proper use gives investors an understanding of the further movement of the cryptocurrency market rate.
