It is common to talk about fundamental analysis in the world of trading. Who has not looked before choosing a particular stock at the situation in which the sector and the economy is globally and nationally?
However, with cryptocurrencies fundamental analysis does not work the same way. If we want to research this well, we will have to look, above all, at the degree of usability, regulation and the future of the project.
What is a fundamental analysis of cryptocurrencies?
Fundamental cryptocurrency analysis calculates the real value of a cryptoasset.
This way we will know if that cryptocurrency is undervalued or if there is a possibility that its value will depreciate over time. We will also be able to see the opposite: whether that asset is overvalued or can continue to grow.
The goal is to know if the investment you want to make is right or, on the contrary, there are other better opportunities in the market.
Here is an example to help you understand it better.
You have in mind to invest in Bitcoin. Before doing so, you should gather all the information you can about this digital asset. What will you achieve?
Having a clearer view of the market and the asset you are going to invest in. In this way, you will also be able to observe how bitcoin acts in different situations (inflation, energy crisis, etc).
What is fundamental analysis for?
It is a matter of confidence.
Fundamental analysis will encourage you to invest in the cryptocurrency you already had in mind or to opt for a new cryptoasset.
It will also make you more knowledgeable about this world.
However, fundamental analysis is not everything when choosing a cryptocurrency. You will need to combine it with other techniques to determine whether it can actually have a positive or negative effect.
Keep in mind that you may encounter situations that you did not expect and that can have a strong impact on the market. An example was the Covid-19 pandemic: it was not foreseeable and it seriously affected the cryptocurrency sector.
How to do fundamental analysis of cryptocurrencies?
To make a good fundamental analysis of cryptocurrencies, you will have to look at several aspects:
- Usability and market adoption.
- Blockchain networks.
Let’s look at each of these phases in more detail.
Phase 1 – Usability and market adoption.
Do you trust your cryptocurrency? Do you feel safe investing in that asset?
This is what usability is all about. The higher the degree of market adoption of that asset, the greater its real value.
Phase 2 – Regulation
What is the Spanish government’s opinion on cryptocurrencies? Are cryptocurrencies legal in Spain?
This phase focuses on studying how governments determine whether or not a cryptocurrency complies with regulation. Obviously, this will increase its credibility.
Phase 3 – Project
How is your cryptocurrency project progressing?
It is very important that you look at your project, its software and its community before anything else. It will also influence its media coverage, as this is what will indicate whether this cryptocurrency has potential or not.
Look for the White Paper of each project and there you will see the rules on which that cryptocurrency is based, how many tokens will go into circulation (supply) or what amount of tokens is awarded to the creator team and investors.
Phase 4 – Blockchain networks
In this phase, you should look at the data of the blockchain to which your cryptocurrency belongs. It is not the same if it has a PoW network than a PoS network (this will determine whether it can be mined or not).
In the network where it works, or if it has its own network, you will be able to see the data “on chain”: you will know, for example, how many token holders there are, if there is a lot of transactions or not, etc.
Combine your fundamental analysis
It is important to combine your fundamental analysis with technical analysis.
The two are worlds apart; but this does not mean that they are not linked.
In addition to the “external” facade of cryptocurrencies (project, regulation…), there is also an “internal” part, which is of vital importance when investing: the price movements through the charts.
No matter how much you trust your cryptocurrency, that it has a great project behind it and millions of people invest in it, this is not enough if you do not know how to analyze the charts. It is not always a good time to buy or sell. That’s why training is so important (if you want to start investing, this is a good start).
As for technical analysis, you should look, above all:
On the trend of the chart: bullish, bearish, sideways.
Rely on technical analysis tools to buy or sell an asset: Japanese candlesticks, triangles…
What is the most important aspect of fundamental analysis?
The four aspects that we have told you before are the most important when performing a good fundamental analysis.
However, there is something else you should also look at:
What do the whales do?
Cryptocurrency whales (large companies) are a factor to take into account when investing in a cryptocurrency because they handle very large amounts of money.
This also shows whether the value of the cryptocurrency is decentralized. What does this mean?
It is a measure that will help us to know how wealth is distributed, i.e. whether that asset is manipulated (controlled by a minority) or not.
In short, to analyze a cryptocurrency you must take all this into account. In case you don’t, your investment will not go well. If you do not know where to start, we give you the solution: get trained in a good Trading School and keep your savings in a safe place like Material Bitcoin. This way, your money will not be in danger and will always be in your hands.