The first decade of the cryptocurrency domain has been a wild one. It is an emerging sector and one that calls for a different breed of people. Those who are willing to take risks, understand society, dig into age old concepts like money and value creation and do what it takes to create a different money system.
It seems as if the crypto realm has been led by those who have strong feelings and emotions. For instance, the spikes that Bitcoin has had mixed with the heavy declines is something that makes Bitcoin and other digital assets a gamblers delight.
Indeed there is a significant sense that gambling is reigning supreme within this domain. The sector brings significant returns to those who ICO, to those who invest in those initial coin offerings, and to those who invest and speculate in the markets from year to year.
People who don’t invest in Bitcoin or other assets at right times may kick themselves for missing out on massive gains. Individuals who do invest early and see those significant gains in their portfolio can get a rush of adrenaline with that huge value creation. Of course fear of missing out and holding on for dear life seems to be one of the more fun and intriguing parts of the cryptocurrency industry.
But while feeling a risk taker and a shot caller in the crypto industry is fun for a while, at the end of the day, you are placing money in and you want to make sophisticated and intelligent bets. You are investing your money into something at the end of the day and want to make sure that it has staying and appreciation power.
When the glamour fades away, the fundamentals remain, and if the fundamentals are strong, you can sleep soundly. Unfortunately or fortunately, depending on how you look at it, the industry still requires more people who are fundamentally oriented.
A decent portion of investors realize that many digital assets don’t accrue value and are great as fundraising tools for leaders of digital asset projects but don’t provide value to investors. What’s even more interesting is that a good portion of these assets don’t even classify as a currency. If that is the case, then where is the fundamental value?
That’s the question we must ask ourselves as we seek to capture portfolio growth through cryptocurrency allocation. We don’t want to make emotional oriented decisions and lose our hard earned money because of it. Here’s how you can create more value for yourself by learning about fundamental analysis. Learn fundamental analysis and make long term trades based on the fundamentals instead of just emotions.
Let’s learn more about crypto fundamental analysis.
The Basics of General Fundamental Analysis
Fundamental analysis is merely the process of viewing a business at a granular financial level. In the business world, one would apply fundamental analysis by studying the critical ratios and measures of a firm to realize its present position by itself, how it makes sense when compared to peers, and dive deeper to understand growth prospects.
We want to understand the fundamental aspects of a business, realize financial longevity, and potential risk factors. This type of analysis can give you further insight into a corporation and its stock. One can tell if it is overvalued or if it is undervalued based on the actual fundamentals of the businesses such as expected revenues, current sales, etc. This sort of assessment will capture several value factors such as management team, overall output, historical numbers, in addition to the current market discount rate.
Investors in the traditional financial markets will use fundamental analysis to purchase stocks within the company, to realize if they are making a great investment at a wonderful price or if they are buying at expensive prices that would not justify their investments. These company stock investors are interested in understanding one thing, if the stock price is reflecting the actual growth prospects of the company and makes absolute sense.
Market sentiment and unbridled exuberance can usually push the stock in an extremely negative direction in a positive direction causing a divergence between a company’s actual value and market value.
Shrewd investors want to seize opportunities when an advantageous disparity is present. Most people might not do fundamental analysis but it is certain that they will be better off doing so in the long-term. Thankfully, fundamental analysis can be simple if you understand the key ratios involved in the process.
Tools Present in Traditional Fundamental Analysis
We can see that one of the most important aspects of fundamental analysis is the quality of earnings. Now, if you pay attention, we didn’t just say “earnings”, we’re thinking about the quality of earnings. That means we want to see how much they must spend to capture those earnings and how much debt that they have in addition to other factors.
These components help you understand how a company is really doing. Remember that a company can always pump up earnings by taking on more debt, selling material that costs a dollar for fifty cents. Of course, such a tactic raises earnings but doesn’t really indicate a strong company as it will have to raise more funds to continue to operate.
In a traditional firm you will pay attention to factors such as earnings per share, price to earnings ratio, projected earnings growth, price to sales ratio, price to book ratio, dividend payout ratio, dividend yield, and return on equity as well as return on capital.
One aspect that you must be aware of is that even if you know fundamental analysis in the traditional sense that doesn’t always guarantee phenomenal results. You must always pay attention to quantitative and qualitative factors.
But how does it work with other tradable financial assets such as digital currency? How do you evaluate the asset from an intrinsic value standpoint by looking at economic, numbers, and qualitative components?
Let’s find out.
Crypto Related Fundamental Analysis
Right off the bat we see a major difference between fundamental analysis in crypto and that in the traditional financial world. That difference is that regular companies have earnings, assets, and other components by which we can measure its intrinsic value.
This is not the case for cryptocurrency assets. Remember that crypto assets themselves could be tied to a project but certainly are decoupled from the organization behind the project. Further, these cryptocurrency assets typically are not tied projects that have earnings, net income, and other traditional components that fundamental investors use in traditional stocks or bonds.
That’s just the problem with cryptocurrency, it is a new phenomenon that does not look at earnings or interest but rather use of the token, community, and other factors. Individuals must focus on assets from a different standpoint, from a forecasting or predictive standpoint. Further traditional fundamental analysis will not be effective in this arena due to its differentiated nature.
Let’s take a look at Dentacoin, it is an underwhelming “solution” for dentists. But the question is, do dentists really need a cryptocurrency? How does it help to increase the quality of services for dental patients? The truth is that it has no real significant purpose. Dentists have real use for Dentacoin, it is just a creation that seems somewhat plausible in the crypto market.
Dentists don’t need the blockchain in that regard at all. They can use current solutions from currencies to web applications to serve their needs the best. That’s why you would see the price of that particular token fall down in value.
This is where we have to start with the basics in cryptocurrency and dive into the right source origins.
Origins of Information
The critical question within the cryptocurrency realm is where do you obtain the right information that helps you invest in assets that will last for a long time? Even more generally, how do you find information that you can use to conduct fundamental analysis.
Hold your horses because there’s a wide variety of information origination points.
Here’s a few of them.
- The project information sites: For instance, Request Network has its own website, Numerai has its own website, Ripple does too.
- The classic white paper: Bitcoin has white paper and so do the many other coins that have come after it. One must seriously pore over this paper to see if the project has any merit and will provide real value within the world. Of course, it is hard to do but it is something that you must do to see if everything makes sense. You will notice their goals, their management team, their history and the potential future.
- Community hubs: Each project does its best to curate a community so that they have a loyal base of followers who help to bring in more people who are interested in the project. You can find communities on social media like Twitter and Facebook, as well on platforms such as Reddit and Discord. Many will also disseminate information on publishing platforms.
- The general media and niche media: You can find information about projects on large media outlets such as Forbes on niche sites such as Coindesk.
- Price aggregators: Places such as Coinmarketcap and other places update prices regularly and might even provide updates on projects that could move the needle. These many different applications that strive to provide investors with more compelling information.
Look at information from an unbiased standpoint and try to get to the source of truth. Now, that you know where to source the information from on the web, you can start
The Diligent Crypto Investor and Fundamental Analysis
Now, remember that this is a new industry and that people are still formulating ways to fundamentally analyze cryptocurrency assets. Many groups of individuals adhere to specific ways but there is generally a checklist that most people follow. The checklist will comprise both the numbers and the more nuanced details.
Here is a general checklist.
The Context
Why does the cryptocurrency asset exist in the world today? Will it play a significant role in the present and in the future?
That is the main fundamental question to ask. Let’s take Bitcoin for example. It leads the way in the digital asset class. It was and then others would come after it. What made it special? It would propose a trusted system that would require zero third parties, had trust, solved the double spend problem and would in state transparency.
Further, it would be a scarce asset as well and would have a total cap of 21 million bitcoins. That would serve as a real value to those who didn’t like state control over money. As such, Bitcoin has two values, one, it serves as a currency independent from the government, two, it serves as a store of value.
These two characteristics and the other points make it something that is quite unique in the world today.
You can see why it has so much value.
Let’s take another coin, Ethereum for example, it is supposed to be a supercomputer, decentralized, that can create new tokens, host projects, and distribute projects. Those are all valuable components. Further, the token has a use within the system and has value because many people use the Ethereum ecosystem.
The more people that use the more valuable Ethereum tokens should be and that is what the market is trying to figure out today. How much value does accrue to the system because of the regular use?
You must look at other coins such as Numerai, Ripple, and other tokens from this contextual standpoint as well. The real world context will matter for long term investors.
Total Supply
What is the total supply of the given asset? For an investor to have some sort of value appreciation in assets, the overall supply must have a cap. That’s why those that have significant sums of supply usually have low dollar values.
Bitcoin has a limited supply and should always have that limit. The idea is that more people will buy small bits of BTC and Bitcoin should grow in value.
Supple and demand is what makes markets move around. The lower the supply and the higher the demand, the better it could be for the asset.
Of course, there’s always a variety of factors to watch out for in this process but specifically when it comes to total supply, if there’s a set number of coins and demand continues to increase, the value should go up.
Market Capitalization
The market capitalization is the total number of coins in existence times the current price. The larger the market capitalization, the higher the liquidity, and the more parties that should be interested in seeing the asset grow.
There’s quite a few applications that show the price and the market capitalization right off the bat. More people gravitate to those with lower market capitalizations because they think that they will have more control or exposure by buying those with smaller prices. They might also think that there’s massive room for growth but this is not always the case.
Total Volume
Volume matters because it shows how many people are interested in the token and will trade it regularly. The higher the volume, the better it is for you as you can get in and get out and have more orders filled.
You want to check two things here, how much volume is present for the coin and where it is present at the current moment, meaning is it only on three exchanges or thirty?
The Management Team
Do you best to check out the team behind the project. You must learn more about their credentials and what they have done in the past. Why are they perfect for this venture? Who are they associated with? Which investment firms or high profile advisors work with them and why? Are these advisors and firms trustworthy?
Do they have the skills to overcome obstacles on the way to meet their vision?
Always dig around for more information on the people behind the project. Of course, this is kind of ironic to say when we do not know who Satoshi is but the thing is that Satoshi didn’t promise the world. He went ahead and made sure that it was a simple project, solved the problem of double spend and state controlled money, then released it into the public.
There was real value present and we can still see massive value going forward. Talk to people in the industry, look around, ask questions and invest better.
Timeline
We need to know about their plans and their overall progress. Are they meeting their goals at the present moment? Have they had delays? Are their goals realistic? Do they look like they can pull it off?
Everyone wants to create a different world but not everyone has the right plan to do so.
The details matter in this process because that is what can make the coin have more value. They need to share as many details as possible and keep their investors aware of changes due to one reason or other. Those projects that stay quiet and have minimal updates are likely those that will not progress to the next milestone.
The timeline should show that it has the right details and that it will continue to progress even when obstacles present themselves. Think about their big plan, consult with professors and business people who have experience in similar industries. Genuinely think about everything in this plan and how it all works together.
Marketing is great if there is a product that will come out sometime in the future. Those who only have marketing are not legitimate projects in most cases. If there is no product or service then there are no fundamentals.
If there are no fundamentals, then what are you studying? In those cases, move to the next project.
Final Notes on Cryptocurrency Fundamental Analysis
There are more than 1,000 cryptocurrencies in the world today. Are they all reliable and real?
I don’t think so. You know it, I know it, everyone knows it. That’s why we must refine our process.
What’s great is that you can certainly increase your odds in this world by breathing in and breathing out and then focusing on fundamental analysis. Most of the coins out there are not worth your time. Do not chase after them. Look at the top one hundred or so and narrow it down.
Remember that it is difficult but it is quite possible and can help you to create significant value over the long-term. That is the idea, keep it simple, create value by doing the right research and go make a difference in your portfolio today.