The growing range of cryptocurrency investment options has made digital assets a must-have in every investor’s portfolio. But unfortunately, many retail investors are venturing into the wild digital currency habitats in increasing numbers, disregarding crypto fundamentals.
As an illustration, as per a Charles Schwab UK survey, at least 57% of new investors hold cryptocurrencies. A similar study by Morgan Stanley reveals that 31% of European Union retail investors have placed bets on the crypto market. Then, per the CNBC/Momentive Invest in You research, 1 in 10 US investors hold crypto assets. Digital currency investments now come fourth after real estate, stocks, bonds, and mutual funds.
Most cryptocurrency investors joined the market in 2021 when bitcoin values surged beyond $60,000. Driven by extreme fear of missing out (FOMO), excited traders purchased various assets hoping to experience high levels of growth in a short time. Unfortunately, most of these investors are now in the red as short-term losses lead to panic sell-offs.
Events such as the Fed’s tightening monetary policy, instability of platforms such as Celsius, and the collapse of the Terra Luna network have raised FUD (fear, uncertainty, and doubt) levels. Investors that purchased their assets when the price was at the top are now panicking as the price inevitably drops.
What is crypto fundamental analysis?
Cryptocurrency fundamental analysis (FA) can help the savvy investor establish the intrinsic value of a digital asset. This analysis examines a financial asset’s data to determine where it derives its market price.
FA can reveal whether your crypto asset of choice is overvalued or undervalued and establish profitable trading or investing entry and exit positions.
Unfortunately, crypto fundamental analysis is not as clear-cut as the stock or FX market’s fundamental research. You can, for instance, carry out traditional investment or trading assets FA by studying certified business metrics such as earnings per share or price-to-book ratios.
The cryptocurrency market trades decentralized assets that function more as commodities rather than business-linked assets. More so, cryptocurrency markets are not subject to regulation.
To this end, these projects do not have the stringent financial data reporting rules as it is in the traditional world. On account of this, investors do not have access to standardized accounting reports such as liquidity ratios that can guide them on the solvency of crypto projects.
Fortunately, blockchain technology promotes the ethos of transparency of data and operations. Some easy-to-use sources of blockchain technology audited data support crypto fundamental analysis. You can perform a crypto fundamental analysis by evaluating strong metrics such as financial, on-chain, and project data on aggregator and price tracking platforms.
You can use Algory crypto news aggregator to check fundamentals data from websites and social media pages of different crypto projects.
Why should every trader and investor study crypto fundamentals?
Every trader should study crypto fundamentals because whirlwind investments that neglect research will derail their investment strategy. When you, for instance, make frantic purchases of rallying assets, you risk buying them high and selling them low when the market turns.
When you ignore the fundamentals, you will join the markets when the logical part of your brain clearly warns you that the biggest payoffs have been had. Cryptocurrency traders and investors can avoid FOMO and FUD and keep a level head in the markets by studying essential crypto fundamentals.
Make safe and rewarding cryptocurrency investments by carefully evaluating and researching intrinsic token metrics such as token economics, use case, project teams, and token development phases and achievements.
Study a crypto asset’s qualitative and quantitative data, then derive a better view of its crypto fundamentals before making an investment decision. This article is not financial advice but in it are golden nuggets that will help you make an educated opinion of a crypto asset’s value.
Clear judgment is all that stands between you and risky hype or fear-driven investment decisions that will derail your investment efforts.
Categories of crypto fundamental analysis data
1. Financial metrics
Crypto fundamentals such as an asset’s liquidity, supply, market capitalization, and trading volume can provide pointers into the potential within an asset. Below are some potent financial metrics you should research before investing in any crypto asset.
● Trading volume and liquidity
A highly liquid asset trades faster than a low liquid asset. Highly liquid digital currencies like ether or BTC have more sellers and buyers. Consequently, you will enjoy narrow and profitable bid-ask spreads when trading them on exchanges.
A crypto asset that has a high trading volume signifies sustained price momentum. On the other hand, highly volatile crypto asset prices and low trading volumes could indicate a rug pull or low growth potential assets.
● Market capitalization
A cryptocurrency’s market cap is the network’s value, and you can access it on price-tracking websites. A rule of thumb is that most low market cap cryptocurrencies signify a massive room for growth.
High market caps, on the other hand, signify established blue-chip tokens. That said, you should evaluate market cap data in the light of asset liquidity. For example, an asset could have low market cap data because it has poor circulation challenges due to a lack of investors or poor use case potential.
● Circulating supply
A crypto asset’s circulating supply can change over time as miners introduce new coins to the market or older tokens undergo token burns. As a result, rigid circulating supply caps could encourage hodling disincentivizing trading.
On the other hand, a token with a steady inflationary supply mechanism attracts new investors and enhances its demand metrics.
2. On-chain metrics
The most popular cryptocurrency assets run atop public blockchains. For this reason, their data is “on-chain .”People can access their public ledgers via blockchain explorer tools and use that data to determine market sentiment.
Some popular blockchain explorers include the Blockchain.com block explorer for Bitcoin and EtherScan for Ethereum data. These tools pull data from raw sources via their application programming interfaces (APIs), allowing you to look up network strength, traders, and price evaluation data.
They provide actionable potent on-chain crypto fundamentals you can review and incorporate into your trading strategy for better decision-making.
On-chain crypto fundamentals data to measure network strength
● Active addresses
The number of active addresses on a blockchain network can help identify price action. Active addresses identify the activity of individuals, miners, and exchanges. A growing number of unique addresses often correlates with a cryptocurrency’s price increase.
A declining number of active addresses suggest falling interest in a token. The best practice, however, is to tally the number of active addresses within a set period and then compare its growth or decline over time.
As an illustration, as per blockchain.com data, the Bitcoin blockchain had 580,000 unique addresses in July 2021. That number has steadily grown to 700,000 in July 2022.
● Transaction volume
Transaction volume data display the fiat amount traders and investors have exchanged over time. As per Etherscan data, the Ethereum network has an average of 1.1 million daily transactions. This tally is much lower than May 2021’s high of 1.7 million daily transactions, an increase catalyzed by rising interest in decentralized finance (DeFi) lending, borrowing, and derivatives activity.
You can attribute the current decrease activity to plunging ether prices and bearish DeFi sentiment. That said, the Ethereum network’s transaction volume data has been consistent, implying a steady circulation of ether and positive potential for future market activity.
● Hash rate
Blockchain network hash rates signify the potential security of a network. Proof-of-Work (PoW) blockchain networks with high hash rates have high node activity. A high hash rate metric implies they have more combined computational power to defend their data from malicious attacks.
A declining hash rate signifies unprofitable mining and loss of interest in a blockchain network. Bitcoin network hash rate, for instance, has grown steadily from lows of 100 million in July 2021 to current daily highs of 215 million Total Hash Rate (TH/s), sure proof of its rising security and popularity.
On-chain crypto fundamentals metrics that evaluate price
● Network Value to Transaction (NVT)
A Network Value to Transaction (NVT) contrasts a cryptocurrency’s market cap to its transaction volumes. The NVT ratio is the digital asset market’s equivalent to the traditional investment sector’s Price to Earnings ratio.
A high NVT ratio can signify bullish trends, while a low NVT ratio could be a pointer to bearish market sentiment.
● Market Value to Realized Value (MVRV)
The Market Value to Realized Value (MVRV) compares an asset’s market capitalization to its fully diluted or realized market cap. A high MVRV could signify that an asset’s price is at an all-time high.
3. Project crypto fundamental metrics
A cryptocurrency project’s team members, white paper, road map, competitors, and use case are crypto fundamentals that can help evaluate its potential for safe investing, as you will find out below.
● Project team analysis
A legitimate cryptocurrency project should have, amongst other communication channels, a website. This web platform should list team profiles, as well as their industry experience. Most projects also display their investors, partnerships, and advisors for enhanced credibility and transparency.
● White paper
In the past, the crypto community placed massive weight on a project’s white paper. Curious investors would first study a project’s white paper and then discuss it on community social media before investing.
Today, most new crypto buyers hardly go through white project papers. Yet, unbeknown to them, these technical documents provide a deep dive into every token’s use case, solutions, team information, features, token economics, distribution, and upgrade data.
The validity and quality of these crypto fundamentals guide the eventual performance of an asset in the market.
● Road map
A cryptocurrency project’s road map highlights crucial information that could affect its performance and price. New releases, feature rollouts, and test nets often positively impact price action. As an illustration, Ethereum’s EIP-1559 upgrade in 2021 gave ETH tokens a deflationary supply and increased ETH price upward momentum.
The upcoming Ethereum Merge event could also positively impact network functions and ETH prices. A project that adheres to its original roadmap is also trustworthy and has growth potential.
● Utility and competition
Most blockchain projects build on the Bitcoin open-source code. Projects seeking to differentiate themselves from the mass market will find a powerful use case and tweak this code to stand out from the competition.
Before purchasing an asset, you should understand a project’s use case and its competitor’s advantages. A project’s unique utility will drive the price of its native assets.
Crypto fundamentals and quantitative analysis can give you an asset’s performance overview, enhancing investor decision-making. Access the information regarding crypto fundamentals for various coins and projects conveniently in one place using Algory crypto news aggregator