Unlike traditional markets, the crypto market has its own set of key issues to consider when analyzing a project and its assets.
Fundamental analysis is the process of determining the intrinsic value of an asset with the aim of determining whether the asset is over or undervalued. This information can then be used together with technical analysis to decide whether to invest or trade in the asset.
Fundamental analysis of cryptocurrencies takes a slightly different approach than that typically used to evaluate legacy market assets. Crypto assets do not have the required historical data, as there is usually no history of profit reports or profit and loss statements.
Analyzing a cryptocurrency requires finding all available information about the asset through research that includes examining use cases, its network, the team behind the project, dosage schedules—the list goes on. By looking at the right set of factors, traders can determine the fundamental value of an underlying project before investing.
Here are 10 steps that have proven most helpful:
1. Read the white paper
Especially for long-term buy-and-hold investments, reading the token’s white paper is crucial. It is a document that gives a purposeful detailed overview of the project. A good white paper explains:
Project objectives
Use cases and distribution
Team vision
The technology behind the sign
Plans for upgrades and new features
How the token provides value to users
2. Evaluate the claims of the white paper
Be skeptical, because the people behind the projects may distort or even break the truth.
This happens more often than most realize. For example, Michael Alan Stollery, founder and CEO of Titanium Blockchain Infrastructure Services, raised $21 million in an initial coin offering (ICO).
He later admitted to falsifying parts of the project’s white paper.
It is important to ask some tough questions and get complete answers before investing money in a project.
Some questions to consider:
Are the tokens really distributed as promised?
Do they meet the plan’s expectations?
Do they invent a problem just to solve it?
What do others say about it?
Are there any red flags?
Do the goals seem realistic?
3. Look at the competitors
According to some industry sources, nearly 40% of cryptocurrencies listed in 2021 will no longer exist.
This is an important truth for investors to keep in mind: many projects – almost half, and possibly more – fail, and fail miserably.
An overview of the project’s white paper reveals the use case the crypto-asset is targeting and the problem it is trying to solve. It is then necessary to consider whether this use case is really feasible and desirable.
In addition, it is important to identify competing projects and examine existing projects that could replace new ones if successful. The bottom line: Smart investors check whether this project is better than others or not.
4. Look at the team behind the project
A project is only as good as the team behind it.
The people presenting the project must have exactly the right skills to make their project work. The white paper should include information about each team member, but some independent research can also be helpful.
Some questions about the people behind any project to consider:
Have they worked on other reliable, successful projects in the past?
What are their credentials? Are they experienced?
Are they trusted members of the crypto community and blockchain ecosystem?
Have they been involved in any questionable projects or scams?
What if there is no team? Then reach out to the developer community.
Find out if the project has a public GitHub. Check the number of participants and activity levels. The more consistent development activity on a project, the better.
5. Check the chain dimensions
On-chain statistics are available by viewing blockchain data.
Data can be accessed from websites or APIs – such as on-chain analytics, data maps and project reports – specifically designed to inform investment decisions.
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