The Art of Filtering: Crypto Fundamental Analysis 101
This is your primer on how to apply crypto fundamentals and invest in virtual assets with your eyes wide open.
The volatile world of crypto defies standard analysis. Yet behind the hype and headlines, fundamentals matter.
Embarking on the exhilarating journey of trading cryptocurrencies demands a certain level of prowess. Fortunately, there are plenty of methods to help you climb the steep learning curve in crypto. For starters, there are technical and fundamental analyses. But there is the catch: while in crypto tech analysis, a wealth of knowledge can be gleaned from the time-tested financial markets, the story is not as straightforward with fundamentals.
Although cryptocurrency fundamental analysis shares similarities with its legacy counterparts, the traditional tools of the trade fall short when assessing crypto assets. To execute a comprehensive fundamental analysis of cryptocurrencies, it's crucial to grasp their unique value proposition. But how do you do that?
The secrets of crypto fundamentals won't unravel themselves, so join us on the ride while we step into this fascinating frontier to help you prepare your fundamental homework.
What Is Crypto Fundamental Analysis?
For crypto traders, fundamental analysis is the key to unlocking the hidden value of digital assets. Unlike technical analysis, which focuses on charts and price movements, fundamental analysis lets you see into the very heart of what gives a token life.
👉 As an astute crypto analyst, you go beyond the surface and discern a token's intrinsic worth. By evaluating both macro and micro factors, you gain priceless insight into whether an asset is over or undervalued. With this hard-won knowledge, you can strategically enter positions ahead of the crowd, and exit before others get caught holding empty bags.
While traditional analysts rely on metrics like earnings per share and the price-to-book ratio, crypto calls for a more sophisticated approach. As blockchain pioneers, we examine indicators that would seem strange, even absurd, to old-school investors. But these metrics illuminate the decentralized future of finance that is now unfolding before our eyes.
Technical analysis has its uses, but only fundamentals can reveal crypto's deepest truths. Examining a project's fundamentals means seeing its potential, progress, and purpose. Your fundamentals should cut through the hype and expose the token’s real value.
Fundamental vs Technical Analysis in Cryptocurrency Trading
When it comes to analyzing investments, there are two main approaches: technical analysis and fundamental analysis.
Technical analysis is all about studying an asset's historical market performance, including price trends and trading volume. This can give you a sense of how the market views the asset and whether it's likely to rise or fall in the future.
On the other hand, fundamental analysis takes a broader approach by looking at an asset's underlying fundamentals. This includes things like financial data, user community, and potential real-world applications. By considering these factors, you can gain a deeper understanding of the asset's long-term prospects.
👉 Both technical and fundamental analyses are valuable tools for investors and traders. By combining the two, you can build a comprehensive trading strategy that takes into account both short-term trends and long-term potential.
How Does Fundamental Analysis Work in Cryptocurrency Trading?
As savvy crypto analysts, we can't look at digital assets through the narrow lens of traditional finance. Cryptocurrencies are a breed apart — commodities of the future, decentralized disruptors, open-source startups. Whatever you call them, they demand a perspective as innovative as the technology itself.
Old metrics won't cut it here. We need to forge new frameworks fit for crypto. The first step is finding metrics with substance — ones that illuminate real progress, not vanity stats. Follower counts and hype can be faked, so they reveal more about marketing than merit.
There is no single measure that defines a crypto network's worth. Looking at one factor alone, like active addresses, leaves too much in the shadows. An uptick in users could just be one big player manipulating data to appear significant.
To see the full picture, we explore metrics in three categories: on-chain, project, and financial. On-chain metrics come from the blockchain itself, offering hard data on usage and growth. Project metrics evaluate development, community, and technology. Financial metrics incorporate market-based insights.
Together, these provide a foundation for crafting indicators tailored to crypto. They help filter signal from noise, so you can spot opportunity and value where others just see a jumble of data. As crypto expands into the mainstream, your ability to make sense of it all is what will set you apart.
Crypto Fundamental Metrics: How Do You Do Fundamental Analysis?
Fundamental analysis in crypto demands effort and diligence. But for visionary traders, the rewards of insight are well worth it.
As an analyst, you should question everything — consider each concern, evaluate every claim, and explore all arguments for or against a project's potential. Then forge your own conclusions based on facts and reason alone.
Without further ado, let’s dive into the fundamental metrics we’ve mentioned above, namely on-chain, project, and financials.
On-chain metrics reveal how a network is truly being used over time, if activity is growing or declining, and what really drives value.
On-chain analysis does require technical skill. We could run our own nodes to gather raw data, but for investment insights, it's simpler to rely on crypto data aggregators. Sites like CoinMarketCap, Coinmetrics, and Binance Research have done the hard work for us, offering on-chain metrics packaged to inform trading decisions.
Metrics like transaction counts and volume show how much activity is happening day to day. But be wary — this data can be misleading if one entity is just shuffling funds. We look for consistent growth over time, signaling real adoption.
Active addresses tell us how many unique users are actually tapping into a network. Again, the trend is what matters most. A consistent increase suggests a thriving, expanding community.
The fees paid point to demand for a network's limited transaction space. For proof-of-work chains, higher fees also make mining more profitable, helping secure the network. Given that mining expenses generally rise over time while the block subsidy gradually diminishes, it is logical to expect transaction fees to increase. If not, miners would incur losses and start exiting the network, which would subsequently impact the security of the blockchain.
Today's blockchains employ a variety of consensus algorithms, each featuring its own unique mechanisms. Since these algorithms are essential for securing the network, examining the data associated with them could be beneficial for fundamental analysis.
In proof-of-work cryptocurrencies, hash rate is a good indicator of network health. A higher, rising hash rate means greater difficulty for attackers to overpower the network. Drop-offs in hash rate signal mining is less profitable, so some players have quit. This can undermine network security until the remaining miners pick up the slack.
Staking metrics apply to proof-of-stake networks, where users lock up funds to validate blocks instead of mining. The amount staked shows interest in the role of block validator. More stakes mean greater security and decentralization. Less suggests the opposite.
As you can see, on-chain metrics give us clues that offer hard evidence of the progress, participation, and potential of a given crypto.
Project metrics explore the qualities that give a crypto vision life — its team, technology, roadmap, and purpose. Rather than hard data, you evaluate softer factors that determine a project's potential for progress and impact.
Any project's pillar is its whitepaper. This outlines the concept, use cases, roadmap, and tokenomics. A strong whitepaper answers key questions:
- What problem does this solve?
- What technology does it use?
- Is the roadmap realistic?
- Does the token possess genuine utility?
Then, cross-reference claims against community discussion to flag any concerns.
A dedicated team with relevant experience boosts confidence in a project's success. But for open-source projects, an active developer community is just as crucial. Consistent updates signal progress; long gaps may mean development has stalled. Either way, you need to research key members to check for questionable past involvement.
You’ll also need to tap into the project’s competitors. A project may seem groundbreaking in isolation but weak compared to rivals. A rigorous analysis of competition helps determine whether a project can dominate its niche or is outgunned from the start.
Next, you want to examine token distribution. Were the tokens distributed via ICO or IEO? Could users mine it? In the case of an ICO or IEO, the whitepaper should specify the allocation for founders and team members, as well as the portion available to investors. For tokens obtained through mining, one can investigate whether the asset's creator engaged in premining (mining on the network before its public announcement). To put it simply, you want to see tokens distributed fairly, not concentrated among founders. Heavy premining or founder allocations signal the risk of price manipulation, whereas wide distribution suggests a project built for users.
Project metrics provide a holistic view of progress and purpose. They reveal whether hype matches reality, if vision can be achieved, or if a project is solutionless technology chasing funds.
Details about the asset's current and past trading performance, liquidity, and other financial aspects can prove extremely valuable in conducting fundamental analysis.
Market capitalization shows a crypto's current total value, calculated from price and supply. But taken alone, it can be misleading. A large cap means little without real utility to match, and reported supply ignores lost or unusable tokens, giving a false sense of scarcity or abundance.
Even so, market cap indicates potential, especially when comparing assets. Some believe small caps offer more room to grow, while large caps have stronger network effects. The savvy analyst weighs both views to determine an asset's realistic trajectory.
Liquidity and volume signal how easily you can buy or sell an asset. Illiquid assets may force us to sell at a loss or hold waiting for buyers. High volume suggests strong interest; low volume hints at little activity or demand.
An asset's supply model also matters. Coins with hard caps appeal to those expecting demand to outpace supply. But others argue fixed caps discourage use, disproportionately reward early buyers, and are unrealistic. As there are merits to both views, you’ll need to consider each model's pros, cons, and impact on incentives. An ideal model matches an asset's purpose — whether as a store of value, payment method, or platform resource. The wrong model could undermine an otherwise useful project.
Tokenomics reveals what makes a crypto asset's market and community tick. They drive behaviors, set expectations, and create incentives and disincentives. As a savvy trader, you’ll need to explore both data and design.
Example of a Fundamental Crypto Analysis
Jimmy was ready to yolo his life savings into the latest crypto hype, thanks to some highly enthusiastic Reddit shills. But then his inner skeptic kicked in. "I should probably do my own research before betting the farm on this 'revolutionary' project," he mused.
Jimmy cracked open the whitepaper, expecting to find a roadmap to riches and early retirement. Instead, the tokenomics looked rather...token. As in, the only use for this token seemed to be separating gullible investors from their money.
"So your 'utility token' has zero actual utility. Interesting strategy!" Jimmy chuckled. This project wasn't dreaming of changing the world — just cashing out and retiring to a private island.
Jimmy had seen enough. This token wasn't the future of finance — it was the future of exit scams. He hit the sell button immediately, bidding a heartfelt "Good riddance!" to his short-lived position.
His investment funds now freed up, Jimmy went looking for a project with more purpose than plundering pocketbooks. It didn't take long to find a team building real technology to solve important problems.
But Jimmy didn’t stop there — he plunged into the real depth of research, looking ruthless facts in the eye. He examined the project’s whitepaper, checked team devs against the FBI database, looked up the token’s market cap, distribution, liquidity, volume, and hash rate.
"Now this is more like it," Jimmy grinned, clicking buy and toasting his new investment. "Prosit! To the future — the real future, built by visionaries, not opportunists!"
Jimmy's close call was a reminder not to believe everything you read on Reddit — or any hype, for that matter. In crypto, as in life, if something sounds too good to be true, it usually is. The projects poised to change the world don't promise riches or hype their half-baked visions. They're too busy building.
And the moral of our story? Be a Jimmy! Do your own research!
Crypto Funamental Analysis Indicators
As a savvy trader, you should know that a single indicator means little; each should be considered within a wider context. But since indicators combine several metrics for a better perspective, they give deeper insight into crypto’s fundamentals. Among a wide variety of indicators, it’s worth paying attention to at least a few basics.
One such indicator is the network value to transactions ratio (NVT), calculated as the market capitalization (or network value) divided by the daily translation value. The NVT suggests overheated markets, hinting when prices race ahead of underlying network value. If daily transaction volume lags a price spike, a selloff may loom. But this assumes volume and value directly correlate — ignoring network effects, user incentives, and more. So we use NVT as but one perspective.
Likewise, the market value to realized value ratio (MVRV) compares market cap to the cap discounting for lost coins. A high ratio may signal a pending correction as traders take profits from overvalued coins. But a low ratio could mean undervalued gems, not realizing a project's potential. Either way, you’ll need to verify signals against on-chain activity and roadmaps before acting.
Even vaunted stock-to-flow (S2F) models have their limits despite being a reliable predictor of bitcoin's price. Calculated by dividing the total supply by annual production, a higher ratio indicates greater scarcity and value. Bitcoin's halving events increase its S2F ratio, as fewer coins enter the market. However, S2F stumbles when modeling deflation, suggesting negative prices as keys are lost and supply dwindles. So S2F provides respectful insights but has its shortcomings.
No indicator is gospel; all have blind spots. But together, they provide a glimpse of the forces shaping each market, if analyzed critically and not taken as scripture.
Crypto Fundamental Analysis Tools
Fortunately, there are a ton of tools to help you perform thorough fundamental analysis and filter information:
- Baserank aggregates analyst reviews and scores to provide a quick overview of any crypto project.
- Glassnode Studio offers on-chain intelligence on curated dashboards.
- Crypto Fees displays each network’s transaction fees over the past day or week.
- Cointree’s top portfolios let you discover gems and buy high-performing portfolios created by top traders.
- DeFi Llama’s Total Value Locked tracks funds deposited in DeFi protocols across chains.
- IntoTheBlock provides real-time bullish and bearish signals based on on-chain, exchange and derivative data.
- Coindar tracks major events for each crypto like governance votes, announcements, hard forks and more.
- The Coin Perspective compares any two coins’ market caps and shows the price if one matched the other’s cap.
- Cointree’s Crypto Fear & Greed Index measures current market sentiment.
- LunarCrush analyzes social signals across platforms to gauge millions of crypto investors’ sentiment in real-time.
- Coin360 offers a visual market overview.
- CryptoPanic filters crypto news by bullish or bearish sentiment, media type, recency and more.
- CryptoMiso tracks developer activity and commits on GitHub for major crypto projects.
- Bitsgap is a major crypto aggregator and trading platform that connects to top 15+ exchanges and offers proprietary crypto automation tools, TradingView charts and instruments, as well as a plethora of smart trading options.
Lucky for you, by signing up for Bitsgap today, you’ll get a seven-day free trial on the PRO plan, which you can extend, downgrade, or continue practicing your skills risk-free on the demo mode after your trial expires. While not purely for fundamentals, the platform, nevertheless, arms you with an explorer’s full-blown arsenal of tech-powered trading tools. With Bitsgap, you can automate routine tasks, hedge bets, and deploy smart orders to focus on navigating the market instead of wasting time on the mundane. By connecting 15+ exchanges to your one account on Bitsgap, you’ll get a bird’s-eye view of the frontier and spot new opportunities no ground-level traders would ever see.
While of this sounds exciting, it’s best to come over and see for yourself. Ready to dive in and test Bitsgap? You’re more than welcome!
Crypto Fundamental Analysis Checklist
When analyzing crypto fundamentals, look for projects offering real value at a good price.
- Technology: Is it unique and superior? Will people want to use it? Even the best tech means little without use case and demand.
- Use Case: Why own the token? How does it tie into the platform? Will people actually use and buy it? A token without purpose will not retain value.
- Team: Do they have the skills, resources and dedication to deliver? The best ideas go nowhere without capable leadership and execution.
- Roadmap: Is there a clear path ahead? Look for teams hitting milestones and building steadily. Missed goals or lack of vision suggest trouble.
- On-chain metrics: Are there any patterns in transaction data that may indicate a specific trend? Does the network look healthy? On-chain metrics can be a good indicator of a token's value when there’s minimal macro involvement.
- Financials: What’s the token’s market cap? What are liquidity and volume? Too large a supply can hamper price growth. Coins with little volume risk becoming illiquid and worthless. Consider how new supply enters the market and the factors influencing demand. Look for steady, healthy trading, and demand over hype.
- Social Activity: Every project needs community. Look for engaged users and an active, responsive team. Silent social media suggests a lack of interest or direction.
Of course, you’ll need to look beyond a checklist and try to see the vision animating a project: its meaning, mission, and promise. But a checklist is a priceless way to start, isn’t it?
Bottom Line: Why Fundamentals?
The crypto boom ignited more than just innovation — it fueled excess and greed. Not every token fuels a visionary project. Some are outright scams, vanishing with investors' funds. Others have no real use or purpose and were created only to crowdfund hype. When a token lacks utility, its value relies on speculation alone. And once investors realize the token isn't needed, that value disappears.
Performing diligent crypto analysis protects you from empty investments and ensures your funds fuel real progress. It allows you to weed out scams and pointless tokens, so you can focus on digital assets built to empower rather than exploit.
There are visionaries launching tokens to solve real-world problems, expand human potential, and transform industries. Your task is to find them — the needles in a haystack of hucksters and opportunists.
How to Learn Crypto Fundamentals
Understanding the fundamentals of cryptocurrency can be rewarding, especially if you enjoy delving into innovative projects.
One approach is to immerse yourself in the subject and learn from those who are passionate about it. Engage in discussions with others in the crypto community, read source materials, and watch how experts evaluate crypto projects.
It's also important to choose projects that spark your interest, so that you're motivated to learn more about them. Don't feel overwhelmed by the depth of details for each crypto; start with the basics and build your knowledge gradually over time.
And remember to look beyond the hype and think critically about what gives each project purpose and potential.
Why Fundamental Analysis May Not Work for Crypto Markets
The world of cryptocurrencies demands an entirely new investigative toolkit. Traditional ways of evaluating businesses simply don’t apply. Cryptocurrencies like bitcoin are more like commodities than companies. Even the more centralized digital coins can’t be grasped using standard financial metrics.
So, as you’ve seen from this article, we’ve had to get creative. We’ve been trying to find metrics that truly matter and can’t be easily manipulated. Things like social media followers or chat app users are shallow measures, easily faked or bought. Unfortunately, as we’ve discovered, there’s no single measure that reveals the full truth about a cryptocurrency network. We might see a surge in active addresses on the blockchain, for instance, but that alone means little. For all we know, it could just be one person shuffling funds between new addresses.
To really understand crypto, we’ve examined three key areas: on-chain metrics, project details, and financials. They lay the foundation for crafting indicators that cut through the hype and expose the inner workings of cryptocurrency networks. With time and experience, you may find your own better approaches to doing the fundamentals. But this article is a good place to start.
When to Use Cryptocurrency Fundamental Analysis
While day traders may dart in and out of positions quickly without much concern for the details, as an investor looking to the horizon, you must know the lay of the land. A fundamental analysis is your best guide.
Don’t be lured by flashy price action alone. Instead, seek to find projects with solid foundations, strong teams, viable technology, real-world use, and room to grow. Study the white papers, analyze the team, compare metrics across projects to orient yourself on how far they’ve come and how far they may yet go.
Yes, day to day market swings still matter for an enterprising trader. But study the fundamentals first to set your course true. Know what you hold and why you hold it.