How to Conduct Fundamental Analysis of Crypto

Cryptocurrency Investing: Exploring the Necessity and Challenges of Fundamental Analysis

In the ever-evolving landscape of cryptocurrency markets, traders must not only master technical charts and indicators to capitalize on short-term price fluctuations but also delve deeper into asset intrinsic value, hence highlighting the significance of fundamental analysis. While traditional financial market tools like RSI, MACD, and Bollinger Bands can still offer valuable insights when predicting cryptocurrency market trends, the distinct attributes of cryptocurrencies present unique challenges in their fundamental assessment.

Unlike conventional financial assets, the value anchors of cryptocurrencies are inherently more complex and diverse, encompassing aspects such as technological innovation, community vibrancy, network utility, deflationary mechanisms, among others. Consequently, merely applying traditional financial statements and economic models falls short in providing a holistic understanding of a cryptocurrency's true value potential. In this piece, we systematically explore the specific components of cryptocurrency fundamental analysis, including on-chain data metrics, project core competencies, ratios relating network value to actual usage, developer activity, and introduce effective tools and platforms tailored for cryptocurrency fundamental analysis.

By meticulously examining these key indicators and the underlying rationale, readers will not only learn how to synthesize various measurement standards to construct their own fundamental analysis framework but also gain profound insights into the inner workings of cryptocurrency markets, empowering them to make wiser investment choices.

Fundamental Analysis: The Key Method to Unveil an Asset's Intrinsic Value

Fundamental analysis (FA) serves as the core approach for investors to assess the genuine worth of financial assets or tangible businesses. This methodology emphasizes delving into a multitude of inherent and extrinsic factors influencing asset prices, with the aim of determining whether the asset's current market valuation is rational. When employing fundamental analysis, investors seek to identify overvalued or undervalued investment opportunities and formulate their investment strategies based on such findings.

Contrary to technical analysis (TA), FA does not rely on historical price charts and trend indicators to forecast future movements but instead focuses on the economic underpinnings, profitability, industry standing, management team, and other substantive information of a company or project. For instance, in traditional financial markets, fundamental analysts diligently scrutinize corporate financial statements, utilizing key metrics like earnings per share (EPS) to gauge the net income attributable to each outstanding share of stock. Simultaneously, they also consider the price-to-book ratio (P/B Ratio), representing the ratio of a company's market capitalization to its book value, to gauge the market's perception of the firm's underlying asset value.

Unique Challenges and Indicator Selection in Cryptocurrency Fundamental Analysis

In delving into cryptocurrency fundamental analysis, a core issue we confront is the inability to directly apply traditional financial market evaluation methods. Due to the decentralized nature of cryptocurrency networks and their distinct operational mechanisms, whether dealing with decentralized assets like Bitcoin or centralized cryptocurrencies issued by specific organizations, conventional fundamental analysis indicators often struggle to fully capture their intrinsic value.

In light of this characteristic, there is a need to construct a novel analytical framework tailored specifically to the cryptocurrency realm. The primary task here is to identify and select key metrics that are both representative and resistant to manipulation. For instance, superficial data such as follower counts on social media or community activity levels are insufficient as reliable evaluative criteria, as these figures can easily be manipulated and inflated by human influence.

Moreover, reliance on a single on-chain activity metric, such as growth in the number of active addresses, does not provide a complete picture of the network's true state. There may be instances where a single user creates multiple new addresses for self-transfers, skewing the data. Thus, a profound understanding of cryptocurrency fundamentals necessitates considering information from multiple dimensions.

In the following article sections, we will comprehensively examine three core categories of cryptocurrency fundamental analysis indicators: On-chain metrics, encompassing the operational status and transaction behavior of the blockchain itself; Project metrics, which assess the inherent quality, development trajectory, and market positioning of a cryptocurrency project; and Financial metrics, despite cryptocurrencies typically not presenting themselves in traditional financial statement format, there are still relevant economic models and ratios that can be used to gauge their worth. By systematically examining these three categories of indicators and interpreting them through real-world case studies, we aim to furnish readers with a more comprehensive and robust foundation for conducting cryptocurrency fundamental analysis.

On-chain Metrics: Key Dimensions Unveiling the Value of Cryptocurrency Networks

In conducting fundamental analysis of cryptocurrencies, on-chain metrics play a pivotal role. These indicators, derived from blockchain's openly accessible data, provide profound insights into network activity, user behavior, security, and market sentiment.

1. Transaction Volume & Value: Transaction volume serves as a straightforward gauge of network vibrancy, though caution is warranted regarding potential duplicate transfers and invalid transactions. Transaction value, on the other hand, focuses more on actual economic transactional volume; the aggregate value of transactions occurring over a period reveals market demand and liquidity conditions. For instance, by monitoring daily transaction volumes in Bitcoin or Ethereum (denominated in USD or native tokens), investors can gauge the market's temperature.

2. Active Addresses: Representing the number of participating entities within the network, active addresses are typically calculated based on sending and receiving transaction addresses within a specific time window. However, due to address reuse and the inability to directly map them to individual users, this data should be interpreted with care.

3. Paid Fees: Fees serve as a crucial measure of network demand intensity and block space scarcity. Particularly for Proof-of-Work (PoW) cryptocurrencies, as block subsidies diminish over time, fee revenue assumes greater significance. High fees indicate users' willingness to incur higher costs to ensure swift transaction confirmation, reflecting the network's inherent value and stability.

4. Hashrate & Staked Amounts: In PoW systems, hashrate acts as a key barometer of network security, fluctuating with mining difficulty adjustments and indirectly influencing asset price movements. In contrast, within Proof-of-Stake (PoS) frameworks, staked amounts signify investors' confidence in the network's long-term prospects. Substantial staking implies that a larger pool of stakeholders has locked up their assets to secure the network's safe operation.

Project Metrics: Delving into the Intrinsic Value and Potential of Cryptocurrency Ventures

In cryptocurrency investing, on-chain data offers an objective quantification of network activity. However, to gain a comprehensive understanding of a cryptocurrency project's true worth, qualitative analysis must be integrated, starting with project metrics. This section primarily focuses on whitepaper analysis, team background scrutiny, competitor assessment, and token economics and initial distribution.

Whitepaper Interpretation

A thorough and high-quality whitepaper serves as the foundation for investors to delve deeply into a cryptocurrency venture. It should encompass critical technical details, such as whether the project is open-source and its intended use cases and technological implementation roadmap. Moreover, it should provide a clear upgrade plan, token supply, and distribution mechanism. By meticulously examining and cross-verifying the whitepaper content, investors can gauge the practical feasibility of the project vision, avoiding falling prey to hollow concept hype or potential scams.

Team Credentials Assessment

The composition and past performance of the team are crucial indicators of a project's likelihood of success. If there is a core team behind the project, members' professional backgrounds, industry experience, and prior successful endeavors should be scrutinized. If the project relies on community-driven development, monitoring development activity and contributor numbers on platforms like GitHub can help assess project vibrancy and growth prospects.

Competitor Analysis

Any cryptocurrency project must carve out a niche in a fiercely competitive market environment. Thus, examining competitors' strengths and weaknesses, along with the traditional domain the project aims to disrupt, is a pivotal step in assessing its market positioning and future growth potential. Comparing various fundamental metrics of similar assets reveals a project's genuine strength in market competition.

Token Economics & Initial Distribution

Profound comprehension of a token's role within the project ecosystem and its value creation mechanisms is paramount. A well-designed token solves specific issues and garners broad acceptance and recognition from the market. Furthermore, the manner in which tokens are initially distributed impacts project fairness and market risk. For instance, during ICO or IEO issuance, the share held by the founding team and early investors, as well as the proportion of tokens available to the public, directly influence market fairness and liquidity. Regarding pre-mining activities, investors must be vigilant for any potential market manipulation, thereby mitigating associated investment risks.

Financial Indicators & Market Dynamics: Analysis of Market Cap, Liquidity, and Supply Mechanisms

In fundamental analysis of cryptocurrencies, financial indicators serve as crucial yardsticks for assessing asset value and potential growth potential. Key elements such as market capitalization, liquidity, and supply mechanisms provide an in-depth understanding of a cryptocurrency's intrinsic worth.

Market Capitalization and Its Limitations

Market capitalization, a common gauge of a cryptocurrency's size and influence, is calculated by multiplying the circulating supply with the current market price. However, it does not fully encapsulate a cryptocurrency's true value, as it overlooks token utility and actual market demand. For instance, a high-market-cap token lacking practical use cases or robust community backing may have an inflated valuation. Moreover, uncertainties surrounding the number of tokens in circulation (e.g., lost keys, token burns) should be cautiously considered when using market cap as a judgment criterion.

The Importance of Liquidity

Liquidity is vital to the healthy functioning of cryptocurrency markets. High liquidity signifies that investors can buy and sell assets rapidly and at low cost, whereas low liquidity can lead to significant price fluctuations and increased trading expenses. Trading volume, a core measure of liquidity, reveals the level of transactional activity among market participants within a given period, providing valuable insights into the market's interest in a particular investment.

Impact of Supply Mechanisms

Supply mechanisms are among the decisive factors shaping the long-term value trajectory of cryptocurrencies. Bitcoin's halving mechanism and fixed total supply cap enhance the perception of scarcity by reducing the rate of new coin issuance, appealing to certain investors. Nonetheless, different supply strategies come with their own advantages and drawbacks. Some projects opt for a limited but adjustable supply, aiming to strike a balance between inflation and user incentives; others adhere to a strict total supply cap, believing it will drive token value appreciation, yet confront the risk of reduced liquidity due to hoarding. When researching various cryptocurrencies, investors must thoroughly comprehend and weigh the implications of each supply mechanism on future value trends.

Building Fundamental Analysis Metrics: Effective Integration and Utilization of Measuring Indicators

When making investment decisions in cryptocurrencies, relying solely on a single measuring indicator often fails to provide a comprehensive understanding of an asset's true value. Therefore, combining different measuring indicators to create a set of fundamentally insightful analysis metrics is crucial.

For instance, merely focusing on the difference in active address counts for Token A and Token B over the past six months yields little meaningful insight. However, constructing a ratio to compare such indicators, say by coupling market capitalization with transaction volume, can reveal more about the intrinsic value of the tokens. If Token A has a market cap-to-volume ratio of 5, while Token B has a ratio of 0.125, it might suggest that Token B exhibits a higher frequency of trading relative to its market value or that Token A could be potentially overvalued.

Moreover, within the cryptocurrency realm, a widely employed composite metric is the Network Value to Transaction Ratio (NVT). Analogous to the Price-to-Earnings (P/E) ratio in traditional financial markets, this concept, introduced by analyst Willy Woo, calculates the ratio of market capitalization to transaction volume over a specified time period, gauging the relationship between network value and actual usage. A lower NVT ratio typically signals higher utility or relative undervaluation.

Indeed, judiciously constructing and applying such composite metrics constitutes a central aspect of fundamental analysis. Investors should strive to thoroughly grasp the underlying logic behind various indicators and how they reflect aspects of a cryptocurrency project's economic model, market demand, user behavior, among others. Only then can one make more scientifically grounded and holistic investment judgments amidst the complex and dynamic cryptocurrency landscape.

It is worth noting that when utilizing various metrics for evaluation, qualitative factors such as project background, target positioning, and token functionality must also be given due consideration. After all, any numerical indicator is merely a tool revealing part of the truth; a thorough understanding of a project's overall potential and long-term prospects is key to formulating an effective investment strategy.

Key Metrics & Measures: A Comprehensive Overview

In cryptocurrency fundamental analysis, a myriad of critical on-chain, project-specific, and financial indicators interweave to form a multidimensional understanding of an asset's intrinsic value. Below are some essential metrics for such analysis:

1. Network Value to Transaction Ratio (NVT): Analogous to the Price-to-Earnings (P/E) ratio in traditional finance, this metric assesses the relationship between a token's price and its actual usage by dividing market capitalization by transaction volume within a specified time window.

2. Market Value to Realized Value Ratio (MVRV): This ratio reveals the connection between current market capitalization and the average purchase price of all investors, aiding in determining whether the market is in a bubble or undervalued state.

3. Stock-to-Flow Ratio Model: By comparing existing circulating supply with the pace at which new tokens are issued, this model analyzes trends in token scarcity and potential future price movements.

Moreover, non-quantitative indicators like community engagement and developer activity play a significant role in evaluating a cryptocurrency project's long-term growth prospects. To make more accurate and comprehensive investment decisions, analysts must adeptly employ various metrics and integrate blockchain data tools like Baserank, Crypto Fees, and Glassnode Studio for in-depth research. While each metric has its distinct focus, it is their collective synthesis that enables a more efficacious insight into a cryptocurrency's true value and underlying investment opportunities.

Network Value to Transactions Ratio (NVT): Uncovering Market Bubbles and Undervaluation

In fundamental analysis of cryptocurrencies, the Network Value to Transactions Ratio (NVT) is a crucial metric that assesses the reasonableness of an asset's price by comparing its market capitalization against its daily transaction volume. NVT serves as the "price-to-earnings ratio" for the cryptocurrency space, assisting investors in determining whether the market is experiencing a bubble or is undervalued.

To compute NVT, we divide the total market capitalization of a token by its transaction volume over the past 24 hours. When this ratio rises, it indicates that the token's market cap is disproportionately high relative to actual trading activity, suggesting potential bubble risk. Typically, if NVT exceeds the 90-95 range, the market may be overheated, warranting caution from investors regarding potential price retracements.

Conversely, a declining NVT signifies that demand for the token is growing faster than the pace at which its market cap is increasing, potentially indicating that the token's value is being underestimated by the market. Such circumstances could present attractive buying opportunities for investors. Thus, when making cryptocurrency investment decisions, incorporating NVT alongside other fundamental analysis tools and attentively monitoring and analyzing its trend changes can help discern more accurate investment signals.

Market Value to Realized Value Ratio (MVRV): Unveiling Over- and Undervaluation of Cryptocurrencies

In the realm of cryptocurrency fundamental analysis, a crucial metric is the Market Value to Realized Value Ratio (MVRV). This ratio juxtaposes a token's current market value against its realized market capitalization, enabling investors to gauge whether a given crypto asset is overvalued or undervalued.

Central to understanding MVRV is grasping the concept of "realized market cap." Unlike conventional market capitalization calculations (total supply multiplied by current price), realized market cap recalculates the value of all circulating tokens based on the price at which each last traded. For instance, if a Bitcoin last changed hands when its price was $400, it contributes $400 to the realized market cap, even if the current market price has significantly appreciated since then.

The MVRV ratio is simply the market value divided by the realized market cap. When this ratio is high, it suggests that the market may be overly exuberant about the crypto asset, implying an inflated token valuation. Historical data shows that when Bitcoin's MVRV surpasses around 3.7, markets tend to experience corrections or substantial sell-offs, as was the case prior to the significant downturns in 2014 and 2018, both instances where Bitcoin's MVRV reached elevated levels.

Conversely, when the MVRV ratio falls below 1, it indicates that the market might be undervaluing the crypto asset. Such circumstances present buying opportunities, with increasing market demand and buying pressure likely to drive prices upward. Thus, MVRV serves as a pivotal fundamental analysis tool for discerning market sentiment towards cryptocurrencies and timing investment decisions accordingly.

Inventory-Flow Ratio Model: Uncovering the Relationship Between Cryptocurrency Scarcity and Price

In fundamental analysis of cryptocurrencies, the inventory-flow ratio model stands as a distinctive metric particularly suited for crypto assets with fixed supplies. This model gauges the relative scarcity of a cryptocurrency by dividing its total global circulating supply by the amount of new output generated annually, thereby providing a basis for predicting its future value.

Taking Bitcoin as an example, its inherent deflationary mechanism—wherein the production of new coins halves every four years—results in a steadily declining issuance rate and a corresponding rise in the inventory-flow ratio. As mining rewards decrease, demand for existing Bitcoins intensifies, exerting upward pressure on prices. Historical data reveals a clear correlation between Bitcoin's price and the 365-day moving average of its inventory-flow ratio, indicating that this ratio effectively reflects the market's supply-demand dynamics and underlying value.

However, the inventory-flow ratio model is not without limitations. In extreme scenarios where a portion of Bitcoins become permanently immobilized due to lost wallet keys or when no new coins are produced post-mining exhaustion, the ratio may trend towards infinity or turn negative, rendering the model unreliable. Moreover, extrapolating from current inventory-flow ratios suggests that Bitcoin's theoretical market capitalization over the next several decades could vastly exceed the present aggregate global wealth, but such an assumption must account for numerous real-world conditions and market influences.

Community Engagement & Developer Activity: Dual Engines Driving the Vitality of Cryptocurrencies

In fundamental analysis of cryptocurrencies, community engagement and developer activity are two indispensable factors for consideration. They respectively reflect a project's degree of acceptance at the user level and its potential for innovation and development on the technological front.

Community engagement manifests in multiple dimensions such as a project's social media traction, forum activity, and number of active trading accounts on the blockchain. For instance, if a cryptocurrency project boasts a substantial and lively Telegram group membership or a large Twitter following, coupled with a sustained growth in active addresses on the chain, it is typically indicative of high market buzz and a robust base of potential users. The scale and liveliness of the community aid in assessing whether a cryptocurrency can foster a strong network effect and sustain or enhance its intrinsic value in the future.

On the other hand, developer activity serves as a key gauge of a project's technical prowess and the maturity of its technology ecosystem. Active developer contributions, code update frequency, and GitHub submission counts are all critical benchmarks for evaluating a project's ability to continuously optimize, troubleshoot, and roll out new features. Ethereum, the world's second-largest cryptocurrency, exemplifies this with its vast developer community and frequent technological advancements, which, along with the thriving DApp ecosystem, have powered Ethereum's robust growth momentum.

Practical Applications of Fundamental Analysis Tools

In conducting fundamental analysis of cryptocurrencies, selecting the right tools is paramount. Here are several commonly used fundamental analysis tools and their functionalities:

1. Baserank: This platform offers a one-stop solution by holistically evaluating multiple dimensions such as project team, community activity, technological advancements, and market performance, enabling investors to conduct systematic and structured fundamental analysis of cryptocurrencies. Users can swiftly obtain an overall score for each project and make more informed investment decisions based on this information.

2. Crypto Fees: Specifically tailored to monitor real-time blockchain network transaction fees and analyze historical data, this tool provides comparative data on transaction costs across different cryptocurrency networks. For investors keen on the efficiency of specific networks and the sustainability of their economic models, tracking fluctuations in transaction fees is indispensable.

3. Glassnode Studio: As an advanced on-chain data analytics platform, Glassnode Studio presents a wealth of on-chain metrics like active address count, holder distribution, Market Value to Realized Value ratio (MVRV), among others, allowing users to gain deep insights into the on-chain behavior and market sentiment of cryptocurrencies. Its visual charts and comprehensive reports assist investors in grasping market dynamics from various angles and refining their investment strategies.

By leveraging these fundamental analysis tools, investors not only benefit from extensive data support but also can more precisely assess the value potential and future trajectory of cryptocurrencies in conjunction with their own understanding of the market. Importantly, when utilizing any tool for analysis, it is essential to integrate other financial analysis methods and broader macroeconomic conditions to develop a comprehensive and objective investment perspective.

Baserank: A One-Stop Cryptocurrency Evaluation Platform

In the realm of fundamental analysis tools, Baserank stands out as a platform worthy of attention. Designed specifically for researching cryptocurrency assets, it consolidates and integrates opinions and ratings from analysts and investors, offering users an intuitive and convenient means of assessing projects.

The platform employs a scoring mechanism (ranging from 0 to 100) to provide an overall evaluation of each cryptocurrency, with average scores enabling investors to quickly grasp a project's overall performance. While some in-depth commentary is reserved for subscribers, free users still gain access to comprehensive overviews encompassing aspects such as team quality, token utility, and investment risk, significantly streamlining the initial screening process.

For investors with limited time or those seeking a swift overview of a particular cryptocurrency project's characteristics, Baserank serves as an ideal starting point. Nevertheless, building upon this foundation, investors should undertake further in-depth research on their areas of interest to fully comprehend a project's potential value and future prospects, ultimately facilitating more informed investment decisions.

Crypto Fees: Transaction Fee Data Reveals Blockchain Network Activity

In the arsenal of cryptocurrency fundamental analysis tools, Crypto Fees is a practical utility that specializes in providing real-time transaction fee information. It aids investors in tracking fluctuations in fees across various blockchain networks over the past 24 hours or seven days, serving as a direct reference indicator for assessing network utilization and traffic conditions.

Typically, networks with higher transaction fees indicate stronger demand and higher user activity. However, relying solely on this single data point—transaction fees—can be misleading. Some blockchain projects, in their early stages, set lower fees to attract users, such as Dogecoin and Cardano, both of which boast considerable market capitalization despite frequent trading. Their low fees render them less conspicuous in fee rankings.

Consequently, when utilizing Crypto Fees to gather transaction fee data, investors should integrate other key metrics like transaction volume, active addresses on the chain, and market sentiment into their analysis for a more accurate understanding of the genuine state and underlying value of different blockchain networks. Such multidimensional scrutiny offers comprehensive and insightful support for investment decision-making.

Glassnode Studio: A One-Stop Platform for On-chain Data Analysis

Glassnode Studio, a powerful cryptocurrency fundamental analysis tool, offers users an extensive dashboard teeming with a multitude of detailed on-chain metrics and data. While the platform provides subscription services to unlock more advanced features, even free users gain access to ample blockchain information sufficient to meet the needs of casual investors.

Compared to manually gathering information via blockchain explorers, Glassnode Studio significantly enhances efficiency and convenience by providing an abundance of indicators spanning various categories and subcategories for users to readily consult. Not only does it display key fundamental metrics such as the Network Value to Transaction Ratio (NVT) and Market Value to Realized Value Ratio (MVRV), but it also integrates TradingView charting tools, enabling users to seamlessly incorporate technical analysis techniques in examining cryptocurrency value trends from multiple angles.

The one-stop service design of Glassnode Studio undeniably boosts its appeal, allowing investors and traders to consolidate and holistically evaluate diverse analytical methods within a single platform when making decisions, thereby enhancing the efficacy and accuracy of their investment strategies. Consequently, Glassnode Studio has emerged as a crucial reference tool among numerous participants in the cryptocurrency market.

Conclusion

In the realm of cryptocurrency investing, fundamental analysis extends far beyond conventional financial market metrics such as balance sheets and economic models, necessitating a profound understanding of blockchain technology alongside unique considerations for on-chain data, project ecosystems, and network value. This article systematically explores the specific dimensions of cryptocurrency fundamental analysis, emphasizing the significance of constructing personalized analytical frameworks.

Looking ahead, as the complexity and sophistication of the cryptocurrency market continue to escalate, investors will increasingly rely on precise and comprehensive fundamental indicators to uncover an asset's intrinsic worth and make sound investment decisions amidst ever-changing market conditions. Thus, continually updating and refining fundamental analysis tools and methodologies will remain a critical challenge for investors to confront.