From Beginner to Expert: A Guide to Fundamental Analysis of Cryptocurrencies

Entering the world of crypto assets is both exciting and challenging, especially when you need to understand this rapidly evolving financial ecosystem. Don’t worry—this comprehensive guide will reveal the core principles of fundamental analysis. Mastering this powerful tool will enable you to make more informed investment decisions in the dynamic digital asset market. Whether you’re a beginner enthusiast or a seasoned investor looking to refine your analysis skills, this article will provide practical insights, operational advice, and a solid evaluation framework.

Current Market Status and Growth Potential

With new digital assets constantly emerging, the value of cryptocurrencies can change dramatically in an instant. What is certain is that a large influx of new investors has driven the total global market capitalization of crypto assets to surpass $3 trillion at its peak—ten times the size since early 2020. According to CoinMarketCap data, over 25,000 digital assets are currently registered. By 2030, the industry’s global market cap is projected to reach $4.94 trillion, with a compound annual growth rate (CAGR) of 12.8% during this period.

Beyond these figures, the crypto market also attracts a younger demographic. According to research from the NORC at the University of Chicago, most crypto traders are under 40 years old. Given market volatility, tracking what works effectively and what needs improvement is no easy task. Trading in crypto markets involves risks, but combining fundamental and technical analysis methods can effectively reduce risk exposure.

Certain factors attract some investors while deterring others. First, due to rapid market changes, small investments can generate considerable profits in the short term. Although crypto assets differ from traditional stock markets, they share similarities. Fundamental analysis strategies are not only effective in traditional markets but also applicable to the crypto space.

Basic Concepts of Trading

Trading is an economic activity involving the buying and selling of assets—these can be goods or services, with the buyer compensating the seller with money. In some cases, trading may involve the exchange of goods and services.

Assets traded in financial markets are called financial instruments, including stocks, bonds, forex pairs, options, futures, margin products, and cryptocurrencies. Trading employs various strategies such as day trading, swing trading, and trend trading.

To profit from trading crypto assets, a deep understanding of fundamental, technical, and sentiment analysis is required. If these concepts are unfamiliar, you can learn through various professional educational resources. Now, let’s delve into fundamental analysis and its applications.

What is Fundamental Analysis (FA)?

Fundamental analysis is a method used by investors to assess the intrinsic value of an asset or company. It involves evaluating various internal and external factors to determine whether the asset or company is overvalued or undervalued.

By analyzing financial statements, industry trends, market conditions, and competitive environment factors, investors can understand the long-term prospects of an asset. The theory of fundamental analysis first appeared in the 1934 publication of “Security Analysis.” The authors advocated that investors should consider all fundamental factors related to securities before investing.

Traders use fundamental analysis to predict the “intrinsic value” of an asset or company, aiming to judge whether the asset is overvalued or undervalued by studying various internal and external factors. Fundamental analysis is a valuable trading tool that helps traders make thoughtful decisions and improve profitability.

Traditional Financial Market Fundamental Analysis

In traditional stock markets, fundamental analysis uses specific indicators to assess a company’s true value. These include earnings per share (EPS) and price-to-book ratio (P/B). EPS reflects the profit generated per share, while P/B shows how investors value the company relative to its book value.

Analysts can compare multiple companies within the same sector to understand how potential investments measure against each other. After completing fundamental analysis, experts judge whether an asset is overvalued or undervalued, guiding traders’ investment decisions.

Framework for Cryptocurrency Fundamental Analysis

Crypto fundamental analysis can incorporate on-chain metrics—a burgeoning data science branch that processes public blockchain data. These fundamental indicators include network hash rate, major token holders, addresses, and transaction analysis.

While fundamental indicators are widely used in stock and forex markets, their applicability to current-stage crypto assets is limited. Due to the relative novelty of these assets, a clear and comprehensive valuation framework has yet to be established. The influence of fundamental factors on crypto asset prices is limited. However, as the market develops, more precise methods for crypto asset valuation may emerge.

Key Elements in Conducting Crypto Fundamental Analysis

Crypto fundamental analysis involves three categories of indicators:

- On-chain metrics
- Project metrics
- Financial metrics

Blockchain Metrics

Cryptocurrencies are the first asset class capable of extracting investor activity data from a public ledger—each blockchain records all transactions historically. Because blockchains are open and objective repositories of financial data, we can establish standards for economic activity within these networks.

Collecting and analyzing this data can gauge market sentiment and investor behavior. Blockchain analysis is based on fundamental data rather than hype, market sentiment, or technical analysis. Such analysis compares different crypto assets to assess their market value or focuses on the historical trends of a single asset.

The actual value of cryptocurrencies like Bitcoin can be divided into speculative value and utility value. Blockchain analysis helps distinguish these two components. For example, by analyzing user adoption rates and miner activity, we can determine whether the token’s underlying metrics support its current price.

Data Sources for Blockchain Metrics

Although blockchain networks hold immense value, extracting information manually from raw databases is time-consuming and costly. Fortunately, various APIs provide tools to help investors make smarter decisions. For example, CoinMarketCap’s blockchain analysis of Bitcoin offers rich information.

Core fundamental indicators include hash rate, status, active addresses, transaction volume, and fees. Let’s analyze each one.

Hash Rate

Hash rate measures the total computational power of a blockchain network using proof-of-work (PoW) consensus mechanisms. It can also be used to determine how quickly mining machines perform calculations. The higher the hash rate, the more difficult it is to execute a 51% attack.

An increasing hash rate over time may indicate growing mining interest, possibly due to decreasing costs and increasing profits. Conversely, a declining hash rate suggests miners are leaving the network due to unprofitability (miner capitulation). The current asset price, transaction volume, and fee payments all impact overall mining costs. Direct mining costs (electricity, computational power) should also be considered.

How Hash Rate Works

Miners use computers to solve complex mathematical problems based on transaction data. These systems generate millions or billions of guesses per second to find the correct answer. Hashes are random alphanumeric codes that identify unique data segments. The goal is for miners to be the first to generate a block of transaction data that contains the correct solution and meets all standards.

In PoW networks, other miners must verify the validity of the hash to confirm it was generated with sufficient computational effort. Once validated, the block is added to the chain, and the miner receives newly created cryptocurrency as a reward. Bitcoin (BTC) is the most popular cryptocurrency globally, currently using proof-of-work to validate transaction blocks before adding them to the blockchain. Other tokens like Bitcoin Cash (BCH), Bitcoin SV (BSV), Dogecoin (DOGE), Litecoin (LTC), and Monero (XMR) also employ proof-of-work.

Active Addresses

Active addresses are blockchain addresses that are active within a specific period. There are various ways to calculate active addresses. A common method is to count the sender and receiver addresses involved in transactions within a set period (e.g., daily, weekly, monthly). Other methods track unique addresses over time, monitoring the total number of distinct addresses. Comparing the number of unique addresses within specific periods is also common.

Transaction Volume and Fees

Consistently high transaction volume indicates that a digital currency is actively circulating. Transaction fees can be likened to bid prices in an auction—users compete to prioritize their transactions. Ethereum’s gas fee is an example, but each cryptocurrency may have its own fee mechanism. Higher bids result in faster confirmation, while lower bids require longer wait times.

Additionally, proof-of-work blockchains provide block rewards, which may include block subsidies and transaction fees. During events like Bitcoin halving, block subsidies decrease. Over time, mining costs tend to rise, and block subsidies diminish. As a result, transaction fees gradually increase—otherwise, miners would incur losses and leave the network, negatively impacting security.

Project Metrics

Regarding fundamental analysis, project metrics adopt a qualitative approach, focusing on internal and external factors. These include reviewing the crypto token’s whitepaper, team experience, competitor analysis, and upcoming roadmap.

Review and Analyze Team Experience

Warren Edward Buffett is a renowned American business magnate and philanthropist, currently chairman and CEO of Berkshire Hathaway. According to Buffett, one of the key factors to consider is the team behind a project and their experience, as the success of a project depends on the team. Like publicly listed companies, crypto project teams are often listed on official websites. Therefore, analyzing team members’ backgrounds is crucial for predicting token success.

After research, ask yourself:

• Have team members previously succeeded in this field?
• Do their skills and experience suffice to achieve the project’s goals?
• How is the community development without a team?
• Are they involved in suspicious projects or scams?

Experience and achievements of team members on GitHub should be well documented, giving you insight into their ability to execute plans. It’s also important to determine the number of active contributors and their activity levels on the project’s public GitHub. Tokens with ongoing development plans may be more attractive than those with stagnant repositories for years.

Cryptocurrency Whitepaper

The whitepaper is an essential document every potential investor should read; it illuminates two key aspects of a crypto project: its goals and the underlying technology. Each token has a “whitepaper” that contains all project information, including historical performance data and other relevant details.

Whitepapers help projects stand out among many options. Besides providing information, a well-written whitepaper lends legitimacy and professionalism to a crypto project. An appropriately crafted whitepaper attracts attention, while a poorly written one can cause disdain. The whitepaper’s statements typically specify who, what, when, and why investors should choose this project over others.

The Bitcoin whitepaper remains one of the clearest documents to date. Satoshi Nakamoto is the pseudonym of the person or group believed to have created Bitcoin, published in 2008. The concepts described in this document led to the creation of Bitcoin and the start of the decentralized finance revolution.

Competitor Analysis

In crypto fundamental analysis, competitor analysis is a method to identify competitors and understand their strengths and weaknesses relative to the planned investment project. This helps determine how to constrain competitors and adjust strategies. While a crypto asset may seem attractive initially, its true potential becomes clearer after analyzing other altcoins.

Upcoming Roadmap

A roadmap is a business planning tool that defines short-term and long-term goals within a flexible timeframe. Most crypto projects display a roadmap outlining testnet launches, mainnet releases, and new features. Internally, the roadmap provides strategic vision for the development team, offering clear milestones and phases to create the final product.

The roadmap should clearly indicate future prospects. It also defines the importance of individual tasks based on the planned product structure. The roadmap helps investors understand the project’s direction and vision. It also allows for evaluating development speed and success. Using the roadmap, we can track phases and make more informed investment decisions.

Financial Metrics

Market-based fundamental analysis includes quantitative and qualitative factors. Similarly, crypto fundamental analysis involves quantitative aspects. This section explores five key financial metrics many investors and traders use to assess whether buying a crypto is reasonable. These include market cap, supply, and trading volume.

Brief tips:

• Look for projects with high growth potential
• Seek projects with strong network effects
• Avoid biased decision-making

Market Cap

A company’s market cap is the total value of all its shares. For the crypto market, market cap refers to the total value of all mined tokens. In cryptocurrencies, market cap is calculated by multiplying the total number of mined tokens by the current price per token.

Market cap can serve as a rough indicator of an asset’s stability. It’s worth noting that even the highest-market-cap cryptocurrency, Bitcoin, can be volatile. However, like larger ships perform better in storms, high-market-cap cryptocurrencies may be more stable investments than low-market-cap assets.

Low-market-cap digital currencies are more sensitive to market fluctuations—they can show huge gains or significant drops. The calculation is as follows:

Market Cap = Current price of the digital asset × Circulating supply

Market cap is a popular financial indicator among traders because it reflects the amount of capital invested in the network. It also allows traders to compare the market cap of one token against another. The larger the market cap, the more stable the project. Conversely, low-market-cap tokens often have greater growth potential.

Liquidity and Trading Volume

Liquidity refers to how easily an asset can be converted into cash in the financial market. In crypto markets, liquidity indicates how easily tokens can be exchanged for fiat currency or other tokens. Liquidity is essential for all tradable assets, including cryptocurrencies.

Low liquidity indicates low market volatility. Conversely, high liquidity in crypto trading means smaller price swings and a more stable market with lower investment risk. As market participation increases, buying or selling digital assets in highly liquid crypto markets becomes easier because orders execute faster.

“24-hour trading volume” is self-explanatory—it shows the ability of a token to sustain momentum. This indicator reflects how frequently a particular cryptocurrency changes hands within a day. Rising prices accompanied by increasing trading volume are likely sustainable. Conversely, small trading volumes with price fluctuations may be short-lived.

High trading volume indicates a healthy market and boosts investor confidence, as it signals active buying and selling of the crypto.

Circulating Supply

The circulating supply of a specific digital asset is the total amount of tokens available for trading in the market. Unlike total supply, circulating supply can change as the project issues more tokens into the market. Developers can increase the number of tokens in the central supply.

For example, mining operations can increase the circulating supply of mined cryptocurrencies. Understanding supply is not an exact science; it can be difficult to determine which tokens are held by long-term investors, which are burned, lost, or forgotten.

For instance, looking at Bitcoin’s current circulating supply of 19.89 million, an estimated 3.7 million Bitcoin are permanently out of circulation, including all 1.1 million held by Satoshi Nakamoto. In fundamental analysis, examining supply can help avoid “unit price bias”—the phenomenon where people want to buy tokens simply because of low market prices.

Max Supply

The maximum supply refers to the total number of tokens that will ever exist for a given cryptocurrency. Bitcoin’s maximum supply is capped at 21 million coins. Currently, 18.9 million are in circulation, with only 2.1 million left to mine, but not all tokens have a supply cap.

The maximum supply, circulating tokens, and inflation rate can influence decision-making. Some tokens reduce the number of new units created over time, which can be attractive to investors who believe that the supply of new units will be exceeded by demand.

Conclusion

The digital economy is expanding rapidly, with new information emerging daily. Conducting fundamental analysis is crucial to extract valuable insights that cannot be obtained through technical analysis. The ability to distinguish between current market prices and the “true” value of the network is a practical skill in trading.

Certainly, technical analysis plays an important role in helping identify entry and exit price levels. On the other hand, fundamental analysis can help forecast future price movements. As a result, many traders now combine both technical and fundamental analysis.

These simple financial metrics can quickly provide an understanding of any project. We hope this article helps you grasp the key fundamental analysis factors to consider before entering or exiting crypto assets. Now, by mastering these fundamental analysis tools and tracking real-time data (e.g., BTC current trading price $88.63K, Ethereum circulating supply 120,694,972), you will be better equipped to make more rational investment decisions in this opportunity-rich market.