Fundamental Analysis
Fundamental analysis is a method to measure the intrinsic value of an asset by examining the underlying forces that affect the economy, marketplace, and the asset itself. In traditional Finance, stocks, for example, are evaluated by the state of the economy, market sentiment, and performance of the underlying company. The companies that exhibit strength and growth in its cash flows receive the highest values.
Cryptocurrencies as a non-traditional asset are much different than fiat currencies and stock equities. However, fundamental analysis still holds similar principles for these assets. Fundamental analysis is generally done by accessing and interpreting available information to determine future value. As stated in the technical analysis guide, overall, fundamental analysis determines what to buy, and technical analysis determines when to buy it.
Effectively Gathering Information
There are both primary and secondary sources of information for cryptocurrencies. Primary, or internal, sources come straight from the developing team of the cryptocurrency and external sources are created by an entity apart from the team behind the asset. The most common example of an primary source would be a cryptocurrency project’s whitepaper. A whitepaper is a formal declaration of the intentions and objectives of a project. It is released prior to an ICO and provides the public with the details involving a cryptocurrency. Another primary source of information would be a cryptocurrency website or other forms of media. It is very common for a developing team of a cryptocurrency to create a website to help the public better understand the functions and use cases of a cryptocurrency.
An example of an secondary source would be your friends at CryptoScores.org. We provide unbiased investment information on many cryptocurrencies, and these can be viewed at online on our website. There are some distinct advantages to external sources – primarily, external sources can provide an unbiased source for information. It is very important to keep in mind in that the cryptocurrency market is not heavily regulated and it easy for conflicts of interest to take place behind the scenes, so it is important to use reliable sources such as Cryptoscores to help found a basic of research off of.
So, we have internal and external sources of information, but what exactly are we looking for? Again, the objective is to analyze the intrinsic value of an asset. Possibly the most important aspect of a cryptocurrency is the network it uses and the utility it provides to users. What separates this cryptocurrency network from all the others? Does it provide any advantages to other coins? Has the network been tested? External sources become extremely important in this case, because it takes unbiased opinion to test and review the network of a coin. Some important features that successful currencies must include network and blockchain effectiveness, scalability, utility and usefulness, and security.
The community backing a specific cryptocurrency is also very important. First and foremost, the developing team are the creators of the cryptocurrency and are the most influential people involved with the coin. Although there is no way to definitively evaluate a coin’s team, there are certain indicators. A cryptocurrency with a talented and experienced team will usually provide a page on their website highlighting qualifications and past experiences. Many team members of a certain cryptocurrency used to be a part of a team for another currency, and there is a community comprised of well-known, talented individuals. Vitalik Buterin, Charlie Lee, and Jed McCaleb are a few celebrity cryptocurrency developers. Essentially, a cryptocurrency that does not provide information regarding the developing team is a major red flag. This could indicate that they are fraudulent and want to conceal their identities for a quick cash grab and then bail.
External factors also determine the intrinsic value of a cryptocurrency. A catalyst event is an event that triggers a type of emotion in the overall market. Cryptocurrencies are extremely young and highly volatile, and because of this, the price of one can easily swing one way or another just based off a piece of news. For example, when Warren Buffett made negative comments in regards to Bitcoin earlier in 2018, they actually affected the price. A more severe catalyst can be observed when news surfaces about a cryptocurrency exchange being hacked. Large security breaches on exchanges have always negatively affected the price of the cryptocurrency market. Some positive catalysts for cryptocurrencies can include exchange listings, endorsements, main net launches, and successful forks, just to name a few. For example, when a popular exchange like Coinbase adds a coin, that normally has an immediate positive effect on the price.
A trader serious about capturing profits and staying ahead of the curve has to keep up with the market in general. We recommend following one of our cryptocurrency news account, @CSmarketnews on Twitter in order to stay up-to-date with the news, or even using a news aggregator website like Cryptopanic.com.
In addition to distinct catalyst events moving the price of specific assets, it’s also important to be able to identify what kind of market phase is taking place. On Wall Street, there are only two types of market – a bear market and a bull market. When something is referred to as bullish, it means positive price growth. A bearish market is negative, referring to a drop in prices. Basic economics shows us that financial markets are cyclical, meaning that it acts as a cycle, resetting itself because of imbalances in supply and demand.
An easy way to identify what kind of market is taking place in cryptocurrencies is just by looking at the total market capitalization graph. The market cap equates to the total value, and so, the total market cap of cryptocurrencies in a bull market is expanding, while a bear market can be identified by a contraction in the market cap.
The above image is taken from coinmarketcap.com and is the total market cap of all cryptocurrencies in the last year. It’s easy to identify the bull market transition into a bear market.
Fundamental Analysis is essentially the process of gathering information to determine the intrinsic value of an asset. Subsequently, the most important lessons to learn to conduct an adequate analysis is to know how to effectively gather information and what to look for.