Learn the fundamentals of cryptocurrency analysis from scratch

Before making investment decisions, many people only look at technical charts, but that’s not enough. To truly grasp a project’s potential, you need to learn how to perform fundamental analysis of cryptocurrency—this is a standard skill for professional traders. This article will guide you from beginner to mastery, helping you understand the core methods for evaluating crypto assets.

Current State of the Crypto Market: Why Learn FA Now?

In the past two years, the cryptocurrency market has expanded rapidly. According to the latest statistics, over 25,000 digital assets are in circulation worldwide, with a total market cap that once surpassed $3 trillion, ten times the amount at the beginning of 2020. In terms of market capacity, it is projected to reach $4.94 trillion by 2030, with an annual growth rate of 12.8%.

What lies behind these numbers? A surge of young investors entering the market. According to research from the University of Chicago, over 70% of crypto traders are under 40 years old. This market is full of opportunities but also fraught with risks.

Crypto prices are highly volatile; small investments can double in a short period or result in total loss. Learning how to perform fundamental analysis of cryptocurrency, combined with technical analysis, can significantly reduce your risks.

What is Fundamental Analysis? Why Is It Key to Crypto Investing?

Fundamental analysis involves evaluating various internal and external factors to determine whether an asset is overvalued or undervalued. This method was first proposed in 1934 for the stock market and is equally applicable to cryptocurrencies today.

The core goal is simple: identify the “true value” of a project and compare it with the current market price. If the market price is significantly below the true value, it’s a buying opportunity; if above, caution is advised.

Traditional stock analysis looks at metrics like EPS (Earnings Per Share) and P/B ratio. While cryptocurrencies don’t have these, they have their own evaluation systems—and that’s what we need to learn.

The Three Pillars of Cryptocurrency Fundamental Analysis

When doing fundamental analysis of cryptocurrency, focus on three dimensions:

1. On-chain Data (On-chain Metrics)

This is a unique advantage of crypto. All transactions are recorded on a public blockchain, making data fully transparent. You can extract key information about investor behavior, market sentiment, and network activity from these raw data.

2. Project Metrics

Includes team background, whitepaper quality, competitive advantages, and development roadmap. These are qualitative assessments.

3. Financial Metrics

Mainly market cap, circulating supply, and trading volume.

On-chain Data: Gaining Insight into the Real Activity of the Crypto Market

Hash Rate

For Bitcoin and other PoW projects, hash rate is the first metric to watch. It represents the total computational power of the network.

What does a high hash rate mean? First, it indicates the network is more resistant to attacks (higher cost for 51% attacks). Second, it shows miners still have confidence in the project. Conversely, a declining hash rate suggests miners are withdrawing, often due to decreasing mining profitability.

Changes in Bitcoin’s current hash rate directly reflect miners’ cost-benefit analysis—factors like coin price, transaction fees, and electricity costs all influence it.

Active Addresses

This metric is straightforward: how many wallet addresses have been active within a certain period. An increasing number of active addresses usually signals more participation in the network and is a positive sign.

Transaction Volume and Fees

High-frequency, large-value transactions indicate real circulation of the token. Transaction fees are determined by bidding mechanisms—those willing to pay higher fees get priority in transaction processing. Ethereum’s Gas fee operates on this principle. In PoW networks, as block rewards decrease over time (e.g., Bitcoin halving events), transaction fee income becomes increasingly important for miners.

The Project Itself: Soft Power Is Also Critical

Team and Track Record

Not all crypto projects disclose team information transparently, but serious projects do. Check team members’ contributions on GitHub, their professional experience, and whether they’ve participated in suspicious projects. A project that actively updates its codebase is more trustworthy than one that hasn’t been updated in years.

Whitepaper Quality

A project’s whitepaper is like a business plan. A good whitepaper clearly states the project’s goals, technical solutions, and competitive advantages. Bitcoin’s whitepaper remains a benchmark—well-structured and clearly articulated.

Competitive Landscape

Who are the competitors in the same sector? What are their strengths and weaknesses? A promising project may face challenges if stronger competitors exist, raising questions about its future prospects.

Development Roadmap

Does the project have clear milestones? What is the schedule for testnets, mainnet launches, and new feature releases? A well-defined roadmap provides confidence to investors.

Financial Data: Numbers Don’t Lie

Market Cap

The most straightforward indicator: Market Cap = Current Price × Circulating Supply

Based on the latest data, Bitcoin (BTC) is priced at $89,000 with a circulating supply of about 19.97 million coins, giving a market cap of approximately $1.78 trillion. Such a large market cap indicates Bitcoin is relatively stable but still subject to fluctuations.

In comparison, smaller coins have much lower market caps, which can collapse under large sell orders but also offer greater upside potential.

Circulating Supply vs. Max Supply

Bitcoin’s maximum supply is capped at 21 million coins. Currently, about 19.97 million are in circulation, with roughly 2.1 million yet to be mined. This supply cap mechanism gives BTC scarcity.

Some projects have no supply cap and experience ongoing inflation, which investors should be cautious of. Increasing dilution diminishes value over time.

Litecoin (LTC) has a max supply of 84 million, with about 76.66 million in circulation. Dogecoin (DOGE) has no supply limit, but due to mining difficulty and profitability considerations, its growth rate has slowed.

Trading Volume and Liquidity

A 24-hour trading volume indicates how easily the coin can be bought or sold. Coins with high liquidity can be quickly traded without significant slippage.

Bitcoin’s 24-hour trading volume is about $882 million, Ethereum (ETH) around $445 million. These major coins have good liquidity. If a coin’s 24-hour volume is only a few thousand dollars, be cautious.

Practical Application: How to Use These Metrics for Decision-Making?

• Identify projects with growth potential: Look at the difference between circulating and total market cap, and whether the project has genuine user growth.
• Find projects with strong network effects: Rising active addresses and steadily increasing trading volume indicate real user adoption.
• Avoid being fooled by low prices: Some coins are cheap not because they are good deals, but because of high inflation. Focus on potential, not just price.

Summary: Combine Technical and Fundamental Analysis

Just looking at candlestick charts only reveals short-term trends. Performing fundamental analysis of cryptocurrency allows you to predict long-term value.

Technical analysis helps you determine entry and exit points, while fundamental analysis helps you select projects worth investing in. Combining both is the approach of professional investors.

In today’s market, filled with information noise, mastering this method will help you filter out junk projects and focus your time and capital on assets with real value.