With fundamental analysis, you evaluate investment opportunities based on a company’s underlying financial and economic factors, and then make informed decisions about potential risks and rewards. It is used to determine the intrinsic value of a company and its assets.
As part of the analysis, the fundamental data of an asset are considered above all. These include, for example, the profit achieved, the return on equity or the balance sheet total. For this reason, fundamental analysis is particularly suitable for long-term investments. With the data collected, one wants to assess whether a (crypto) company achieves good results in the long term and is therefore a good investment.
In addition, fundamental analysis can be used to analyze the macroeconomic conditions affecting your particular investment. This is based on statistical data points that are more or less publicly available. These macro data points are just as important as a company’s fundamental data.
The factors of fundamental analysis
The fundamental analysis thus distinguishes between micro factors (company-specific relationships) and macro factors (macroeconomic relationships).
Some of the factors that fundamental analysis takes into account are:
- The team: How experienced are the managers and employees and what is the career path of these individuals?
- Macro factors include broader economic and industry trends. They play a similar, if not greater, role in a company’s potential growth.
- Growth prospects, expansion plans and product development.
- Financial reports such as income, balance sheet and cash flow statements of a company. They are among the company-specific data points and help to assess the profitability, liquidity and financial health of a company.
While the above factors are also relevant to cryptocurrencies, they do offer some distinctive features. In contrast to the analysis of classic assets such as stocks, some crypto-specific factors can be used in crypto analysis.
These factors for evaluating crypto projects include:
- Total cryptocurrency supply: Some cryptocurrencies have very low total supply, e.g. B. Bitcoin with 21 million coins. Other currencies, on the other hand, have an infinite total supply, including Dogecoin.
- Cryptocurrencies are constantly being created. Some cryptocurrencies (like Dogecoin) are highly inflationary and many units enter the market daily. Other cryptocurrencies (like Ethereum) are almost deflationary, which can have a rather positive effect on appreciation.
- Regulations and cryptocurrencies are a sensitive topic. It is therefore important to assess whether the crypto company in question is compliant with regulatory requirements. If this is not the case, regulation can stamp the project into the ground in no time at all.
This is how fundamental analysis works
Fundamental analysis assumes that the price of an asset approaches and fluctuates around its intrinsic value. Part of the analysis refers to the past, it is diagnosed.
Another part of fundamental analysis is the forecasting part. Here one would like to try to predict future developments. This is to be done in order to move effectively in the market and achieve the highest possible returns.
In fundamental analysis, the determined value is compared to the current share or crypto value. This is how you try to determine whether the respective investment is undervalued or overvalued. From this, in turn, one can derive which cryptocurrencies, companies or industries one should invest in.
Training makes perfect
But nothing is set in stone in the market and even the best fundamental analysis can make wrong forecasts. It’s an inherent part of a crypto career that investments don’t go as planned. In the market you only play with probabilities. You should therefore always be prepared to be wrong and take the appropriate safety precautions.
The crypto market in particular is subject to extreme price fluctuations that are unpredictable. Therefore, fundamental analysis should only be a part of your crypto strategy. In addition, you should consider other factors such as market psychology, technical analysis, and risk management.
An investment in knowledge brings the best returns
Benjamin Franklin
That is why there are numerous learning platforms that provide materials on trading, crypto and investing. If you are interested in this, you can take a look around the Binance Academy, for example. There you will find the answers to the most important questions you should know about crypto trading as a beginner.
In the Binance Academy you will find answers to the most important questions about trading, Bitcoin, blockchains, NFTs, metaverse, gaming and much more, so that you too can master the cryptocurrency landscape.
