Understanding fundamental analysis will give you an edge over the millions of degens and plebs in this market.
It reveals the intrinsic value of a cryptocurrency project through a holistic evaluation of various internal and external factors.
In this post, I will share the most important factors to consider when performing a fundamental analysis of any cryptocurrency project and how to evaluate them.
What is cryptocurrency Fundamental Analysis (FA)?
Cryptocurrency fundamental analysis is a method of evaluating the intrinsic value of a crypto project for investment consideration.
It examines a project’s technological, human, economic, and financial strengths or weaknesses and other internal and external factors to assess its value and potential.
Cryptocurrency fundamental analysis should not be confused with a Technical Analysis (TA).
TA seeks to understand a cryptocurrency’s price action over time to predict its potential future price direction for trading purposes.
Though it can be combined with fundamental analysis to provide more robust data, it is not necessary for a useful cryptocurrency fundamental analysis.
Long-term investors mostly use fundamental analysis to predict the potential future performance of a project.
Nine things to look for when performing a cryptocurrency fundamental analysis
Here are the key factors to consider when analysing the fundamentals of any cryptocurrency project.
- The problem it solves and its competitive edge
- Its market size and revenue model
- The token’s use cases or utility
- The team
- Commitment to security and transparency
- Its whitepaper and roadmap
- Community and ecosystem
- The laws and regulations affecting its operation
To have a solid foundation, a project must score well on all these factors.
Let’s discuss each of them below.
1. The problem it solves and its competitive edge
The most important business factor to consider when analysing the fundamentals of any cryptocurrency project is the problem it solves and its competitive advantage.
What is the project’s purpose, and how well is it fulfilling that purpose compared to its competitors?
This is what will keep it relevant in the market.
Make sure you get verifiable answers to the following and related questions about the project:
- What problem is it solving or planning to solve?
- Is the problem relevant enough that people will pay for a solution?
- Are there free alternative solutions for the problem?
- Are people using the project’s solution right now, or are they more likely to use it?
- Is this a recurring or one-time problem that people have?
If a project is not solving any tangible problem and it’s just another cryptocurrency, then it’s only good for speculation.
Furthermore, you must determine how the project is different or better than its competitors.
Does it have unique features and other differentiating factors that set it apart from the competition?
Also, why will people use this project instead of its competitors?
2. Its market size and revenue model
You know, it’s not all problems that are profitable enough to build a successful business around.
The problem(s) it solves must be relevant to enough people to be worth it or profitable.
So, you need to try and gauge how many people (are likely to) find the project useful and can pay to use it.
For example, Brave is solving major problems in the digital advertising market, worth $522 billion as of 2021 and is projected to reach $836 billion by 2026.
Every day, new businesses worldwide sign up to advertise on Brave Browser and its search engine.
Also, Presearch (PRE) targets the global search advertising market worth $260 billion as of 2022 and is projected to reach $435 billion by 2027.
Both retail and institutional marketers are buying PRE to stake against keywords on Presearch, among other revenue-generating uses.
The larger the market size available to be captured, the greater the potential revenue the project can generate and the more profitable it can be.
But remember, how much of the market share the project can capture depends on its competitive strength.
And even a small market size can be profitable if the project establishes its dominance and captures a majority share.
So, it all depends on how much of the total market share the project can capture and whether it has a sustainable revenue model.
Below are some questions you need to answer regarding the project’s market size:
- Are there enough people who need or use this project consistently?
- How many people are currently using the project?
- How is the project generating revenue, or what is its revenue model?
- How much is the project generating or capable of generating every day, week, or month?
- Is the revenue sustainable or scaleable?
3. The token’s use cases or utility
You want to invest in a token with genuine use cases backed by a project with sustainable revenue in a profitable market.
If you pick just two factors to consider before investing in any cryptocurrency, then it should be revenue and utility.
The more uses a token has, the greater its demand pressure.
Assuming it has a good user base, its price is almost guaranteed to increase over time due to the consistent demand.
The problem is that most cryptocurrencies are money grabs or outright Ponzi schemes with zero to no meaningful use cases.
You should avoid such shitcoins, except if you want to speculate. Because, 9 out of 10, you’ll lose money on them.
Think about it: Where will demand come from if people don’t need a token to use a project’s services?
You can speculate on such shitcoins but don’t try to HODL them as long-term investments.
A token with genuine use cases and backed by a project with a sustainable revenue model will survive even the worst market crashes and come out stronger. Assuming other factors discussed in this article are in place.
Tokenomics or token economics refers to the economic design of a token, including its supply, distribution, or applications within a project’s ecosystem.
The most important questions you need to ask regarding a project’s tokenomics include:
- What is the token’s maximum, total, and circulating supply? Avoid projects with multiple tokens or unlimited supply. They’re money grabs and never do well.
- How much of the token is allocated to the team, private investors, and other insiders? And how much is allocated to the community? The more decentralised the token distribution, the better.
- What’s its current fully diluted valuation (FDV)? I love to invest in projects with very low FDV ($10,000 to $10,000,000) as they have more room to grow.
- What is the token emission or inflation rate? The slower the rate of new token creation, the slower the price is likely to fall and vice versa.
All these may sound like some serious work, but they’re not. Everything you need is available on cryptocurrency data aggregators, the project’s website and social media channels.
5. The team
A project’s team is the most critical factor for its success or failure.
When you buy into any project, you’re investing in the team behind it and betting on their competence and commitment to its success.
Nothing else discussed here can save a project with a lousy team. And even a dead project can be brought back to life with the right team.
That’s how important the team is in the grand scheme of things. They make everything else possible.
You want to invest in a project backed by a team that’s shown innovation, competence, and commitment to its success.
Here’s what to look out for and questions to ask when trying to identify a great team to invest in:
- Is the team anonymous or doxxed? Investing in teams that are doxxed or have a good reputation feels safer, but it doesn’t mean anonymous teams are bad.
- Skilled, experienced, and backed by strong advisors or private investors. If some known institutional investors have a stake in the project, they have strong credibility.
- Passionate and committed to the success of the project. A great team will go to any length to make their project successful. They love their projects like a parent loves their child.
- Is the project centralised or decentralised? And if it’s currently centralised, is it on the roadmap to decentralise it later and put control in the hands of the community through governance?
Also, try contacting the team via email or their official social media channels and ask some questions you need answers to.
Their responses will give you valuable insight into their personality or character. Are they responsive and polite, or lousy and arrogant?
Trust your gut and instinct to reveal the team’s character, competence, and commitment. These things show.
6. Commitment to security and transparency
You don’t need to be a developer or know anything about coding to be able to understand how secure a project is.
You can look at the basic things like whether their code is open source or audited and how well they’ve stood the test of time.
However, note that open source and audited codes are not guarantees that a project can never be exploited or hacked. But they show the team’s commitment to transparency and security.
You should be suspicious of any project with an anonymous team and closed source code. It just makes it too easy for them to scam you.
Also, is the team willing to answer difficult but legitimate questions and criticisms, or are they overly defensive?
Do they try to silence people who ask difficult questions or allow the free flow of communication?
However, note that defensive and passive-aggressive behaviours from a project’s team could be just poor attitude, or they don’t want you to know too much.
Either way, it’s something to worry about. Poor communication is a problem; if they’re hiding something, it’s also a problem.
7. Its whitepaper and roadmap
A project’s whitepaper and roadmap do not necessarily affect its performance but reveal important information.
This information helps you to do your research about the project effectively.
For example, the whitepaper and roadmap tell you:
- What the project is all about,
- How it works,
- Its business and revenue model,
- What they’ve achieved so far,
- Where they are now,
- And where they aim to be in the coming months or years.
The quality of the content and whitepaper’s design speak volumes about the project’s value. Serious projects put serious effort into their whitepaper and roadmap.
8. Community and ecosystem
Cryptocurrency projects spend a lot of money on community growth and engagement campaigns.
A vibrant community helps a project attract more users, grow revenue, and maintain a positive brand image.
And that makes it one of the important things you should look for when performing the fundamental analysis of a crypto project.
Because the more active and loyal a project’s community, the more successful the project tends to be.
However, don’t look at the community size and engagement in absolute terms. It’s not a deal breaker.
As I mentioned earlier, crypto projects spend a lot of money to grow and keep their communities engaged.
Some go to the extent of buying fake or bot followers and members. Most active members in these communities are only there because of the potential rewards for participating.
Some great projects are just starting and do not have the marketing budget to pay for such gamed community growth and engagement.
Their community size may be far smaller and less active, but that doesn’t mean the project is bad or will not take off.
Regardless of a project’s size and current status, it should try to grow and maintain an engaged community.
- What’s the community size? Look for how many followers, subscribers, or group members they have on the various social media networks and the level of engagement.
- Is their community growing, and what’s their growth and engagement strategy?
Some projects have the budget to attract and engage community members, while others focus exclusively on organic growth and engagement or a mix of both.
Most importantly, the project must have a place for community growth and engagement in its plans.
Another aspect of the community is the number of industry partnerships and collaborations the project has developed.
These partnerships and collaborations prove a project’s value and enhance its brand appeal.
If other projects partner or collaborate with them, they have something valuable to offer.
However, note that some crypto projects announce useless and even fake partnerships.
Always verify any partnership claims on both projects’ websites and try to understand the nature and content of the partnership.
Lastly, look at the project’s private and institutional investors. These high-net-worth investors usually do their due diligence before investing in a project.
If you find prominent private and institutional investors’ involvement in the project, it’s a clue that it’s probably legit.
But do not blindly follow these investors because they, too, can be wrong.
You should only use their involvement to gauge how legit a project is because these guys don’t invest in outright or obvious scams.
9. The laws and regulations relating affecting its operation
Most cryptocurrencies are decentralised but not entirely outside the influence of international or local laws and regulations.
Take the Telegram (GRAM) token as an example. The SEC got them to halt the project development and return only 72% of the funds they collected to investors.
The token was considered an illegally issued security and thus cannot launch.
Another example is Ripple (XRP), still battling with the SEC in court. And many such cases are coming up.
Follow the development of crypto laws in your country closely and make sure you’re not taking blind legal risks.
Some questions you should be asking in this regard include:
- Under what jurisdiction(s) and law(s) does this project operate? What specific regulation(s) govern its operation?
- What are my country’s laws regarding cryptocurrency or this project? Some countries will require certain projects to comply with specific regulatory requirements.
- Is this a security, utility, or currency token? Each token type has legal implications, and security tokens are the most complicated.
Cryptocurrency fundamental analysis helps you understand the potential of a crypto project and whether it’s currently undervalued or overvalued.
This post discussed nine key factors to consider when performing a cryptocurrency analysis fundamental.
With them, you can confidently estimate the likelihood of a project becoming successful or profitable, especially as a long-term investment.