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Fundamental analysis is one of the types of analysis in financial markets, which aims to investigate the intrinsic value of companies, stocks and projects. This type of analysis is used in various markets such as forex, stock exchange and digital currencies in a different way. In fact, in all traditional markets and emerging markets like digital currencies, there are several general methods for analyzing the market situation and making decisions to buy and sell, and fundamental analysis of digital currency is one of the most important of them.
Fundamental analysis, along with technical analysis, is one of the effective methods of predicting the price of digital currencies in the future. This analysis evaluates the nature of crypto projects and examines important issues such as project criteria, blockchain and financial criteria.
Fundamental analysis has been done according to the underlying factors of financial and economic instruments. While in technical analysis, the focus is on the mathematical aspects of forecasting, stock momentum and the psychology of market participants. Proponents of fundamental analysis are called fundamentalist, and proponents of technical analysis are called chartists.
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the writer: Thomas Myers
Translation and adaptation: Farhad Moghadam Salimi
What is fundamental analysis?
Fundamental analysis is actually the science of examining financial data, micro and macroeconomic variables, and other variables such as the price of an asset such as digital currency. This analysis provides the possibility to determine the intrinsic value (Intrinsic Value) and possible digital currency in the future.
Fundamental analysis was founded by a person named Benjamin Graham, an economist and activist in the United States stock market and one of the great investment managers. In fundamental analysis, the fundamentalist evaluates and examines the conditions of a company or project from different perspectives and aspects and follows its important events and news.
In fact, the fundamentalist deals with all the effective factors and aspects of a project to achieve its potential and intrinsic value. For example, if a person predicts that the price of Bitcoin will increase by publishing the news of Amazon’s acceptance of Bitcoin and buys it based on this analysis and conclusion, this person has actually used a kind of fundamental analysis to make his decision. According to René Rivkin, no rich chartist has ever been seen.
Therefore, it has been said that technical analysis alone cannot be useful for the stock market. In other words, technical analysis should be used alongside fundamental analysis. In fact, technical and fundamental analysis are necessary and necessary for each other.
Read more: Bitcoin price depends on what factors?!
Intrinsic Value
In finance and economics, intrinsic value is the real value of a digital currency, company, stock or any other asset. It is important to know that intrinsic value is different from asset price. For example, a property may have a price of 10 million tomans, but its intrinsic value will be much higher than this amount based on the construction of a highway next to it in the next two years.
Intrinsic value is calculated by the formula of the absolute value of the current price of the asset (Current Price) minus the strike price (|IV=|SK)
Intrinsic value is one of the important factors in fundamental analysis, which has a great impact on the analysis result. It should be noted that the calculation of intrinsic value may be different for different assets.
What is digital currency fundamental analysis?
Fundamental analysis or digital currency fundamental analysis is a top-down analysis solution. This analysis is called an in-depth evaluation of all available information about a token or coin and project. In the fundamental analysis of digital currency, qualitative and quantitative economic indicators are analyzed to achieve the intrinsic value or intrinsic price of that digital currency.
Fundamental analysis of digital currency is sometimes easier than fundamental analysis of other assets; Because the information and documents are easily available to the analyst due to the online presence of all these projects.
For example, you can easily follow the news of a project, website, white paper and blockchain information. This is while obtaining such information for a property or share is not very easy.
In a professional and specialized analysis, investors can be provided with detailed information about the best time to buy a digital currency, as well as predict its price in the future. This analysis requires the acquisition of knowledge in order to get to know the factors affecting the price of digital currencies in the long term.
After collecting information and analyzing the data, a vision of the future of digital currencies can be obtained. For example, if the price of a digital currency is lower than its intrinsic value, a buying opportunity is provided, and if its price is higher than its intrinsic value, a selling opportunity is created.
Fundamental analysis approaches
As mentioned, fundamental analysis creates a platform so that non-technical investors and experienced traders can confidently trade during the market movement. Investors equipped with fundamental analysis are able to create valid strategies with higher profit chances. There are two main approaches in fundamental analysis:
Top-down approach
In this approach, the analyst or fundamentalist first evaluates macroeconomic indicators. Then it goes down layer by layer. For example, after the macro indicators, it will examine the industry indicators and finally evaluate a specific company.
Bottom up approach
This approach, unlike the previous one, instead of macro-to-micro analysis, takes micro-to-macro evaluation. This means that first the company, project or asset is analyzed and then larger issues such as the field are examined.
Basics of digital currency fundamental analysis
Investing in digital currency requires evaluating and reviewing all available criteria. Most of the active projects in this area provide the necessary information about the purpose, the project team and the development of their plan and Tokenomics.
You are able to perform a fundamental analysis of a currency by examining a set of qualitative and quantitative factors and draw a general picture of it.
Among the newcomers to the field of digital currency, there is a myth that states that due to the high volatility of the market, digital currency markets cannot be measured by fundamental analysis. Even accepting that the market has become a toy of the world’s traders, it is still possible to examine it with a scientific eye.
Understanding the fundamental analysis of digital currency will help you to understand whether a cryptocurrency is worth buying or selling! When examining cryptocurrency from the point of view of fundamental analysis, you should consider factors such as blockchain criteria, project criteria and financial criteria.
Necessary variables for fundamental analysis of digital currency
As mentioned above, fundamental analysis of digital currency requires in-depth studies and investigations in this field.
A successful and intelligent investor must be sufficiently proficient in the field of playing with heavy numbers and always be careful in the investment process to learn the correct way to invest. Three different types of fundamental analysis include blockchain metrics, financial metrics, and project metrics.
In the following, we will examine the effective factors in fundamental analysis and these criteria:
Blockchain benchmarks
Blockchain metrics, on-chain metrics, or the like, focus on activity on the chain and its cost in order to evaluate its security and popularity. Among the most important blockchain criteria, we can mention the measurement of network hash rate, active addresses including wallets and nodes, the amount of stake or locked assets in the network, the volume and value of each transaction, and the cost of network transactions.
Financial criteria
Another important part of digital currency fundamental analysis is financial metrics. In this measure, you look at the growth potential of the project and the numbers behind it. Some of these numbers include market value or market cap, tokennomics and the number of tokens or coins in circulation, liquidity and transaction volume.
Project criteria
Project benchmarks use a qualitative approach to examine the performance of a digital currency. In fact, these criteria are focused on external and internal factors such as the purpose of the digital currency and the project’s performance method. Team members, evaluation of white paper communities, roadmap and project growth rate, purpose and application of the project and review of their competitors are among the most important criteria of the project.
Fundamental analysis of digital currency with blockchain criteria
Blockchain makes a valuable resource with collected data or such criteria available to users. At the same time, manual data extraction from raw blockchain data saves resources and time. Fortunately, a wide variety of user programming interfaces (APIs) have created tools that empower investment decisions.
Leading cryptocurrency exchanges have also developed reporting tools that provide a wealth of useful data such as total transactions, number of active users, and transaction value. The most important blockchain criteria for digital currency fundamental analysis include hash rate, number and value of transactions, number of active addresses and fees, which we mention below:
Network hash rate
Hash rate in blockchain networks is the total amount of processing power available with the Proof of Work (PoW) consensus algorithm. This rate represents the willingness of users to work and provide security in the network.
Many crypto investors consider the hash rate as an indicator of the health of a digital currency. The higher the hash rate, the more difficult it is for malicious miners to gather enough power to attack a 51% network. Therefore, the validity of the network will be higher. Miners will be active in the network in conditions where the amount of their income is acceptable as a result of the mining process. As the income decreases, a large number of miners leave the network.
In general, the hash rate of the network is important, but its reduction does not necessarily cause the destruction of the blockchain network. Because blocks produced by miners are confirmed by full nodes and miners are only a part of full nodes active in the network.
Therefore, it can be said that as long as the full nodes work properly in the network, there will be no sabotage in the network. With only a simple system with internet and storage without much cost, you can become a full node of the network.
Staking in the network
Despite the fact that hash rate is considered a valid measure to measure the health of digital currency and blockchain; But it is only used for Proof of Work (PoW) based blockchains. Blockchains based on Proof of Stake (PoS) measure based on the amount staked (Amount Staked). PoS consensus-based blockchains rely on sticky tokens to validate blocks. Therefore, as the size of the staked tokens increases, the security of the blockchain also increases.
The network security in the PoS blockchain is such that if a user does not perform an honest activity and this activity is identified by the nodes, the user will be fined and part of his locked tokens will be lost. On the other hand, for a 51% attack on the user’s network, more than 50% of the network’s tokens are needed, and in this case, the user will suffer the greatest loss by attacking the network.
Paying attention to the balance in the amount of staking is important in checking the amount of staked tokens.
If the amount of staking is too low, the security of the network will suffer, and a malicious user has the possibility to disrupt the activity of the network by inserting a small part of the network tokens into the staking process. Also, if the amount of staking in the network is high, other applications defined for the token will have problems.
Therefore, it is very important to have a balanced amount of tokens in the network.
Read more: How can blockchain security be increased?
The cost of mining digital currency
Miners spend energy and computing power to create a new block. Therefore, the production of each new coin in cryptocurrency networks with a proof-of-work consensus algorithm has a cost. If the price of network coins in the market is more expensive than the cost of producing one coin, in this case it makes sense to mine digital currency. Otherwise, miners will exit the network by turning off their devices.
Shutting down part of the network miners will reduce the cost of creating a bitcoin, but it will make the network security problematic.
Basically, it is important to check the mining cost for networks similar to Bitcoin; Because it can largely determine the floor price for coins. These costs can be considered the same as the cost of gold mining under the title of Bitcoin production support, which will increase the value of its tokens.
Number of transactions
Without users using the network, the tokens of that network have no value and importance. In fact, the number of transactions recorded in the network of a digital currency can be a good factor in order to check the activity of users in that network. Investors can observe changes in user activities during certain periods by drawing transactions (using moving average).
Although it is difficult to separate real and artificial transactions and the correctness of the information may be doubted; However, by comparing the number of transactions in different time periods and on different platforms, it is possible to evaluate the level of interest of users about network activity.
Value of transactions
Transaction value is a measure to show the amount of value traded during a certain period of time for investors. For example, if 5 transactions of 250 dollars are made in one day, the value of the daily transaction is equal to 1250 dollars.
The transaction value of a digital currency that is constantly high indicates that that coin is constantly circulating. At the same time, the future movements of the market can be understood from the comparison of these values. For example, in the first layer blockchains, it is possible to see a decrease in the transaction value of one currency and at the same time, an increase in the transaction value of another cryptocurrency.
Such a situation indicates that the market’s attention is directed elsewhere, and based on the level of secondary cryptocurrency activity and demand, it is likely to be a sign of a potential increase in the price of the cryptocurrency.
The number of active and unique addresses
The increase in the number of addresses in a cryptocurrency network can be assumed to be similar to the increase in the number of customers in a store. Therefore, the number of unique addresses created in the network increases, it shows the interest of users in the network. Meanwhile, it is natural that the addresses that consist of network tokens are more important for the project. Therefore, among all addresses, only those addresses that consist of project tokens can be considered.
Another point about the addresses created in the network is that these addresses are active. Some network users invest in digital currency projects for long-term investment. Therefore, the number of transactions of these types of wallets is very low.
On the other hand, some addresses are continuously active and use their digital currencies for trade, services and buying and selling of goods. Active network users are a good indicator of network efficiency. And the holder users also represent the feature of storing the value of tokens.
Network transaction fees
One of the complex criteria in the fundamental analysis of digital currency is the network transaction fee, and in order to check it, other variables should also be used. A high transaction fee in a network without increasing the number of transactions indicates the weakness of the network, which is rarely seen.
This is while the high fees and the increase in the number of transactions indicate the desire of users to use the network and the inappropriate scalability of the network. Although this issue is in favor of miners, in the long run it can reduce the number of network users.
The low transaction fee in the network is reasonable when the number of daily transactions in the network has reached a suitable size. In such a situation, there are two reasons for the low fee. The first reason is the centralization of the network and the use of a small number of nodes, which increases the scalability of the network. Therefore, the fee is reduced.
The second reason is the use of new and powerful technologies like the second layer projects. However, transaction fees are important for Bitcoin and other non-inflationary networks. Because after the completion of all network coins, miners’ rewards are calculated only from user fees. In blockchains based on proof of stake, there is no problem in this regard due to not spending a lot of money to create a new block.
Fundamental analysis of digital currency with financial criteria
Financial criteria, by drawing a proper picture of the improvement of the performance of a digital currency compared to its past, its growth capacity in the future can be understood. These criteria include the following:
Market value (Market Cap)
The market value represents the value of a network. The value of this metric can be obtained by multiplying the number of circulating supply tokens by the price of each unit of digital currency. For example, if the price of Bitcoin is $45,000 and there are currently 19.5 million units of Bitcoin in circulation, its market value is $877 billion. Market value is an important parameter in fundamental analysis.
The higher the market value or market cap of a digital currency, the lower the risk of investing in that digital currency. Of course, it should be noted that the market value is only an indicator and it is not possible to determine the intrinsic value of the currency by relying only on it and invest with closed eyes.
Evaluating Coin Balance
Maybe you have ever come across the question why some people keep and maintain digital currencies instead of buying and selling them? For the answer, we can say that one of the methods of controlling inflation is the limited supply of a currency in the market. For example, currently 19,464,781 bitcoins have been mined.
According to the law of supply and demand, low supply and high demand will increase the currency price in the future. Therefore, one of the important factors in fundamental analysis that must be examined is the coin inventory.
Trade Volume
The volume of transactions as an important factor in measuring the popularity of digital currency includes the amount of digital currency traded in a certain period of time. In fact, the high volume of transactions in a currency represents the high demand of that currency. In other words, the volume of transactions shows the interest of investors and traders in a digital currency.
Some newbies may only pay attention to the trading volume of a digital currency in a day. While a news, rumor or sudden change can have an impact on the volume of daily transactions.
Therefore, to make a decision based on this analytical model of digital currency, it is better to examine the volume of transactions in a month. If the volume of transactions is low, it creates the problem that if you buy that currency, due to the low volume of daily purchases and sales, you will face the problem of liquidity at the time of sale.
Circulating supply
Circulating supply means the total number of units of a digital currency that are available and actively circulating. The difference between supply and circulation and maximum potential supply or total supply is that the supply in circulation is not static and is able to change over time.
Because digital currencies can be produced and burned. The program or timing of the release of a digital currency is a document that investors refer to for making informed decisions. Some cryptocurrencies have decreased in supply over time and are contractionary. Such currencies are attractive to investors who believe that a decrease in supply leads to an increase in market demand and causes an increase in prices.
On the other hand, cryptocurrencies that are highly contractionary and their supply increases strongly cause investors to worry; Because the excess supply causes their prices to decrease.
rate of return on investment (ROI)
The rate of return on investment or ROI examines the amount of profit received from a cryptocurrency based on its price changes from the start of the launch (the first transaction price) to its current price. For this purpose, first calculate the difference of the first transaction price compared to the secondary price and then divide it by the initial price. At the end, multiplying the obtained number by 100 determines the rate of return on investment. It should be noted that the rate of return on investment is negative only when your property is unprofitable.
Fundamental analysis of digital currency by evaluating the status of project activity
Any platform and tool is worthless if users do not use it. Therefore, in the continuation of this section, we will examine the activity of users on the network based on some such analysis criteria. Most of these metrics are public and can be accessed on most public cryptocurrency sites such as Coinmarketcap and CoinGecko .
In order to qualitatively evaluate the performance of a digital currency, project criteria are used. This series of criteria focuses on internal and external factors such as the purpose of the cryptocurrency and the way the project is implemented.
The executive team of a digital currency project
The website of digital currency projects basically has a list of project members. The experiences of the project team represent the strength of the members in completing the project. Some of the things investors want to know about the project team include:
- Have the team members ever had a successful experience of launching a digital currency?
- Have they participated in other prestigious projects before and do they have the necessary knowledge to advance the project?
- Have they had a bad record in the field of fraud?
- Is there a valid sponsor and consultant among the project team members?
You can evaluate the records of project members through communication platforms such as LinkedIn . If the members of the project insist on keeping their identity hidden, this should be doubted. It is very difficult to get information about the background and progress of an unknown team.
White paper
A white paper is a technical document with an overview of the project’s performance and objectives. In fact, the project white paper is considered the most important document of a project and ideally it has the following information:
- Blockchain technology methods
- Project team information
- About the use of digital currency
- Token economy
- Road map
Competitors of the project
To measure the capacity of a project, one must also know its competitors. A project may be interesting at first glance, but it doesn’t hold much interest compared to other competitors. Because the competitors may have a more experienced team, a higher quality product and a more harmonious community.
Analyzing competitors’ market share helps investors gauge the project’s potential for growth and adoption.
Roadmap
Roadmap is a table, diagram or time graphic that specifies when a project is supposed to do what. In fact, a roadmap is a business plan to achieve a specific goal.
Most cryptocurrency projects have a roadmap for their future, drawing a timetable for releases, testing networks, and new planned actions. The road map should include a clear picture of future developments. With this document, investors can check the success rate of a project and find out if the project is going according to its plan or not!
The road map has different phases that are designed in different seasonal or annual time frames:
- First phase: Early growth up to 6 months
- Second: Platform development 6 to 12 months
- Third: Community participation and ecosystem growth and development 12 to 18 months
- Fourth: Acceptance and expansion of the market 18 to 24 months
Tokenomics or Tokenomics
Tokenomics Tokenomics is an important factor in fundamental analysis. Token economics refers to the study of cryptocurrency or asset economics, which includes examining criteria such as:
- Token Utility
- How to allocate tokens (Token Allocation)
- Token Supply
- Circulating Supply
- How to distribute tokens (Token Distribution)
- Token Unlocks/Vesting Schedule
- Max Supply
- Total Supply
- Token Velocity
- Supply Policy
Reviewing these metrics will help you gain a deeper insight into a property. Token economy or Tokonomics is the driver of the value and price of a digital currency.
Investors can identify potential risks by checking the token distribution. In addition, Tokonomics is the driver of behavior in the network. For example, one of the successful and popular models of Tokonomics is the Vote Escrow model, in which users will be given a monetary reward for depositing cryptocurrency.
Locking up a cryptocurrency means reducing its supply and increasing its price. If the initial investors’ surrender period is short, it can cause investors to dump a lot of their coins in the market for profit and eventually lead to a decrease in the price.
Application of a project
Project applications should be considered. Because many projects have different uses for their projects that are not valuable. The provided applications have value only if they are created to meet a real need and are innovative.
For example, a token that claims to be eradicated is not applicable and will be rejected due to the impossibility of realizing this claim.
News
News about a project or cryptocurrency is very important in fundamental analysis of digital currency. Also, the positive or negative news of a project has a great impact on its price behavior in the short and medium term. For example, after important news that benefits Bitcoin, its price increases.
Also, following the news of exchange hacking, the cryptocurrency market falls. News in the markets are among the most effective mechanisms that should not be neglected.
Listing status in exchanges
A fundamentalist should check which exchanges the cryptocurrency in question is listed on. Before making any decisions about the status of a project, you should make sure that the digital currency you are considering is listed in a reputable exchange.
Definitely, the digital currency project that is listed in reputable exchanges before its official launch has more credibility than other projects.
Advantages and disadvantages of digital currency fundamental analysis
Many investors around the world use fundamental analysis to evaluate digital currencies. But on the other hand, there are others who use other methods to check the market situation. Fundamental analysis and technical analysis are complementary and by examining both, you can make a confident decision about the market situation.
But fundamental analysis, like other methods, has advantages and disadvantages, which we will discuss below:
Advantages of fundamental analysis
- A popular way to invest in digital currencies for the long term
- Effective in the overall understanding of the digital currency market
- Considering the fundamental factors to predict the price of digital currencies in this analysis model
Disadvantages of fundamental analysis
- In order to properly understand the behavior of the market, all the factors affecting the price of digital currency should be examined with a lot of study and research.
- The possibility of misinterpretation of some effective factors in this analysis model
- The time-consuming nature of fundamental analysis due to the comprehensive examination of various factors
Fundamental analysis or fundamental analysis in the crypto market evaluates the fundamental aspects of a blockchain project. Based on this approach, the investor can predict the intrinsic value of the cryptocurrency in question by examining indicators such as market value, capital attraction, toconomics, such data, etc.
In addition to the disadvantages mentioned in the text above, it can be said that the accuracy of fundamental analysis depends on the depth of the investor’s investigations and the available data. In some cases, estimating the intrinsic value of a project based on the available information is a very difficult task, and in the end, it is possible that the analysis performed does not have the necessary validity.
In the digital currency market, fundamental analysis is an attractive option for analysts. But it is better to use technical and fundamental analysis together for any decision in this field.
Technical analysis evaluates the price trend of cryptocurrencies. While fundamental analysis will examine the future conditions of digital currency from an economic point of view. According to Mr. Farhad Moghadam Salimi, these two techniques together can create suitable conditions for investment.
This analysis model is suitable for investors who are looking to check the long-term trend of a digital currency.