As a crypto trader, you want to know what causes prices to rise, fall or stagnate.
While markets are not always predictable, with sound analysis, you can often get at least a reasonably good idea of what the most probable scenarios may be.
A good trader knows when to trade. They recognize market trends and identify areas where they can reliably predict what is going to happen next.
But how do they do it?
There are two answers here: fundamental analysis and technical analysis.
Technical analysis is the study of historical price action to predict future price action. Technical analysis is a significant part of trading, based largely on human psychology – a fascinating area.
Fundamental analysis looks at the fundamentals of an asset, or in other words, every aspect of an asset that contributes to its overall value.
In this blog, we will focus on fundamental analysis.
The basics of fundamental analysis
Fundamental analysis is by no means exclusive to cryptocurrency – it’s ingrained in other types of trading.
The concept is simple: if you can recognize that an asset has intrinsic value that is out of proportion to its current market price, you can trade based on your analysis and, in theory, make a profit.
You should be aiming to identify projects you believe have a strong chance of success. Then when you invest and the team proves it’s capabilities, other investors should notice and the price action should be favorable.
That’s fundamental analysis. You are researching your investments to determine their future value.
It works the other way too. If you research an asset that has a big market cap, you may determine that the asset is highly overvalued. That’s fine, and happens often.
You will often find situations where fundamental analysis plays out just as you would expect.
If you can recognize the future potential of a project, or realize that the project is presently undervalued in the market, you can profit.
Fundamental analysis also comes down to smaller details too. In 2017 it was very trendy in crypto to rebrand a token and give it a new name and logo. A price increase would usually follow a rebrand.
However, over time this stopped having an impact.
Traders need to be able to recognize how fundamental changes like this are going to be received by market participants. In many cases it doesn’t matter how you feel about it, it matters how the market is going to feel about it.
Little changes can cause a big difference. Always think about:
- What changes are happening?
- How is the market is going to react?
Of course, fundamental analysis is about more than just markets reacting to changes. Realizing the potential future value of assets is key.
How to do fundamental analysis in crypto
Most cryptocurrency projects aren’t like traditional companies. You don’t have mounds of data to sift through like you would with traditional stock investments.
Since crypto is in its infancy, it is highly speculative.
There are several factors to look out for when analyzing an investment (click the links to jump to a section or scroll down to read everything):
- Target market
- Competitor comparison
- Demand, tokenomics and utility
- Status and active users
- Community and reviews
- Real world use case
- Price history and age
- Liquidity and volume
- Market cap
Every product has a target market and this means you should consider market size.
A larger market is not always better. If the market is large, it could already be over-saturated with solutions, decreasing the likelihood of adoption.
Niche markets are small, but could be highly receptive to a new solution to a problem.
Competition is important in any industry, and you can use it to gauge the effectiveness of a crypto project. Think about:
How many competitors are there?
If there are lots of players, that makes it more difficult for your chosen project to gain adoption.
How do they compare to their competitors?
Stacking something against competitors can highlight strengths and weaknesses, and suggest whether they are likely to beat their competitors in the long run.
Evaluate the level of competition and decide whether a project is in good standing or not, relative to the rest. If the product is unique, that could be a great sign.
Successful products have great teams behind them.
What can you find out about the team?
Look at the senior management: who are they, where they are from, what’s their history? If there is a skilled team with a wealth of experience, that’s definitely a good sign.
Crypto projects often have roadmaps in one form or another. They show what upcoming plans there are to move the project forward. Take a look at these plans and see what you think.
How ambitious is the roadmap? Ambition is good, but there can be too much.
Development and releases
Just like a roadmap looks into the future, you can look back and see how a project has performed over time in terms of development.
If there is a healthy history of releases, that’s a good look.
In crypto, partnerships are important for assigning value, but make sure you understand the details of the partnership before passing judgment.
Demand, tokenomics and utility
Price and value are driven by supply and demand. Theoretically, the larger the demand, the higher the price.
Demand is controlled by tokenomics and utility.
Look into the tokenomics, which is essentially the economy based around the token. The token should be useful within the ecosystem to create sufficient demand.
Evaluate whether the utility is enough to drive future demand, and factor future plans for utility in your decision.
Crypto projects don’t start on a level playing field. If you were to launch a cryptocurrency tomorrow, and Google also launched one on the same day, it’s likely Google’s would gain more traction.
How established is the company that controls this project? If it already has a lot of users that will now use the cryptocurrency in question, that could contribute to value.
Whitepapers outline the nitty gritty of a project. They are technical documents, but they are important. They will detail everything you need to know about how it works, which can massively influence your investment decisions.
Read whitepapers before investing.
Community and reviews
Take a dive into the community and read reviews about the project. See what different people have to say about it.
Real world use case
This is important.
A lot of people get caught up in the moment and don’t stop to think: why?
While a project may have great fundamentals, ask yourself whether it has to use blockchain and have its own cryptocurrency. If it doesn’t, that is something to think about. It could sway long term value, one way or another.
Price history and age
Cryptocurrencies come and go. If a project has been established for a long time, and has consistently maintained value relative to other cryptos, perhaps it has longevity.
However, larger returns may be found from smaller, relatively unknown coins that breakout and become mainstream.
Liquidity and volume
How often is the cryptocurrency traded?
If there is a lot of interest, and lots of trading, this may be a token that’s high in demand.
Take into account the market cap to see the potential for growth. Projects with larger market caps most likely have smaller growth potential relative to lower cap ones.
Regulation matters. If a project is not adhering to laws and regulations, that could have adverse effects on the price in the future.
When you are looking at a potential investment, keep these things in mind. This is not an exhaustive list, but it’s a great way for you to get started analyzing potential crypto investments to help you become a better crypto trader.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.
Providing liquidity for the crypto economy.