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The cryptocurrency market seems spontaneous and unpredictable only at first glance, but any movement in it can be explained by a certain cause-and-effect relationship. The analysts carry out research on these patterns and forecast trend behaviours.
While technical analysis is price prediction based on its past fluctuations, fundamental analysis tries to explain first of all what is the reason for the price decline/increase. It examines the causes, not the effects. It takes into account micro and macroeconomic factors and analyzes all aspects of assets that contribute to their overall value. Fundamental analysis is the basis of investing, especially long-term investment. In fact, some would say that you do not really invest if you do not carry out fundamental analysis. It is a good tool for long-term investments, but when answering the question of exactly what to buy, it does not say when it is most profitable, that’s what technical analysis is for.
Fundamental analysis is based on the assumption that financial markets can be irrational and emotional over a shorter period of time. However, in the long run, they will always return to or approach the real market value of assets.
It should be emphasized that of course, the fundamental analysis in the case of the cryptocurrency market is slightly different from the analysis of the ordinary stock exchange market. There are usually no earnings reports available, nor profits per share that can be calculated. Most projects do not even have a product! There is a lack of “hard” fundamental data, and the industry is at an early stage of development. Cryptocurrencies are not corporations. Their profitability is not based on generating revenues but depends directly on the share of the community (users, miners and programmers).
Basics of fundamental analysis
If you can recognize the future potential of the project or you realize that the project is currently undervalued on the market, you can gain profit.
The basic objectives of fundamental analysis are:
- measuring the intrinsic value of assets being traded
- recognition of future possibilities
- identification of risks related to the investment decision and their potential impact on the market
- estimation of a fair market price based on basic data and total supply
There are internal and external factors that affect the perspective of a given project. The internal ones include, for example, the technology on which the project is based, the team behind the project, how many users and programmers support the project, the total supply of coins in circulation, total capitalization (supply x price), security, scalability, being placed on large cryptocurrency exchange platforms etc. Examples of external factors are issues such as changing legal regulations, new technologies appearing on the market that may create competitors for the project in the near future, the number of hacker attacks (may affect the market in many ways), the bankruptcy of a large cryptocurrency exchange plaform, new political conditions in various countries, etc. For example, external factors include the recent (cumulative) market reaction of cryptocurrencies to information about Facebook’s presentation of a new cryptocurrency called Libra. The price can also be affected by specific news and events, including, for example, the last CoinBase failure, after which the price of Bitcoin fell significantly. Do not forget also about hard forks and theft from exchanges.
Before you buy anything, you need to know how much it is really worth. Always think about what changes are taking place on the market and how it will affect the project. Check what technology is behind the project and whether it is unique. How does it compare with the competition? Make sure that the project has a clear roadmap. You should pay attention to what problem the project is going to solve and whether it is clearly presented. It is said that if you do not know what problem the project solves in the first five minutes of research, you should not invest. Check who is behind the project, what opinions he has and whether the team is experienced. The next issue is whether the project has large investors and whether the sale of the token is successful. See the specification of the token. What is its use and total supply? What is the distribution? How many percent of tokens will go to the community, and how many will be kept by the company? How does the project earn money, what is its business model and how will the funds be deployed? Is the project present in social media? What does its marketing look like and the prospects for the future? You should also pay attention to the size of the market – for example, compare the project focusing on the global financial system and the second one only in the world of online gambling. The difference in the size of the market does not mean that you should always invest in a larger project, but you should be aware of that when analyzing the risk compared to the prize (risk to reward ratio). At what level the project provides liquidity and what is the volume – these are the next basic questions that you should find the answer to.
Always before investing you should read the Whitepaper of any given project. It is the main source of project evaluation. The downside of Whitepaper is that it is sometimes written in a very technical way, often incomprehensible for cryptocurrency enthusiasts.
Follow regularly the social profiles of a given project. This is the main bridge between the team of marketers and, above all, programmers and the community. Be active and ask questions about project development. Get as much information as possible about the token / cryptocurrency. If it exists, you should also follow the updates from the developers on their official blog.
Forums are another great way to better understand the design as well as the “surrounding” feelings of a given coin. You can find an easy to understand coin analysis on forums. A variety of ideas allows you to better understand the project, especially if you are not technically advanced.
You should consider for whom the cryptocurrency is created and whether it is a really useful product for these recipients.
Above, we presented the basic assumption of fundamental analysis and the steps you should take to assess the profitability of a given project. We wish you good luck along this path!