Fundamental analysis is the true foundation of investment and is applicable to all asset classes. In traditional financial markets, fundamental analysis refers to evaluating the intrinsic value of assets and analyzing factors that may impact their future prices. This analysis is based on macroeconomic factors, microeconomic factors, financial statements, and industry trends. Fundamental analysis can be broadly categorized into two main approaches: top-down and bottom-up.
Fundamental analysis for cryptocurrencies differs slightly from traditional financial market analysis and is not as developed. In cryptocurrency fundamental analysis, the following methods are commonly used: ①On-Chain Metrics ②Project Analysis ③Token Analysis. These three methods are applicable to both cryptocurrency spot trading and futures trading.
① Active Addresses
Analyzing the number of active addresses on a blockchain network provides insights into user participation. An increasing number of active addresses over time indicates a growing user base, which may be considered a positive sign for holding the project's assets. Conversely, decreasing active addresses may indicate a declining user base, which may lead investors to reduce their holdings of the project's assets. Analyzing active addresses involves tracking the number of unique addresses that send or receive assets on the network on a daily or weekly basis. It is essential to consider the rate of change in active addresses over time and compare it with other indicators, such as transaction volume. Tracking active addresses on the blockchain can generally be done through the use of a blockchain explorer specific to that project, such as Etherscan for Ethereum.
② Hash Rate
It is essential to note that the hash rate metric is only applicable to cryptocurrencies based on Proof-of-Work (PoW) consensus mechanisms, such as Bitcoin, Ethereum, Bitcoin Cash, etc. In PoW networks, miners are responsible for validating transactions and securing the network through cryptographic computations. They solve complex mathematical puzzles using powerful computers to achieve this task. The hash data represents the solutions found for each puzzle, and thus, the hash rate is a measure of the total computational power devoted to processing transactions. A secure network will have a higher hash rate. For example, in the case of Bitcoin, as shown in the chart below, the hash rate is positively correlated with the mining difficulty of Bitcoin and will change in response to its price movements.
Data source: Bitinfocharts
③ Total Value Locked (TVL)
Total Value Locked (TVL) is a specific metric used to measure a decentralized finance (DeFi) project's performance. TVL stands for Total Value Locked and refers to the total value of cryptocurrency assets that users have staked or locked in a DeFi platform. Investors can use TVL data to compare the growth of different DeFi projects. Generally, a higher TVL indicates higher popularity and interest in the project, while a lower TVL indicates lower market attention. DeFiLlama is a good resource for researching TVL.
① Whitepaper
A whitepaper is the founding document of a project that is used to explain its background, principles, development, team composition, project roadmap, and other key factors. Therefore, the whitepaper is like a business plan for the project and serves as the core of its fundraising efforts. In the context of blockchain projects, the whitepaper is an official announcement that showcases the project's business model, technical capabilities, team expertise, and future prospects. It serves as an essential basis for evaluating the quality and potential of the project.
② Team Background
The team background is an essential component of project analysis. Firstly, if the team has previous experience in developing similar products or has a track record of successful projects, it can increase investors' confidence. Secondly, the presence of industry leaders within the team is crucial. For example, Ethereum has Vitalik Buterin, a prominent figure in the industry, and YFI has Andre Cronje, a recognized technology expert. Having well-known industry leaders in a project often indicates its potential as a high-quality project. Thirdly, investor background is another key consideration. Strong and reputable investors can provide a project with technical support, talent acquisition, and access to industry resources. Some well-established cryptocurrency investors include Andreessen Horowitz (a16z), Multicoin Capital, and DCG (Digital Currency Group).
③ Competitors
Before investing in a project, it is beneficial to understand the problem the project aims to solve or the direction it intends to pursue. If the project has no direct competitors in its field, it may indicate an innovative project with the potential to become a market leader in the future. In such cases, the valuation of the project's token may have significant potential. However, if there are competitors in the same field, it is essential to assess how these competitors are valued in the industry. Then, considering factors such as the project team's background, the investors involved, and the level of innovation, one can make a rough estimation of the potential market value of the project.
④ News Analysis
News can also significantly impact the price fluctuations of project tokens. A black swan event, such as a major security breach in a DeFi project, can lead to a substantial decline in token prices. On the other hand, positive news, such as the SEC determining that XRP is not a security, can result in a significant increase in token prices. Additionally, macroeconomic data can also influence the price volatility of cryptocurrencies to a certain extent. Therefore, it is essential to stay vigilant about project news and macroeconomic data to be prepared for any black swan events.
Note: Cryptocurrency news and macroeconomic data can be viewed on the MEXC website. Click on [Market] on the top left corner - [Macro Data] to enter the page.
① Market Cap and Fully Diluted Valuation (FDV)
There is a significant difference between the market cap and the fully diluted valuation (FDV) of a cryptocurrency project. The FDV refers to the total market value of the protocol when all tokens are in circulation. For those who intend to hold a project's assets long term, understanding this difference can be very valuable. If there is a large discrepancy between the market cap and the FDV of a project, it means that a large number of tokens are yet to enter circulation. Therefore, investors should be aware that once these new tokens enter the market, it may result in considerable selling pressure.
Newly launched projects often face this situation because the circulating supply of tokens is typically only a small portion of the total supply. For example, when Curve released its CRV token, the token's trading price reached $15-20, and the protocol's FDV exceeded $50 billion. This valuation was even higher than that of Ethereum at the time! Clearly, such an inflated valuation is unreasonable, and the market is likely to undergo a self-correcting downturn. On the other hand, an undervalued project may trigger an upward movement in the token's price.
② Earning & Burning Mechanism
The whitepaper of a project usually outlines the token's earning and burning mechanisms. Generally, participating in project activities and staking project tokens can earn additional tokens. The burning mechanism is designed to control the total supply of tokens and avoid inflation. Common methods of burning include token buybacks and fee burning from transactions. Before investing in a project, it is essential to understand the earning and burning mechanisms to avoid unfavorable factors like unlimited token generation.
Fundamental analysis is indeed crucial in the cryptocurrency market and can complement the limitations of technical analysis. It is one of the essential skills that investors must master. When making decisions to invest or hold a particular project's token, it is advisable to have a comprehensive understanding of the project's fundamentals. However, it is important to note that sometimes even with strong fundamentals, the project's token may not experience significant price increases. In such cases, it is recommended to combine fundamental analysis with technical analysis for a more comprehensive investment approach.
Disclaimer: Cryptocurrency trading involves risk. This information does not provide advice on investment, taxation, legal, financial, accounting, or any other related services, nor does it constitute advice to purchase, sell, or hold any assets. MEXC Learn provides information for reference purposes only and does not constitute investment advice. Please ensure you fully understand the risks involved and exercise caution when investing. The platform is not responsible for users' investment decisions.