When new investors and traders are entering the cryptocurrency markets they probably get overwhelmed by the huge number of different available currencies and assets. In the early days of cryptocurrencies trading was limited to a few different coins. Nowadays there are thousands of currencies and assets and it’s difficult to pick the ones in which you should probably invest in.
This is why fundamental analysis of cryptocurrencies is so important to get a forecast of the future value of each of it. It’s the first step you have to do before you invest into something to be sure you don’t bet on a dead horse. Of course this isn’t easy and you have to take a look on various factors but in the end it will pay off.
You are aiming to answer the following questions: Is this cryptocurrency under- or overvalued? What are the chances it can beat the competitors? What value / market cap could it reach in 1/3/5 years and in this context – can it even survive 3 or 5 years?!
Fundamental Analysis Pt. 1 – Key figures
The key figures are the first thing you should look at. Key figures include:
- Market cap: the marketcap is simply the price of a coin multiplied by the total amount of coins. It gives you a first feeling for the size of a cryptocurrency when you compare it to others and the rest of the fundamental analysis will lead you to a conclusion/forecast how much the marketcap could increase in the future
- Supply: the supply doesn’t matter that much; it has to match with the concept/the purpose of the currency; just because a currency got a high supply, like 1 Billion coins, it’s not bad per se if it’s needed for scalability e.g. – what really matters is the marketcap
- Latest price development: this doesn’t mean you have to do technical analysis at this point, but you have to get a quick overview over the last weeks/months/years and how the price developed since then. It is recommended to look at 1D candles to begin with.
- Degree of centralisation: One of the main advantages of cryptocurrencies in comparison to fiat currencies is that the currency isn’t controlled/dominated by a few players. For instance, although a far-fetched hypothetical, a coin where 90% of the supply belongs to 3 different wallets isn’t favourable. Look for currencies with a balanced distribution and in this context how the initial distribution was organized
- Exchanges/volume: On coinmarketcap.com you can look up the different exchanges on which a currency is traded and how big the trading volume is. Two things are important here: If you maybe want to daytrade a currency it’s important that it got a decent liquidity. And as an investor it’s great to see on which exchanges currencies are not traded yet to estimate a possible growth due to the adding to major exchanges in the future.
What’s next? Fundamental analysis pt. 2 – Idea, Competition, Team, Development
Those key figures give you a rough overview – but this isn’t enough, of course. You have to add a lot of more factors to get an answer to the question of whether it is worth to invest in a cryptocurrency or not.
The main aspect in your fundamental analysis should be the idea of the currency (ie. it’s use case). Is it a currency for storing value, like BTC? Is it a currency which could be interesting for payments in the real world, like LTC? Is it a platform for other applications on the blockchain like ETH, NEO or KMD? Or is it an application that attempts to solve a real world problem such as PTOY? Everything stands and falls with the basic idea.
Look at both, micro and macro-perspective:
➢ Does the project potentially solves a real world problem?
➢ Is there high enough demand so it can get a success?
➢ What are the forecasts for the industry?
➢ How is the project/company positioned in their industry?
➢ In case of coin clones; what is the USP?
➢ How much competitors are there in the certain field?
➢ In case of a token, is it really needed?
➢ Is the usecase valid or is it forced?
Many cryptocurrencies do not aim to solve a concrete problem or to offer a service. Investing in such cryptocurrencies for the long term would be a huge mistake. So make sure that there is a concrete idea which when there is an finished product will increase the value of the currency. Moreover, any cryptocurrency/token should be crucial to the project beyond being used as a fundraising mechanism.
If you found a currency backed up by great key figures, a nice idea or even a working product to solve a real world problem or to improve an outdated process you made the first big step. Now, it’s about finding out more details to determine the probability of success in the future:
- Competition: Let’s make this clear – there are a lot of cryptocurrencies with a lot of competition in the same field. A lot of investors think everyone of them will increase more and more over the years – but that won’t be the case. There will be winners and there will be losers. NEO was declared as the “ETH killer” from china. But in china alone there are two more main competitors (QTUM; MetaVerse, ETP). The fundamentals on all of them are great but in the long run not every project can survive. This is the reason why you have to get as much info as possible, not just once but in an ongoing process to be up to date at every time.
- Team/Advisors: The people behind a project are key to it becoming successful. Make sure that they have educated and skilled people in the management and all other areas (development, marketing, community management). Most websites of currencies are giving you an overview over the team; but if you take it serious you have to make little background checks on each of them, means look up the names on Google, figure out what they did before, look up Social Media channels (eg. LinkedIn) to get a better feeling of the team behind it – it’s the essence! When the team is worse you can’t expect a project to grow on long term, no matter how awesome their product is.
- Whitepaper/Roadmap: get in touch with the whitepaper of the project. Even if you don’t understand every single (technical) term you have to get deeper insights in what they want to achieve at the end of the day. Compare it with their published roadmap, try to figure out if their time planning is achievable or a little bit optimistic; and even more important try to find out how they delivered in the past; look for dev updates in their blogs/if you are technically advanced look in their GitHub directory.
- Marketing: even if you have the best product in the world – you have to let people know that. Main problem of a lot of promising cryptocurrency projects is that they don’t have a decent marketing and are more focused on developing the currency and/or the product behind it. Try to find infos on their ongoing marketing on different channels (on- and offline). If there is no marketing at the moment try to find out what their plans for the future are, how they want to fund it, etc.
- Community: every successful cryptocurrency got a more or less big community which is backing it up. Smart founders of cryptocurrencies know how important this community factor is. Look for the activities on Bitcointalk in the official announcement thread, check Reddit, Twitter, watch out for official Slack/Telegram/Discord channels to know how active they are and to find reliable sources for future news and updates which could drive the price upwards
Put the pieces of the puzzle together!
Of course there are even more special factors when it comes to the fundamental analysis. But if you get all infos to every of this points you are already far above the average knowledge level – and this is what counts.
Make sure that you take notes or use a spreadsheet when you do your research so that you don’t miss something important. Find a system for yourself how you weigh different factors – and get as end result of each fundamental analysis a probable forecast about the chances that this cryptocurrency can gain more attraction and value.
It’s not about to predict that an investment will increase by 1.240% over the next 410 days – but it should give you clearly a hint where this journey could go!