Futures trading, unlike spot trading, features "high leverage, high risk, and high returns," making it highly sought after by numerous traders. However, futures trading has a higher entry barrier and a larger number of individuals facing losses. As a result, it is necessary for us to have a comprehensive understanding of the futures contracts' underlying assets and conduct fundamental analysis of said futures contracts in order to minimize the possibility of losses, and enhance the opportunities for achieving profits.
Fundamental futures analysis refers to a method used by traders to assess the valuation of futures contract prices based on the fundamental aspects of a project. Common fundamentals include on-chain indicators of the project and token-related data. By interpreting these data dimensions, fundamental futures analysis allows for a comprehensive understanding of the actual status of tokens, enabling an evaluation of their true value. The actual value and the current market price might differ, and when there is a significant disparity between the two, traders have opportunities for futures trading.
Many traders employ technical analysis when engaging in futures trading, relying on K-line patterns and volume-price relationships to determine trading opportunities for current futures contract types. However, technical analysis is not foolproof and carries the potential for distortion. To trace its origins, technical analysis stems from studying historical market trends, deducing high-probability patterns and cyclical trends. Consequently, various technical analysis methods are experiential and outcomes are derived from processed information, implying a lagging nature. Action is taken only after futures market trends have emerged. This is not the worst aspect of technical analysis; in a fully competitive futures market, price trends are diverse, and different technical analysis methods may yield inconsistent or even contradictory conclusions, making it challenging for traders to determine the direction for opening positions.
In conclusion, technical analysis is not infallible and can be subject to distortion. Fundamental analysis, however, can effectively compensate for the shortcomings of technical analysis mentioned above, offering a more comprehensive, long-term, and conclusive analytical approach. Firstly, fundamental futures analysis encompasses on-chain indicators, token data, and other comprehensive market factors. Secondly, fundamental futures analysis can broadly predict the long-term trend of an asset's price. Lastly, unlike the ambiguous nature of technical analysis, conclusions drawn from fundamental analysis are often affirmative.
However, it is important to note that sometimes, even with strong project fundamentals, token prices might not experience significant increases within a short period of time. Similarly, poor project fundamentals might not necessarily result in sudden token price drops. This is because fundamental futures analysis primarily focuses on identifying long-term trend trading opportunities. For pinpointing short-term buying and selling points, it is advisable to complement fundamental analysis with technical analysis.
We can utilize the following five data points for fundamental futures analysis: ① Active Addresses ② Hash Rate ③ Total Locked Value (TVL) ④ Market Capitalization and Fully Diluted Valuation ⑤ Token Supply.
① Active Addresses
Active addresses involve analyzing the active addresses within a blockchain network, providing insight into user participation. As the number of active addresses increases over time, it signifies a thriving project ecosystem. If, during this period, token prices are low, it might be advisable to consider holding assets of the project and trading long positions. Conversely, a decrease in active addresses suggests a reduction in the user count, which could lead to considering decreasing holdings of the project's assets and trading short positions. Generally, tracking active addresses can be achieved through blockchain explorers for the project, such as Etherscan.
② Hash Rate
It is important to note that the hash rate metric is only applicable to cryptocurrencies based on Proof of Work (PoW), such as Bitcoin, Bitcoin Cash, etc. In proof-of-work networks, miners validate transactions and secure the network by solving complex mathematical problems using powerful computers. Hash data represents solutions to each puzzle, making hash rate a measure of the total computational power processing transactions.
In general, the hash rate correlates positively with the long-term value of a cryptocurrency. A higher hash rate indicates miners are willing to invest long-term capital into the foundational infrastructure of that cryptocurrency. When the hash rate of a cryptocurrency increases, it indicates increased miner investment, and the token's value might be underestimated, offering opportunities to trade long positions. Conversely, a decrease in hash rate suggests that miners are withdrawing from the project, potentially overestimating the token's value and offering opportunities for short position trading.
BTC Hashrate. Source: Bitinfocharts.
③ Total Locked Value (TVL)
Total Locked Value (TVL) is specifically used to measure a decentralized finance (DeFi) project's strength. TVL is an abbreviation for Total Value Locked, encompassing the total value of cryptocurrency assets that users have staked or locked within a DeFi platform. Investors can use TVL data to compare the growth of different DeFi projects. Common platforms to query TVL include DeFiLlama.
Typically, TVL represents the popularity of a project. An increase in TVL suggests potential opportunities for trading long positions. A lower TVL indicates less market attention towards the project, with funds rapidly leaving, offering opportunities for trading short positions.
④ Market Capitalization and Fully Diluted Valuation
There is a significant difference between market capitalization and fully diluted valuation. Fully Diluted Valuation refers to the protocol's total market capitalization assuming all tokens are in circulation. Understanding this distinction can be valuable for those seeking futures trading opportunities. If there is a substantial difference between a project's market capitalization and its fully diluted valuation, it signifies that a significant portion of tokens have yet to enter circulation. The introduction of new tokens to the market can lead to substantial selling pressure.
This situation is common for newly launched projects, where the circulating supply of tokens often represents only a small fraction of the total supply. For example, when Curve released the CRV token, its trading price reached $15-20, with a fully diluted valuation exceeding $50 billion. This was higher than Ethereum's valuation at the time. Clearly, such an inflated valuation is unreasonable, and the market is likely to self-correct by decreasing. Therefore, in such cases, opportunities for short position trading might exist. Conversely, an undervaluation could trigger an increase in the project's token price, offering opportunities for long position trading.
⑤ Token Supply
When other fundamental aspects of a project are relatively equal, the supply of tokens significantly influences asset prices. Max supply and circulating supply are key token supply metrics, with circulating supply being particularly important.
In the context of fundamental futures analysis, circulating supply serves as the theoretical foundation for long-term holdings. Specifically, when circulating supply is low, and chips are relatively concentrated, the potential for token price increase is high, making it suitable to hold long positions. If token circulation is high and chips are distributed, the likelihood of price increase diminishes, favoring the holding of short positions.
The aforementioned five data points are crucial in fundamental futures analysis and can provide a long-term direction for trading. To summarize, if the data performs well but the token price fails to rise, the token's true value might be underestimated, presenting a long-term opportunity for going long. Conversely, if the data declines but the token price remains steady, the token's true value might be overestimated, offering a long-term opportunity for going short.
Fundamental analysis for futures trading is of paramount importance, as it can compensate for the shortcomings of technical analysis. It is one of the essential skills that investors must grasp. When making decisions regarding the direction and quantity of futures positions, it is advisable to have a comprehensive understanding of the project's fundamentals. However, it is important to note that, typically, we need to combine technical analysis methods to pinpoint specific buying and selling points.
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