In today’s blog, I will talk about Fundamental Analysis – picking cryptos and the techniques used to determine if a cryptocurrency is high quality or a good investment. Additionally, this topic was requested by one of our Members, so if YOU have a topic you want me to cover you can message me on the website or through Facebook messenger.
One thing to keep in mind about ‘How to Pick Quality Cryptos to Buy’ is that it’s a vast subject! In today’s featured article, I’ll present a high-level overview that will help you get started with your own research. Over the next 4 weeks I’ll go over each of the 4 sections of today’s blog in more detail.
Okay. Let’s get started!
In the world of investing there’s a word that describes the process of researching assets in order to select a quality asset to buy. It’s called FUNDAMENTAL ANALYSIS. The word originated with stock trading.
FUNDAMENTAL ANALYSIS – official definition
“Fundamental analysis (FA) measures a security’s intrinsic value (ie asset value) by examining related economic and financial data. Intrinsic value is the value of an investment based on the issuing company’s financial health (are they profitable or not) along with current market and economic conditions (bull or bear market).”
Investopedia
In short,
- Fundamental analysis is a method of determining a stock’s REAL or “fair market” value based on the health of the underlying company
- Researchers look for stocks currently trading at prices higher or lower than their real value
- If the REAL (ie fair market value) is higher than the market price, the stock is deemed undervalued, and a buy recommendation is given
- If the REAL (ie fair market value) is lower than the market price, the stock is deemed overvalued, and the recommendation to not buy is given
- If the stock is already owned, then a recommendation to hold might be given
Fundamental Analysis Stock Example
Consider the price of Apple Stock. Currently, its price is $154.48 per share. At the end of the next quarter when Apple reports its earnings, the value of the stock will go up if Apple earned a profit during the quarter. That’s because it’s REAL value (ie intrinsic value) would be higher than the market value. If they had a loss during the quarter the value of their stock will likely go down, because the REAL value would be less than the market value.
Likewise, consider that in the equities market, ie the stock market, the field of fundamental research and analysis is well documented. However, the fundamental analysis of cryptocurrencies is very different and not as widely covered. Why?
Significantly, the crucial difference between fundamental analysis of stocks vs crypto is that a cryptocurrency is NOT tied to the value of the underlying company or a project that issued it. Said another way, crypto does not reflect the net worth of the company or project that issued it.
Fundamental Analysis – Picking Cryptos
Before I continue I want to take a brief moment and look at the difference between FUNDAMENTAL ANALYSIS (FA for short) and TECHNICAL ANALYSIS (TA for short). FA helps decide which cryptos to buy, while TA is often used to determine when to buy. FA requires lots of research, while TA uses charts to pick the timing of when to get into or out of a trade. In a future training I’ll teach about TA.
As I have noted cryptocurrencies are NOT issued by a corporation and do not reflect the underlying profit or loss of a company. So, how can we use FA to arrive at the underlying value of a crypto asset?
We start by looking at surrounding factors that could influence it. These factors take into consideration the big picture, the people picture, the behavior picture, and the financial picture.
To help with the rest of this blog and future posts on FA, I’ve organized these factors into four groups.
- Macro-economics
- Project metrics
- Blockchain metrics
- Financial metrics
In this blog, I will briefly describe each of the four groups and in future featured articles, I will expound on each of them.
Fundamental Analysis – Macro-economics
The first group of factors is based on macro-economics. From a high-level macro-economic perspective we could evaluate:
- the state of the cryptocurrency investment sector
- the investment market as a whole
- the domestic and global economic environment
- the competitive crypto development landscape
Fundamental Analysis – Project metrics
The second group of factors is based on the project itself and the team behind it. From a high-level perspective we might research:
- The team of developers that created the project
- The whitepaper that explains the project
- Utility of the project or its cryptocurrency
- Competitors to the project
- Tokenomics of the project
Fundamental Analysis – Blockchain metrics
The third group of factors analyzes on-chain data to determine investor behavior. This data is provided by the blockchain where the crypto resides. For example, the bitcoin resides on the Bitcoin blockchain. The ETHER resides on the Ethereum blockchain. And AVAX resides on the Avalanche blockchain. From a high-level perspective we might research:
- Transaction count or on-chain activity
- Transaction value/volume over a specific time-frame
- Number of active addresses in a given period of time
- Hash rate for proof of work blockchains
- Amount staked for proof of stake blockchains
Fundamental Analysis – Financial metrics
The fourth group of factors analyzes financial metrics to determine the economic health of the project by measuring the flow of money into the crypto market. From a high-level perspective we might research:
- Market capitalization (total # of tokens in circulation x current price)
- Liquidity
- Trading volume
- Total Value Locked (Proof of Stake)
Fundamental Analysis – Picking Cryptos Summary
As you can tell Fundamental Analysis is rather complex and to do it well requires a great deal of time, knowledge, and due diligence. Does that mean you should avoid it and just rely on other types of data to make your buying decisions? Of course NOT! However, there are ways to reduce the amount of work YOU have to do to get the information you need. Here are a few ideas:
- You can follow someone that has done the analysis and trust what they say about it, or
- You can subscribe to a professional service that analyzes crypto projects and read their reports
- Do some of the analysis yourself and get the rest from someplace else
For myself, I do a little of all three of the above ideas.
In the next 4 featured articles on Fundamental Analysis – Picking Quality Cryptos, I will go over in more detail each of the four factors outlined above. The next blog will cover Fundamental Analysis of Macro-economics.
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Are you someone that thinks you should know about crypto, but you don’t? Let’s do a private call and talk about how to get you started. Message me on Facebook or this website.
Thanks for reading. Enjoy the rest of your day. Bye for now!
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