As there are thousands of cryptocurrencies out there, newcomers can understandably have a hard time knowing how to go about deciding which cryptocurrency to look into. This is where fundamental analysis can help.
What Is Fundamental Analysis?
Fundamental analysis is a way to measure an asset’s worth, or intrinsic value, through looking at economic and financial factors.
When you do fundamental analysis, you’re basically looking into factors that may affect the value of an asset. As you could imagine, the range of factors is huge. In the case of stocks, examples of factors are the state of the economy and the professional background of the company’s management.
You’re taking a deep dive into the stock, cryptocurrency or security in order to assess its prospects as an investment that aligns with your investment goals and plan.
More comprehensive fundamental analysis methods will include coming up with an estimated fair value of the asset that is being looked into. When it comes to cryptocurrencies, there aren’t yet any widely used valuation methods due to the newness of the asset class.
What to Look For
What’s the project?
If you’re considering investing in a cryptocurrency, you should definitely know what the corresponding project actually is.
Ask key questions such as:
- What’s the purpose of this project?
- What problem is the project trying to solve?
- How does the project’s proposed solution actually work?
You should be able to summarise the general project in a few sentences. Getting a feel for the project and understanding what they do is one of the most important steps of any fundamental analysis process.
You may have heard the saying “never invest in a business you don’t understand.” The same applies when it comes to investing in cryptocurrencies. If you own a cryptocurrency but can’t explain the project and the purpose of the cryptocurrency, you’ll likely find it more challenging to manage your investment than another investor who took more time doing their fundamental analysis prior to investing.
A good place to start your fundamental analysis is the project’s website and white paper.
Read the white paper
Most crypto projects have a whitepaper. This is a document detailing everything you need to know about the project. Look for key information, such as:
- Purpose of the project—what problem is it solving?
- Usage of blockchain technology—why does this solution need to be built on a blockchain?
- Token mechanics—what’s the purpose of the cryptocurrency?
- Token release schedule—how much supply is yet to become circulating?
- Roadmap—how far away is the proposed solution from being ready?
White papers can get technical. Don’t get too caught up in understanding the advanced technology behind it or how it works to the finest detail. Rather, focus on understanding what it is and what problem it intends to solve.
If you finish a whitepaper and are left with more questions than you started with, consider contacting the project’s team for answers.
Research the industry
What’s the real-world industry that the project is looking to disrupt? Answering this question can indicate to you the amount of potential value that could flow to the cryptocurrency if the project’s solution eventually proves to be superior to that which is currently offered by that industry’s leaders.
To guide your fundamental analysis, consider looking for answers to the following:
- Who are the competitors in the industry?
- Are there other crypto projects trying to disrupt the same industry?
- What’s the state of the industry?
- Can this project’s proposed solution penetrate the market?
Understand why the use of blockchain technology is inherent to the project’s very existence. That is, why has the team chosen to build its solution with blockchain? This should be clearly explained in the whitepaper and, ideally, expanded upon in the project’s blog.
Not every solution has to be run on a blockchain and, in many cases, it makes little to no sense to do so. When a project can’t offer a clear reason for using blockchain technology, it is widely considered to be a red flag.
Who’s steering the ship?
In the cryptocurrency space, it’s common for founding teams to stem from the same company, start-up or college. Many projects will be under development at the time of investing in the underlying cryptocurrency, so it’s extremely important you spend time researching the co-founders’ professional and educational track records.
For each co-founder, consider finding answers to questions like:
- What experience do they have?
- What other projects were they a part of? And did they do well?
- Where did they study?
- What is their reputation?
You can normally find information about the team on their website. Once you have found their names, LinkedIn can be a good place to start to see their experience, education and previous projects they were a part of.
You can use this information as a springboard to further research their credentials and help spot any potential red flags.
Look into their funding & backing
Many projects have ambitious goals to deliver a solution. But to deliver this solution, funding is needed.
Has the project behind the cryptocurrency previously raised funding? If so, which investment firms or investors are backing them?
If the project is preparing to conduct a token sale, will this be their main source of funding?
Sometimes projects receive grants from government-backed entities or the innovation arm of technology multinationals such as Samsung’s Samsung NEXT Stack Zero Grant Program. If a project has received such funding, you could take that as a signal to research its solution and the underlying cryptocurrency further.
For example, the UNICEF Innovation Fund regularly funds blockchain start-ups.
Do they have partnerships?
Examining the quality of a project’s partners can be a great way to gauge the promise of its solution and the value of its underlying cryptocurrency.
Is their blockchain or cryptocurrency being used in the real world? Who are their partners? Do they have any partners that aren’t in the crypto industry?
If the project does claim to have partnerships with world-leading corporations, be sure to read the partnership announcement, as it will detail the parameters of their relationship. For example, a partnership with Visa may just mean the project is a member of Visa’s Fast Track program.
Take a deep dive into the token
Does the token or cryptocurrency have an actual use case? For example, a cryptocurrency might need to be held by anyone who wants to take part in the governance of a project. It might be used as a key feature for an insurance service or it could be used as a chip to govern a casino’s gaming ecosystem.
Does the cryptocurrency have a utility? Can the project run and function without the token? What’s the supply of the token and how are tokens distributed?
Look into their progress & upcoming dates
If the project has existed for a fair while, consider looking over their roadmap and past blog posts to see what they have promised and achieved. Have they reached any key milestones?
In instances where deadlines have been postponed—which can happen for various reasons—seeing how the team communicated this (if at all!) will tell you plenty about the nature of the team.
Are their developers active and are they actively improving the project’s solution? A good place to monitor developer activity is GitHub.
Knowing what’s down the pipeline for projects can be useful. Have they set a date for a mainnet or test launch? Are they looking to upgrade the blockchain or tweak the cryptocurrency’s use case? Typically, price will become more volatile leading up to a key date such as a mainnet release.
Once you’ve done your own research, it can be a good idea to supplement it with others’ research.
This is where a group of enthusiasts such as the Collective Shift community can prove valuable. You can use the search bar to find past discussions, research and insights. There’s a treasure trove of value you can access and pair with your own research.
Other resources such as Binance Academy are also useful ways to enhance your fundamental research. Finally, it’s highly likely the cryptocurrency you’re researching has been scrutinised by independent analysts—a quick Google or YouTube search will tell you if it has.