How to conduct fundamental analysis in 2023

Muhammad Naeem

Blogger

Trading assets as volatile as cryptocurrency require some skill. Before investing in cryptocurrency, new entrants are always advised to conduct adequate research or due diligence. Investors can decide which tokens to invest in, how to avoid bear markets, predict different market trends, and get the maximum return on their investments.

Methods for analyzing cryptocurrency trends

There are three main methods to analyze cryptocurrency trends.

I. Fundamental Analysis

Fundamental analysis involves analyzing the available information such as blockchain transactions or project white papers about a specific digital asset. Fundamental analysis is a tool to determine the intrinsic value of a cryptocurrency or a digital asset.

II. Technical analysis

Technical analysis forecasts future cryptocurrency price movements by using a chart and the concept of past price patterns. Opening the charts of digital assets such as BTC or Ethereum trading against the dollar is the first step in performing technical analysis.

Investors can use technical analysis to assess how supply and demand for a digital asset influence its future price. Trend lines, indicators, support, and resistance are different tools used for technical analysis. Several cryptocurrency trading platforms such as PrimeXBT now include built-in technical analysis tools for the convenience of their users.

III. Sentiment Analysis

Sentiment analysis is yet another analysis method to analyze the market to make an investment decision. It is important to mention that crypto markets are highly impacted by psychology. Market sentiment considers investors' thoughts, feelings, and moods about a specific asset; by analyzing these factors, you can estimate the amount of fear or greed surrounding a particular cryptocurrency.

Fundamental Analysis in 2023

Fundamental analysis is used to determine an asset's intrinsic value (a number that represents what you would be willing to pay for it). We attempt to determine whether a digital asset is overvalued or undervalued by analyzing past and present data. The approach used in cryptocurrency fundamental analysis differs from that used to evaluate legacy market assets. Crypto assets lack the necessary historical data because there is typically no history of earnings reports or profit and loss statements. In cryptocurrency, all the information we need is sought out from research that includes on-chain metrics, project teams, whitepapers, and so on. Here are some tools used to carry out fundamental analysis of cryptocurrency:

1. Tokenomics

“Tokenomics” or simply token economics is the science that explores the relationship between distribution, circulation, and the total supply of a specific cryptocurrency. Learning about tokenomics is important before investing in any digital asset as it determines its price over time.

I. Market Cap.

Market Cap provides information about the potential growth of a specific token and is calculated by multiplying the circulating supply by the token's current price. If a cryptocurrency has a low market cap, it has more potential for growth but is more vulnerable to price swings. Investing in cryptocurrencies with a high market cap, on the other hand, is a conservative strategy that carries less risk, but also has less growth potential.

II. Coin Cap/Supply

Coin cap is just another way to evaluate the value of a cryptocurrency. The coin cap indicates how many coins are currently under circulation or have been mined and what is the limit of the total supply of the coin. For example, at the time of writing, Bitcoin Supply is at 19.30M and no new bitcoins will be released after the 21-million-coin limit is reached. Supply can be either inflationary or deflationary. A cryptocurrency is inflationary when the supply of coins is constantly increasing and new tokens are introduced through mining, staking, and other means. As the coin supply grows over time, the value of the coin decreases. To keep things in balance, the project's team employs a deflationary mechanism in which some of the coins are burned on the blockchain.

Ethereum Blockchain was introduced as inflationary in August last year and according to Cointelegraph, “the Ethereum network has been burning ETH at an annual rate of 773,000 tokens against the issuance of 603,000 tokens. In other words, ETH’s supply is going down by 0.14% per year.”

III. HODLers

The term HODL is an acronym that means “Hold On for Dear Life.” This strategy allows investors to avoid short-term losses due to the high volatility of cryptocurrency while gaining long-term appreciation. While conducting fundamental analysis, it is also important to keep an eye out for major HODLers of a specific coin.

2. Team-Goal-Competition

Not every cryptocurrency project has a team. If a project does have a team, make sure to dig into the members' characters, ambitions, and careers. When a project is supported by a community, the token associated with the project tends to appreciate. Social media influence can have a significant impact on the price of a cryptocurrency. The price of Dogecoin, for example, is heavily influenced by tweets from Elon Musk, the CEO of Twitter. What the coin wants to achieve in the long run as well as who its competitors are, are also important considerations when deciding whether or not to invest in a specific cryptocurrency.

3. Whitepaper

A complete study of a project’s whitepaper gives us an understanding of what the project wants to achieve, what are its capabilities and potentials, and how it plans to achieve those things. This gives us a better understanding of this highly volatile digital asset.

4. Marketing

One may be surprised to know how many cryptocurrencies are out there and the numbers are growing at an astonishing rate. The number of cryptocurrencies has more than doubled between 2021 and 2022, making it more difficult for new projects to stand out and differentiate themselves from the crowd. As a result, the project team must be fully aware of the market situation, its requirements, and how to gain market share.

5. Check if the token has any real utility

It is also critical to determine whether the token has any real utility. It is entirely up to the investors to determine whether they are truly able to use a specific utility using the token on the crypto project's ecosystem or whether these are simply false claims.

6. On-Chain Data

Users can examine blockchain transaction activity, all data recorded on the blockchain, how many coins are in circulation and held by wallets, and so on using On-chain data. Using this data, the user determines how decentralized a blockchain is.

Conclusion

Whether you are a bull or a bear, the fundamental analysis must be a part of your trading strategy. But you should be aware of its limitations as it cannot guarantee 100% success.