By Larry Wright
Have you ever stumbled across cryptocurrencies or the crypto market? Because if you haven’t then it can be hard to comprehend the nature of the crypto market as compared to other financial markets out there. Therefore there is a need for running a fundamental analysis by the investor, but it needs to be done beforehand when an investor or trader is investing in their dedicated asset regarding crypto. It isn’t like the stock or forex market where you analyze a few trends and go buy a dedicated asset of your choosing, hoping to make a quick return or opting for a long-term position to sell your assets when the prices are favorable.
The crypto market is a bit strange; it is more tedious offers a more generous return, but to have it on your plate, you have to grease your elbows pretty good. This means that whatever you are thinking about investing into it, you must run a deep fundamental analysis before putting your foot down and investing your money. Some of the things that you should take a look at are the use case of the project, the number of people who are actually using it, and the team members who are behind the development of the project.
You must reach a consensus on whether the asset you want to invest in is overvalued or still pose a pretty good detail of opportunity that you should grasp right away. This article will help you to take a more direct approach with crypto fundamental analysis, defining why this is extremely necessary and the ultimate benefits that you would be able to harvest from this specific method.
Why do we Need Fundamental Analysis for Cryptocurrency?
When talking about investing in cryptocurrencies that are extremely volatile, you must have some sort of skill up your sleeves, a strategy that you can rely on, and technical knowledge of the present trends around that specific asset, or you are going to get swept away. All of it comes at a price, of course, particularly there is a learning curve that you can’t simply jump out of. You can’t expect to take it and make a journey from point A to point B without running into multiple obstacles and hindrances along the way. The same applies in the context of technical and fundamental analysis. The first thing that you need to get through to your skull is that the crypto market is a completely different financial entity as compared to forex or stock markets.
The strategies or technical analysis that you used to perform in those markets are not going to work in the crypto market at all. You need to change your attitude; you need to change the way you used to collect and interpret data and then make a series of decisions based on these findings. While it is paramount to use some of the tools used in the forex or stock market to predict the present behavior of the market but these should be fine-tuned and customized according to the likelihood of the crypto market.
Now that you have made an assessment of the crypto market and have accepted the fact that it is very different from the legacy markets that are stock and forex, you need to move on to the next step, which is to understand the derivation of value for these assets. Moving on, you must know the source of driving value for these assets and what it potentially means for you to invest a chunk of your money into that particular asset is.
Fundamental analysis refers to the approach that is used primarily by investors and traders to take a deeper dive into the asset they want to invest in. The ultimate purpose is to find out the intrinsic value of the asset that they want to invest in by looking at a bunch of factors, both external and internal. The ultimate goal here is to determine if the asset is overvalued or does it still have a chance of opportunity for the investors if they put their foot down and invest some of their money into it. This type of information generated by fundamental analysis can help them either enter a dedicated financial position or exit one.
Difference Between Fundamental and Technical Analysis
There is a bit of difference when it comes to technical analysis and fundamental analysis; both might be tied to the word ‘analysis,’ but these are extremely different in their own doing and insights that they are able to bring forward. Technical analysis is apprehended by investors and traders as something that they can use to derive insights for the future price movements of a dedicated commodity or asset regarding a particular financial market.
They are not trying to reach a consensus on whether the asset is something that they should be investing their money into or they should be running away from it. This is not the element or scene that is being established here; they simply want to use the insights that they have received from running their own technical analysis to find out if their trade is going to harvest them any money or not.
Multiple indicators are used both in technical and fundamental analysis to ensure that careful processing of all the data angles for a dedicated commodity or asset in question is being performed, and not even the tiniest detail is being left out. This is how an analysis of a commodity or asset is performed by the investors and traders, and this is how they make up their minds about either investing in that particular something or leaving it as is.
Problems Associated with Crypto Fundamental Analysis
If you are going to use the same tools and trends that you can use to determine the current movement of an asset in stocks or forex market within the crypto market as well, then it is something that is simply not going to work. The very first reason why this is so is that these assets are completely decentralized, which means that no single state or entity has any say in what kind of policies are being processed at the moment and what changes are made within the financial or political esteem of these assets.
You might see Bitcoin growing strongly one day, and the next day it will simply be plummeting to nothing. That is why the traditional indicators can’t be used to assess the nature of these assets, and in what particular direction these are moving. Therefore a completely different framework needs to be developed here, and the first step is to determine the strong metrics on which you can lay the foundation of your whole analysis. If you are thinking about following someone on Twitter or Reddit for the sake of getting insights about a particular asset or project into decentralized space, then that is not going to qualify as a very great metric to begin with.
Many people are simply there as clickbait, selling information that is not tried or tested by the severity of the market, and therefore this kind of information is of no use to you. To be able to grasp the complete picture for a dedicated asset or commodity, it is important to bring a lot of these metrics and indicators into the game because if you are leaving these out, then you won’t be able to paint a complete picture and that says something about authenticity that is required when it comes to the crypto market and its relation with fundamental analysis. Following are some of the metrics that you can take into account when running your own crypto fundamental analysis;
On-Chain Crypto Metrics
On-chain metrics refer to the strands of information that can be observed by looking directly onto the data that is provided by a blockchain environment. You can do this by yourselves; all you have to do is run a node for a potential network and then start exporting the data. It might come out to be time-consuming and a bit of an expensive exercise. But the final results and insights that will be able to get from this particular exercise would be worth it.
You are going to get yourself piles and piles that might not primarily be correct or something that you are particularly interested in. A potential solution for this thing that could work your way would be extracting information from other websites. You should be scouring those for this purpose where you can find tickers and more recent information regarding the investment decision for a particular currency or an asset.
Transaction Count
The transaction count refers to the overall activity that is taking place on the network in terms of the transactions that are being commenced. You can see the particular volume of transactions that have taken place for a dedicated asset over a period of time. This will allow you to better assess the situation of an asset over time, giving you a more wholesome picture of the commodity or asset in question. You must approach this specific metric with the most caution.
Because the volume of transactions that you would be seeing on your screen is going to be tainted. You won’t be able to make up your mind if this is the same user who is performing the transaction from one node to another or different people? In that particular sense, the data is not going to be as accurate as you want it to be.
Transaction Value
The first thing that you must understand about transaction value is that it isn’t something that you should confuse with transaction count. Both are completely different concepts, as the transaction value explains how much value pertaining to a specific transaction has been processed. It gives you a rather tentative idea of just how much transaction value a dedicated asset might have?. This is one of the most incredible metrics out there that you can use to identify if the underlying asset is worth your time or should just keep it aside and move on.
Active Addresses
Active addresses correspond to the specific number of users that are active in a blockchain environment for a specific cryptocurrency or an asset in question. It pertains to the overall idea of just how many blockchain addresses were active at a given period of time. This allows you to have a more direct approach towards the number of people who are transacting a particular asset daily, for weeks or months. This will provide you with a proper idea of just how many senders and receivers are out there while being able to track their movement across the network, interpreting their remote addresses collectively.
Fees Paid
This is yet another metric that you can run for the sake of understanding the value of an asset. It is going to give you an idea of just how many fees have been paid in terms of transactions for a particular asset; this is going to give you a clear cut idea regarding how much demand there is for specific block space.
The more tentative and evidential these transaction fees are, the more interest people have towards that specific asset. They are paying these transaction fees to get their transactions to the very front of the queue so that they can be taken up by a miner in a timely fashion and it could get validated as soon as possible. These are kinds of biddings that are done over specific crypto or an asset; the higher the bidding, the more elementary the asset is.
This is an extremely interesting metric for you to study because as the proof of work is getting more and more cut out by new blockchains are shifting their working from this old algorithm to the new one that is proof of stake. In terms of proof of work, when a new block is generated, an award is given to the person or miner who has helped in validating a certain transaction. But with the passage of time, as Bitcoin halving is taking place, these rewards are being split in half. That is why most of these miners are going to either shift their attention and focus towards more tentative cryptocurrencies or assets that are going to pay and their time’s worth, or they are simply going to reduce their computational power.
The mining cost is increasing overtime while the reward a miner is able to reap for all the investment they have done into this space is getting shot. It is not a particularly melodious or happy transition, but it is something that the crypto market is going through at the moment. The number of miners continues to decrease, either taken away by other tentative opportunities or they are giving up on mining altogether. The security of the network gets weaker and weaker and is more susceptible to a hacking attack or some other kind of compromise. You do not want to invest in such an asset that is losing security by this particular practice.
Hash Rate and Staking
As explained earlier, there are many types of consensus algorithms at work for different cryptocurrencies. Each and every one of these has its own particular mechanism when it comes to controlling the whole network, validating the transactions, and subjecting them into their dedicated blocks. These consensus algorithms are known to play a rather thrilling role not only in securing the network but also in protecting the data of the users and providing traders and investors with fresh insight when it comes to running fundamental or technical analysis for a particular asset or commodity.
Therefore you need to bring a dedicated metric that is closer to the overall array of the consensus algorithm and, therefore, the blockchain network in question, that is, the hash rate. Hashrate is just a measure of the overall health of the network, and it complements the proof of work consensus algorithm and the cryptocurrencies that run on it.
The more intensive the hash rate, the more difficult it would be for hackers and other illicit culprits to launch a cyber attack. To be able to launch an attack, more than 51% of consensus is required across the board from all leaders and miners, and that number is periodically impossible to get until the whole community wants to just give up everything they have believed in so far and turn bad.
When the hash rate of dedicated crypto is higher, then it means that there are enough miners out there who are validating the transactions and subjecting these transactions into definitive blocks; it means that the network, as well as the crypto, is doing great and this is something that can be taken up as a potential opportunity on investor’s part for the sake of investing their money into it.
There are some factors out there that can affect the potential cost of mining, such as the present price of the underlying asset, the volume of the transactions that are being processed along with the fees that are being paid by the people for the sake of getting their transaction validated as soon as possible. Staking is also something that should be taken in as a metric if you are trying to run a deep fundamental analysis of the situation. The basic approach with staking is that people use their own holdings and money to participate in the validation of a particular transaction.
When the transaction is successful, they get to earn this small amount of fee as a miner, but at the same time, they don’t have to put down their foot and invest a huge chunk of their money into setting up a mining operation. They can simply take their crypto to do all the heavy lifting while they still earn a pretty good return for their contribution. These metrics are going to help you to develop a more sound understanding of the whole deal, what possible trends you should be looking at, how to analyze the data and what kind of insights interact best with the final goals that you have concerning a dedicated asset.