Trading cryptocurrencies is a task that requires skill and knowledge. Making the most of it requires understanding how to use different strategies, navigating the vast world of trading, and mastering both technical and fundamental analysis. Fundamental analysis (FA) in particular has gained traction among crypto traders as it helps them determine the intrinsic value of an asset in order to get the best return on their investment. Let’s take a closer look at what exactly fundamental analysis is and how it can be used for cryptocurrency trading.
How does fundamental analysis work?
Fundamental analysis is a process of analyzing an asset’s intrinsic value, examining its qualitative and quantitative factors to determine whether it is undervalued or overvalued. This analysis examines an asset’s potential and forecasts its future performance based on external variables such as news events and macroeconomic trends.
While traditional FA focuses on company fundamentals, crypto fundamental analysts look at financial statements (like balance sheets, income statements, and cash flow statements), economic indicators (like the unemployment rate or inflation rate), industry trends, global news events, etc. to get a comprehensive understanding of one obtain a specific coin or token and assess the risk and potential.
One of the most important metrics used by fundamental analysts is network activity. Network activity can tell analysts a lot about how well a cryptocurrency is performing, e.g. B. Transaction fees, number of transactions, active addresses and more. Social media sentiment can also be a metric used to gauge market sentiment about an asset. And blockchain data allows traders to look at key metrics like hash rate, block size, and difficulty. All of these metrics are important in understanding the current state of a cryptocurrency and predicting its future performance.
On-chain metrics in fundamental analysis
On-chain metrics are used in basic cryptanalysis to measure the health and strength of a blockchain network. They provide traders with valuable insights into market sentiment, ICO success rate, project risk assessment and more. On-chain metrics include:
1. Hashrate – This metric measures the computing power of miners within a network. It is an indicator of how secure or strong a blockchain is and thus influences its price movements.
2. Transaction Volume – This metric shows the number of transactions made on a given blockchain over time, providing insights into user usage and adoption trends, as well as potential ongoing pump/dump activity on exchanges that use the token /Coin are connected to this blockchain.
3. Average Transaction Fees – This metric provides useful information on how much money people are willing to spend when using that particular cryptocurrency for transactions, regardless of whether they are buying or selling them (it is also an indication of how competitive fees are in the compared to others are cryptocurrencies).
4. Network Difficulty – A measure that tells us which coins require more resources (time and processing power) than others; This can be useful when trying to find undervalued coins with low difficulty but high potential returns when you could get them at lower prices compared to their peers.
Project metrics in fundamental analysis
Project metrics also help with fundamental analysis. This means you look at specific things that will help you understand the project better. Here are some things to look for:
1. White Paper – Analysts can read the white paper and see what the team’s goals are for this project and how likely they are to achieve them.
2. Tokenomics- You should also look at a project’s tokenomics, which includes details about its tokens such as supply, inflation rate, and reward system.
3. The team analysts should make sure they know who is behind a project and what their vision is for it. Try to research their past projects and achievements, as well as any conflicts of interest they might have with this one.
4. The Community Fundamental Analysts should take a look at how active the community is on a particular project by checking social media platforms or websites dedicated to online discussion to get an idea of the user sentiment before they publish their analysis!
5. Roadmap – You should also go through a project’s roadmap, which outlines planned stages of development and milestones that should be achieved in order to be successful.
Understanding these objectives can help investors who would read the analyzes to decide whether or not to invest.
advantages
1. Fundamental analysis in crypto provides a comprehensive view of an asset’s health by considering both traditional and blockchain-specific metrics.
2. It provides insight into the strength and security of a coin or token’s underlying network, giving traders an idea of its future performance.
3. Fundamental analysis gives traders a better understanding of the risks and potential rewards associated with different coins or tokens, helping them to make more informed investment decisions.
4. Fundamental analysis can be used to identify undervalued coins or tokens that have good long-term prospects that may be overlooked by the market.
5. It can also be used to identify cryptocurrencies that are overvalued or prone to pump-and-dump schemes, allowing traders to avoid such investments.
6. By understanding a crypto asset’s underlying fundamentals, traders can better assess its long-term growth potential and adjust their strategy accordingly.
Some cons
1. Fundamental analysis in crypto can be time consuming and requires a lot of research to accurately assess the risk and potential of different coins or tokens.
2. Network activity is difficult to measure accurately because factors such as user sentiment, blockchain data, and economic indicators can all affect them in unpredictable ways.
3. Fundamental analysis does not take into account technical factors that could also affect the price of a cryptocurrency, exposing traders to potential losses due to sudden price movements caused by market speculation or panic selling.
