A short guide on how to do fundamental analysis of altcoins has been published on TradingView.
What is fundamental analysis
Fundamental analysis is an analytical approach that aims to establish the intrinsic value of an asset. In other words it aims to determine whether the asset is overvalued or undervalued.
Various investment assets have the ability to generate profits for the investor in two ways:
- The price of an asset rises and there is someone willing to pay for it;
- The asset generates revenue. E.g. the staked cryptocurrency produces a predetermined periodic return or the shares offer an annual dividend.
Fundamental analysis studies the characteristics of the asset and determines whether and what the conditions are for the asset to bring the return that investors want. For stocks and cryptocurrencies, which are blockchain-based trading projects, this analysis focuses on the ability to generate returns on profitable terms.
Can Tesla profitably produce and sell electric cars to a large number of customers? Can Aave attract creditors and debtors to a decentralized lending platform to generate reasonable fees? How many people want to use the Ethereum network to run their decentralized financial projects or to create an NFT?
The fact is that fundamental analysis of cryptocurrencies, while having a somewhat similar approach to that used in legacy markets, cannot use many of the proven tools that are typically used.
Thus, cryptocurrency networks cannot be evaluated using the same criteria as traditional companies. On the contrary, more decentralized cryptocurrencies, such as Bitcoin, can be analyzed in a way that is more similar to how commodities are analyzed, whereas for more centralized ones, traditional indicators often do not say much.
In order to be able to proceed with a certain degree of certainty, some strong metrics would have to be identified, and this already excludes weak metrics such as the number of followers of the project on Twitter or Facebook, since it is easy to buy thousands of followers nowadays.
How to do fundamental analysis of altcoins
To go a little deeper, it is possible to analyse the so-called on-chain metrics, i.e. those that can be detected by analyzing transactions recorded on public blockchains.
The guide recommends starting by looking at three metrics in particular:
- number of active addresses
- value of transactions
- value of fees (to get an idea of the real market demand).
It also recommends using API-based solutions for analysis, or using third-party tools such as Binance-research project reports.
Other information that might be interesting is about the team behind a project.
For example, one could try to understand from transaction analysis whether team members are sending tokens to themselves, or to other people in the team, using new addresses each time to try to artificially inflate the number of on-chain transactions.
Or one could read the white paper and assess whether or not the intended use cases make sense. Indeed, it is important to determine whether the token has real utility, and will have good mass adoption. The whitepaper should also highlight how many tokens are retained by the founders and team, and how many will be made available to investors.
Other useful data to analyze are those related to the past experiences of the team members, e.g. if they have experience in the field or if they have raised sufficient funds to carry out the project. One can even go as far as looking at company registers to see who the shareholders, directors, etc. are.
Another thing to look into is direct competition to a specific project. Another thing to look at is direct competition to a specific project. In particular, it is worth checking whether there are other projects offering similar solutions, and whether these were, for example, already further developed.
It would also be necessary to consider the mechanisms for offering tokens on the market, liquidity and trading volumes, as well as market capitalization.
Finally, the initial distribution of tokens and the tokenomics of the project should also be analyzed.
Unfortunately, it is impossible to determine a standard procedure to proceed with the fundamental analysis of a cryptocurrency, because each project is organized differently and releases different information. Furthermore, the information released by the team is not always correct.
The fact that crypto markets as a whole are still very speculative makes it even more difficult to identify which deep metrics have a real impact on prices.
Therefore, on the one hand, it is quite difficult and complex how to do fundamental analysis of altcoins while on the other hand, it is very difficult to get any certainty.