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INTRODUCTION

It is known to us that the cryptocurrency industry is still in its infancy and have limited real-world applications, and there is really not enough historic financial statements and track records, coupled with the fact that this digital representation of wealth rely on miners, users/community and developer to succeed makes the intrinsic value (intrinsic value is what a cryptocurrency is actually worth with time rather that its market/current price) of these cryptocurrencies sometimes hard to determine.

To determine if a particular cryptocurrency is either underpriced or overpriced, when to invest and its value with time a technique known as Fundamental Analysis is employed.

Fundamental analysis in cryptocurrency is the use of external and internal factors of a cryptocurrency to cross check and determine whether an asset is overvalued or undervalued. This is the evaluation of the economic, financial and other key variables of an asset to aid trading decision making.

Fundamental analysis is often employed for long-term investment as the performance of the asset overtime is put into consideration. Effective and consistent FA can come in handy when developing investment strategies as it helps to predict the future of a cryptocurrency and deciding whether it is a worthy investment.

The aim of every investor using FA is to recognize when the price of a coin falls below its inherent worth, this is considered the best time to buy and when it exceeds its intrinsic value as this is considered the best time to sell, same old trick as every financial market, buy low!! And sell high!!

FACTORS / METRICS OF FUNDAMENTAL ANALYSIS

Fundamental analysis can be carried out either quantitatively or qualitatively.

Quantitatively fundamental analysis is focused on providing intending investors with numerically measured data to make financial decision that is it focuses on the available monetary data.

Qualitatively on the other hand focuses on the team and overall performance of the cryptocurrency. This focus on internal and external factors, such as the purpose of the cryptocurrency and how the cryptocurrency project operates.

The Quantitative analysis is further divided into two metrics and these are

• The Financial Metrics
• The Blockchain Metrics

While the Qualitative analysis can also be considered as the Project Metrics.

Financial Metrics

Market capitalization

When considering a cryptocurrency for investment, the first thing investors observes is its market capitalization. It’s the total worth of cryptocurrency in relation to a Fiat currency (many a time the dollar $). The market capitalization of cryptocurrency goes to show a lot about how much space for growth the asset has, as cryptocurrency are often bought or invested on, in relation to its market capitalization not really its current price.

To calculate the market capitalization of a cryptocurrency, the current price per coin is multiplied by the circulating supply.

For instance take the current price of one ABC (ABC here represent an assumed cryptocurrency) to be $40, with a circulating supply of 102M when you multiply the current price by the circulating supply ($40*102M) you get $4.08B as the market capitalization.

However, market capitalization can provide a deceptive valuation as price manipulation often occur in the financial market so putting other factors such as liquidity into consideration would prove useful to make financial decisions.

Liquidity and Volume

Liquidity is the ease at which sales and purchase of a particular asset (in this case a cryptocurrency) can be made. It denotes how quickly you can buy or sell an asset without causing significant market movement.

A liquid market proves highly competitive and has a small bid-ask spread as there is a balanced demand and supply of that particular cryptocurrency. If the cryptocurrency is illiquid it makes it difficult to trade it for a reasonable price. Trading volume is used to determine how liquid an asset is because it shows how much money has been exchanged over time.

When an asset is having a high volume, it goes to show that the asset is highly liquid and is considered suitable for investment once all other factors checks.

Supply mechanisms

Price and value of commodities are generally driven by supply and demand. Theoretically, the larger the demand the higher the price, but when supply exceeds demand the price of the asset or commodity tends to drive downward.

That applies to cryptocurrency too, the way and manner in which the cryptocurrency is mined and distributed into the general market is one important factor to consider when making financial decision.

BLOCKCHAIN METRICS

Hash Rates

This a measure of a mining machine’s ability to conduct hashing computations efficiently and effectively. The profitability of a mining pool is in direct relation to the hash rate.

A higher hash rate implies active involvement of miners due to enticing and profitable block rewards, on the other hand, a decrease in hash rate indicates the exit of miners from the network as it the network has proven to be less profitable for them.

It is more challenging to mount a 51% attack on a cryptocurrency with a greater hash rate as it attracts more miners and so computing power are dispersed evenly. When a single individual or group controls most of the hash rate on a blockchain network, a 51% attack is imminent.

As an investor, you should look out for crypto with a more competitive mining network as they are more resistant to attack and data manipulation.

Fees

Fees are payment made to facilitate transactions on the blockchain. An evaluation on the fee paid for transacting a cryptocurrency shows the extent of demand for that cryptocurrency on the blockchain. It gives potential investors an idea of how many users is competing to get their transactions included as soon as possible. An example of these fees is Ethereum gas.

The amount of fee paid over time provides you with an idea of how safe a coin or token is.

Active Addresses/Users

This has to do with evaluating the number of active blockchain addresses that has interacted with the project throughout a specific period. It involves tallying up the number of sending and receiving addresses over a specific period of time be it days, weeks or months and comparing the increase and declines.

As the higher the transaction and increase in active addresses with time the more investment worthy a project gets as it indicates adoption except in certain cases where manipulation might be inherent so this alone can’t completely justify a project’s authenticity and growth.

Transaction Values

When a cryptocurrency tends to have consistently high transaction value, it leaves investor with the conclusion that the cryptocurrency is regularly circulated and there is a good demand to supply ratio which is visible in it high liquidity. Transaction value is popularly measured in the USD.

For example, assume the daily transaction volume for ABC was $2M, with each transaction worth $1000. Given that transaction value indicates how much money has been exchanged in a given period. This goes to show that on this particular day, there were 2000 ($2M/$1000) transactions recorded.

PROJECT METRICS (Qualitative Analysis)

Project metrics is concerned with the factors that evaluates the team’s performance. The look into how the cryptocurrency works and how it came about focusing on the development side. These includes...

Team

Most cryptocurrency project makes team’s information easily accessible (except for some cases such as the anonymous developer(s) behind bitcoin with the code name Satoshi Nakamoto).

Check out for information about the team on their official website and social media profiles. Evaluate how many contributors are there and how active they are. Check to determine if any of the team members have the skills required to execute the task. Have they previously completed any successful projects of this nature? Are they working, or have they been linked to any dubious ventures or con schemes?

whitepaper

A whitepaper is a comprehensive document that describes the cryptocurrency concept in details. When conducting fundamental analysis, it’s good idea to compare this material (whitepaper) with project conversations. Find more about the objectives and what other people are pointing out as red flags

A whitepaper outlines the following information

• Target demographic/market
• Roadmap
• Tokenomics
• Technology open-source code
• Objectives
• Use cases

The Competitors

Competition is important in any industry, and you can use it to gauge the effectiveness of a crypto project. Think about:

How many competitors are there?. If there are lots of players, that makes it more difficult for your chosen project to gain adoption.

How do they compare to their competitors?. Stacking something against competitors can highlight strengths and weaknesses, and suggest whether they are likely to beat their competitors in the long run.

Evaluate the level of competition and decide whether a project is in good standing or not, relative to the rest. If the product is unique, that could be a great sign.