crypto fundamental analysis

How to Analyze a Cryptocurrency for Profitable Investment

Nicoleta Balan Avatar
Oct 13, 2022
7 min reading time

Even though skeptics gave the crypto market no chance, there are now countless cryptocurrencies on the market available for trading. In fact, there are so many of them that it’s almost impossible for a newcomer to identify which of them could be a good investment. 

According to CoinMarketCap, there are over 20,000 cryptocurrencies on the market; certainly, not all have the same investment potential. That’s why we must perform a fundamental analysis to determine which cryptocurrency has growth potential and is worth exploring. 

This process includes more steps to follow, and it is essential to consider regardless of your crypto experience. 

Crypto fundamental analysis (FA) explained 

A crypto fundamental analysis is a method to research a digital asset in-depth before investing in them. This analysis aims to determine if the asset is overvalued or undervalued and therefore safe to be bought and/or kept. 

By completing a crypto fundamental analysis, we can see the exact and objective value of a cryptocurrency or token, regardless of the market price. This kind of examination must be taken into consideration also because investing without thorough research can imply a significant risk, unless you understand what you’re putting your money into. 

To reach a conclusion, the analysis must go through a list of steps: checking points such as verifying the on-chain metrics, verifying the most important project metrics, and checking the financial metrics. 

In this article, we will discuss every part to understand the process step-by-step. 

Checking the on-chain metrics 

The first step in proceeding with your FA is to check the on-chain metrics. While a basic technical analysis focuses on volume or price, fundamental analyses look at some key points that will guide you in deciding if it’s the right time to buy an asset. 

The first on-chain metric is the transaction count & value. The transaction count represents the number of transactions that have completed the process. As for the value, it refers to the nominal value of the transaction. 

Next, you must check the cryptocurrency transaction fees that users are charged when transacting a particular cryptocurrency. The fee varies from case to case and is collected to process the transaction on the network. 

The next on-chain metric is the active address. An address is active as soon as it becomes a direct participant in a successful transaction, either as a sender or a receiver.  The active address indicates daily users’ activity on the blockchain and represents the total number of active users on any given day on the network. 

Last but not least, the hash rate measures the total computational power used by a POW cryptocurrency network to process transactions on a blockchain. 

Verify the most important project metrics 

Once you’re clear about the on-chain metrics, the next step is to verify the project metrics. It is crucial to consider an initial high-level overview of the project to check if it is safe, secure, and has development potential.    

Primarily, you should check what the project is about. Go on the official website and seek all information about it, see what the project’s vision is and which are the strength points it brings. 

Then, a whitepaper is a considerable indicator supporting a crypto project’s credibility. The whitepaper can contain all the information about the project, the roadmap, tokenomics, and further plans. 

Also, from the whitepaper, we can estimate whether the developers have good intentions for potential investors. 

Talking about the developers: any project has a team behind it. 

It is essential to read more about who developed the project. Research the team’s experience and if it developed any previous projects. 

For example, Polkadot received much trust from the beginning, with Gavin Wood as a co-founder. The trust came from the fact that he also is an Ethereum co-founder and a renowned computer scientist. And besides that, Gavin Wood is also a part of Kusama. 

Afterward, look if the project has any competition or a potential competitive project. The project is less likely to progress if the subject they approach is already overcrowded with big players or without a well-planned strategy. 

By this, you get to the last checkpoints: distribution, allocation & investors

Check how much of the project is distributed to project owners and how much is shared with investors. Then, check the allocation and how the project was launched on the market. There are several ways to launch a project: mining, private sales, public sales, or airdrops.     

This project release is crucial because it allows us to check whether it was put up for general sale or sold to investors before everyone had access to the project.    

Lastly, a cryptocurrency with potential also has investors interested in it. Check if the project has any significant institutional investors or partnerships. A large company can be a reliable addition to the project. 

Monitor the financial metrics 

After you’ve found all the information needed and seen that the project is legit, has vision, and a solid basis, it’s time for a final check: monitor the financial metrics.   

Here you should consider some key elements: market cap, liquidity and trading volume, supply mechanisms, and dynamics.  

The market cap represents the cryptocurrency’s total value. It is obtained after a simple mathematical calculation: multiplying the total number of tokens that have already been mined by a token’s value at any given time. 

Checking a cryptocurrency’s market cap may be the simplest test you can run to see if a digital asset has growth potential. And to do that, you can use a market cap comparison tool to calculate what a crypto coin’s value could be if it had the market cap of another. 

Afterward, you may want to check the liquidity and trading volume. The liquidity reduces investment risk. It refers to the ease with which a digital token can be converted into a digital asset or cash without affecting its price. The trading volume measures the market’s activity and liquidity during a set period.  

In the end, look to the supply mechanisms and dynamics, as they can tell you more about how a cryptocurrency is furtherly going to behave.  

You may wonder why these metrics are important when completing a crypto fundamental analysis. These are related to the project’s potential and predicting what will happen in the near future is a must. Supply relates to the number of coins or tokens that exist and will exist and how those coins or tokens can be added or removed from circulation.  

Also, you can find out if they have inflation if they periodically put in circulation more tokens and what else can happen to that project. 

Conclusion 

With all these metrics in mind, you should be able to analyze a cryptocurrency’s basic characteristics and decide whether it is safe to invest in it or not.  

Always remember that extensive research is the answer for most of your questions. Don’t let yourself influenced by other investors or even speculators, and you should be good to go for a positive journey in the cryptocurrency space.  

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* The information in this article and the links provided are for general information purposes only and should not constitute any financial or investment advice. We advise you to do your own research or consult a professional before making financial decisions. Please acknowledge that we are not responsible for any loss caused by any information present on this website.
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