What is fundamental analysis (FA)?

Introduction

Fundamental Analysis (FA) is an investment analysis method that conducts in-depth analysis of the fundamental data of the economy, industry and company to evaluate its intrinsic value and investment risk. Fundamental analysis is widely used in traditional investment fields such as stocks, bonds, commodities, and foreign exchange. In recent years, it has also been gradually applied to the emerging cryptocurrency market. This article will introduce the basic concepts of fundamental analysis, commonly used indicators, as well as its application and pros and cons in the cryptocurrency market.

What is fundamental analysis (FA)?

Fundamental analysis (FA) is a method used by investors to evaluate the value and risk of investment targets. It involves in-depth research on the basic conditions of the economy, industry and company to determine the intrinsic value and investment risks of the investment target. Fundamental analysis mainly includes three levels: macroeconomic analysis, industry analysis and company analysis.

 

1. Macroeconomic analysis is the study of the economic conditions of a country or region, including GDP growth rate, inflation rate, interest rate, employment data, etc. These data can reflect the overall market trend and help investors judge the direction of the market. For example, if a country's GDP growth rate continues to rise, then this usually means that the country's economy is growing, which may have a positive impact on the stock market.
2. Industry analysis is to study the development status of a specific industry, including industry growth rate, competitive landscape, policy environment, etc. Through industry analysis, investors can identify industries with investment value. For example, if the growth rate of an industry is high, then companies in this industry may be more valuable to invest in.
3. Company analysis is an in-depth analysis of the company's financial statements, profitability, growth, management, etc. Through company analysis, investors can evaluate the investment value of a company. For example, if a company's profitability is strong, then the company may be more valuable to invest in.

The advantage of fundamental analysis is that it can deeply explore the intrinsic value of investment targets and provide a basis for long-term investment. However, it also has shortcomings. For example, the analysis process is complex and requires a long period of learning and practice. In addition, information is updated slowly and short-term trading opportunities may be missed.

Comparison of fundamental analysis and technical analysis

In the field of cryptocurrency, fundamental analysis and technical analysis are two commonly used investment analysis methods, each with different characteristics and applicable scenarios.

Fundamental analysis

The application of fundamental analysis in the cryptocurrency space involves in-depth study of cryptocurrency projects. This includes analysis of the project’s white paper, team background, technical architecture, market positioning, competitive environment, partners, community support, etc.

• Advantages: Fundamental analysis can help investors evaluate the intrinsic value and potential risks of cryptocurrencies to make more informed investment decisions. For example, a cryptocurrency project with a strong team, clear roadmap, and innovative technology may be considered to have higher investment value.
• Disadvantages: Fundamental analysis also has some limitations in the cryptocurrency space. First of all, due to the high volatility of the cryptocurrency market, the update speed of fundamental information may not keep up with market changes, causing investors to miss some short-term trading opportunities. Secondly, the information transparency of the cryptocurrency market is relatively low, and it may be difficult for investors to obtain and evaluate the fundamental information of the project. In addition, since the regulatory environment of the cryptocurrency market is not yet complete, fundamental analysis may not fully cover some potential policy risks.

technical analysis

Compared with fundamental analysis, technical analysis pays more attention to the analysis of price and trading volume. Technical analysis predicts the future price movement of cryptocurrencies by studying historical price trends, volume changes, technical indicators, and more.

 

• Advantages: Technical analysis is widely used in the field of cryptocurrency because it can help investors capture short-term trading opportunities in the market and adapt to market volatility.
• Disadvantages: Technical analysis also has some limitations. Technical analysis mainly focuses on historical data and ignores the fundamental factors of cryptocurrency, which may lead to incorrect investment decisions. Secondly, technical analysis relies too much on historical data and cannot predict future market changes, especially for those cryptocurrency projects that have just entered the market. In addition, technical analysis may fail under extreme market conditions, such as market manipulation, emergencies, etc.

Commonly used indicators in fundamental analysis

In fundamental analysis, investors typically use a range of metrics to evaluate a company's financial health and a stock's valuation level. Here are some commonly used fundamental indicators:

 

1. Earnings per share (EPS): This is a key measure of a company's profitability. It represents the company's net profit per common share. The calculation formula is the company's net profit divided by the total equity. The higher the EPS, the more profitable the company is and may be more attractive to investors.
2. Price-to-earnings ratio (P/E): This metric measures a stock's price relative to its earnings per share. The formula is stock price divided by earnings per share. The P/E ratio can reflect the market's evaluation of a stock. A high P/E may mean that the stock is overvalued, while a low P/E may mean that the stock is undervalued.
3. Price-to-book ratio (P/B): This metric measures a stock's price relative to a company's net assets. The formula is stock price divided by net assets per share. The P/B ratio can help investors determine whether a stock's price is reasonable. A lower P/B may indicate that the stock is undervalued.
4. Price-to-earnings growth (PEG): This metric combines the price-to-earnings ratio (P/E) and earnings growth to evaluate a stock's valuation. The formula is the price-to-earnings ratio divided by the expected earnings growth rate. A PEG less than 1 is generally considered to be undervalued, while a PEG greater than 1 may indicate that the stock is overvalued.

These metrics provide investors with a quantitative way to evaluate a company's financial health and the stock's valuation level. However, it should be noted that these indicators are only part of the analysis tools, and investors should also consider other factors when making investment decisions, such as industry trends, the company's competitive position, macroeconomic conditions, etc.

Fundamental Analysis and Cryptocurrencies

As the cryptocurrency market develops rapidly, fundamental analysis is becoming increasingly important in assessing the value of cryptocurrency investments. In the cryptocurrency field, fundamental analysis involves an in-depth study of a cryptocurrency project, including the following important indicators:

 

1. Network Value to Number of Transactions (NVT) Ratio: This metric measures the relationship between cryptocurrency network value and transaction activity. Calculated as the cryptocurrency’s market capitalization divided by trading volume. The NVT ratio can help investors assess the valuation level of cryptocurrencies. Generally speaking, a higher NVT ratio may indicate that cryptocurrency is overvalued, while a lower NVT ratio may indicate that cryptocurrency is undervalued.
2. Active Addresses: This metric reflects the activity of a cryptocurrency network. The higher the number of active addresses, the wider the use of cryptocurrency and the higher the network activity. Investors can assess the popularity and market acceptance of cryptocurrency by tracking the number of active addresses.
3. Price to Mining Cost Profit/Loss Ratio: This metric measures the ratio of mining costs to cryptocurrency prices. It is calculated as the cost of mining divided by the market price of the cryptocurrency. The price-to-mining cost profit-loss ratio can help investors judge the profitability of cryptocurrency mining. If the ratio is below 1, it means that the cost of mining is higher than the market price of cryptocurrency and mining may not be cost-effective.
4. White paper, team, and roadmap: These are important aspects when evaluating a cryptocurrency project. The white paper describes the project's goals, technical architecture, and implementation details. Team background includes team members’ experience, expertise, and previous project experience. The roadmap shows the project's development plan and expected milestones. By analyzing the white paper, team, and roadmap, investors can assess a project’s credibility and prospects.

 

In addition to the above indicators, there are other factors that need to be considered, such as cryptocurrency supply, market liquidity, community support, partnerships, competitive environment, etc. Together, these factors influence the intrinsic value and investment risks of cryptocurrencies.

Pros and Cons of Fundamental Analysis

Advantage

Deeply explore intrinsic value: Fundamental analysis can help investors deeply understand the intrinsic value of the investment target. By analyzing the company's financial statements, industry status and macroeconomic environment, investors can evaluate the company's profitability, growth and risk status, thereby providing a basis for long-term investment.

Applicability in multiple fields: Fundamental analysis is not only applicable to stock investment, but can also be applied to various investment fields such as bonds, commodities, and foreign exchange. Whether it is looking for long-term investment in company stocks, or for commodity and foreign exchange trading pursuing short-term profits, fundamental analysis can provide an important reference.

Disadvantage

The analysis process is complex: Fundamental analysis requires in-depth research on financial statements, industry trends, macroeconomics and other data and information. This requires investors to have certain professional knowledge and experience, as well as investing a lot of time and energy.

Slow information update: Fundamental analysis relies on regular financial reports and macroeconomic data, which are released relatively infrequently. Therefore, fundamental analysis may not reflect the latest developments in the market in a timely manner, and some short-term trading opportunities may be missed.

Overreliance on historical data: Fundamental analysis mainly relies on historical data and past performance to predict future market trends. However, future changes in the market are affected by many uncertain factors, and analysis solely relying on historical data may not be able to accurately predict future changes in the market.

Conclusion

Fundamental analysis is a proven practice that some highly successful traders rely on. By refining their strategies, investors can not only learn to better estimate the true value of stocks, cryptocurrencies, and other assets, but also gain insights into entire businesses and industries.
Fundamental analysis combined with technical analysis can give traders and investors a comprehensive understanding of which assets and businesses can profit from them. Whether it is the traditional market or the cryptocurrency market, the combination of fundamental analysis and technical analysis is favored by many people.

However, the cryptocurrency market is still a nascent field, and we must realize that fundamental analysis may not always achieve the desired results. Be sure to do your own research to ensure you implement a solid risk management strategy.