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What Is Fundamental Analysis? Does It Work in Crypto?

Performing a thorough fundamental analysis is a foundational aspect of stock valuation. Retail and institutional investors often spend weeks reviewing a company’s financials before deciding whether to purchase shares. Although fundamental analysis strategies are most associated with equities, it doesn’t mean they can’t apply to other asset classes such as cryptocurrency. For instance, many crypto investors have begun using fundamental analysis strategies to determine the “fair value” of digital coins. 

Understanding what fundamental analysis is can help you make more informed investment decisions. Whether you’re involved in stocks, crypto, or both, using fundamental analysis can provide a more objective look into a project’s valuation.

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What is fundamental analysis?

Fundamental analysis is a set of investment formulas, tools, and strategies that measure an asset’s intrinsic value. It looks into the “fundamental” aspects of a prospective investment. 

Investors who focus on fundamental analysis aren’t interested in overly technical details. For example, it’s rare for a fundamental analyst to spend much time scanning daily price movements, candlestick chart patterns, or the relative strength index (RSI). Instead, fundamental analysis closely examines an asset’s overall financial health. This often means reading thorough quarterly financial reports of publicly traded companies. However, fundamental analysts also consider sector-specific and macroeconomic trends that may influence a company’s performance.

Fundamental analysis is closely associated with evaluating a company’s share price, but it’s possible to conduct fundamental research on any asset class, including forex, crypto, and precious metals. 

What are the two types of fundamental analyses? 

The two aspects of performing a fundamental analysis are quantitative and qualitative research. While quantitative analysis is concerned with easily measurable financial data, qualitative analysis considers difficult-to-calculate aspects of a business, such as leadership or company culture. The latter also looks into broad economic trends that are difficult to pin down with precise statistics. 

A company’s financial statement (quarter-on-quarter) is a prime example of quantitative analysis. These earnings reports facilitate the following:

  • Investors can use these to assess the overall strength of the business. 
  • Economists can use balance sheet data such as a company’s current debt obligations, liabilities, and holdings to gauge its cash flow. 
  • These reports enable analysts to see whether a company is growing or declining by comparing year-on-year revenues and profits. 

On the other hand, qualitative researchers may examine surveys or economic data affecting a company’s growth rate. For instance, an investor may notice a competing social media platform is stealing market share from an established website. Large-scale customer surveys may also reveal this new social media site has a competitive advantage in key global markets. 

Qualitative analysis also looks into features such as a company’s business structure, governance, and roadmap for the future. While it’s difficult to gauge the “reputation” or growth prospects of a business, these data points may influence an investor’s decision to buy or sell a stock.  

How does fundamental value analysis work in crypto? 

It has proven challenging to perform fundamental analysis on cryptocurrency due to its volatile nature. Crypto assets are speculative, and there’s less historical price data to establish a fair value. Also, unlike publicly traded companies, cryptocurrencies don’t release quarterly financial reports. 

However, since most cryptocurrencies use open-source code and public ledgers, analysts can scan a blockchain to gauge network activity. Data on daily transactions, hash rate, and average gas fees can give analysts a clue on how a crypto should be valued. In addition to on-chain data, fundamental researchers often look into a crypto project’s leadership, roadmap, and token issuance. Potential government regulations, business partnerships, and social media attention can also influence how to analyze cryptocurrency prices. 

As more companies enter the crypto space, it’s getting easier to fundamentally analyze the Web3 sector. For example, large crypto exchanges such as Coinbase now release quarterly financial earnings, providing investors insights into the demand for crypto assets. Also, many publicly traded companies involved in Bitcoin mining offer info about BTC’s hash rate and network activity. 

What are the features of fundamental cryptocurrency market research?

Like evaluating equities in the stock market, crypto analysts use quantitative and qualitative data to develop an investment thesis. As cryptocurrency is a faster growth space, multiples on fundamentals are usually higher than other assets. Here are some other features of crypto fundamental analysis:

  • On-chain data: This refers to any information available on a public blockchain and can include daily transaction volumes, active crypto wallet addresses, and staking activity. Generally, the higher the network activity on a blockchain, the more bullish analysts are on the project. Although anyone can perform on-chain analysis independently, firms such as Chainalysis, Glassnode, and LookIntoBitcoin frequently release fundamental reports. 
  • Tokenomics: It refers to a digital asset’s total amount and distribution. Some cryptocurrencies such as Bitcoin have a hard-cap max supply, while others such as Dogecoin have an inflationary issuance schedule. In fact, some such as Ethereum have a built-in burning mechanism. A project’s pre-set token distribution impacts its market cap and current price. 
  • Comparable projects: Although increasing blockchain cooperation is a major concern in Web3, many crypto projects are competing for a dominant position. For example, there’s now a category of smart contract blockchains such as Solana and Cardano known as Ethereum’s competitors. Other competitive crypto segments include peer-to-peer payments, play-to-earn games, and DeFi (decentralized finance) apps. A crypto investor may compare the size, network activity, and news of various projects in the same niche. 
  • Market sentiment: Typically, risky assets such as crypto perform better during periods of strong economic growth. Tools such as Alternative.me’s Fear and Greed Index help gauge how people feel about putting their money into crypto. Using data points such as Google search trends, survey data, and recent trading volatility, the index reveals how much risk investors are willing to take on. 
  • Project-specific details: When conducting fundamental analysis, investors read through many official documents related to their cryptocurrency, as transparent documentation available on a project helps them build an informed investment thesis. For instance, reputable projects release a whitepaper detailing the technology behind their digital token. Many crypto projects publish roadmaps, team profiles, and financial reports.
  • Upcoming events and crypto news: Crypto investors pay careful attention to crypto market news. Reputable news sites help keep investors informed on crypto regulation and Web3 innovation. 

What is technical analysis, and how is it different from fundamental analysis? 

Instead of relying on financial reports, on-chain data, or GDP numbers, technical analysis focuses on an asset’s daily price action. A purely technical trader may not care what company or cryptocurrency they buy and sell. Technical analysts are solely concerned with metrics such as chart patterns, moving averages, and volume levels. Since each technical analyst has a different methodology, it’s impossible to define a “good pattern.” However, technical traders use many charting tools to make decisions. For instance, a technical analyst can identify “support” and “resistance” lines at prices that an asset rarely crosses. Also, some technical traders believe well-known chart patterns such as Adam & Eve, cup & handle, and head & shoulders signal bullish or bearish price action.

Technical traders also pay attention to metrics such as the RSI and volume charts. These indicators enable traders to know a particular asset’s average trading activity. Abnormally high volume often suggests a significant price spike in either direction. The RSI, however, helps determine oversold versus overbought conditions. 

While investors can use technical indicators, it’s more common for short-term traders to rely on technical analysis. Defining these technical price levels can help traders manage risk when setting up a trade. Even if a chart pattern doesn’t work in a trader’s favor, they can use limit orders, stop losses, or OCO orders to ensure they don’t lose all their capital. 

Wrapping up 

The fundamentals of digital assets aren’t as clear as stocks, but it’s getting easier to perform crypto fundamental value analysis. Ever since the crypto market cap broke $1 trillion, there’s more data available for retail investors and research firms. As crypto becomes more widely accepted, there will likely be even more data for investors to consider when reviewing different crypto projects. 

At Worldcoin, we aim to make people feel comfortable experimenting with Web3, crypto wallets, and digital assets. To help increase crypto adoption, we’re putting a share of our crypto in everyone’s hands and airdropping DAI stablecoins to anyone who downloads our app. Subscribe to our YouTube channel to learn more. 

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