How to evaluate any crypto project using fundamental analysis

by Arthur · February 16, 2023

Fundamental analysis is the process of finding the intrinsic value of an asset, with the goal of determining whether the asset is overvalued or undervalued. This information can then be utilized along with technical analysis to decide whether to invest in or trade an asset.

In cryptocurrency fundamental analysis, the approach is somewhat different than that typically used to evaluate legacy market assets. Crypto assets do not have the historical data required because there is usually no history of income reports or income statements.

For cryptocurrency analysis, all available information about the asset must be sought through research which includes examining the use cases, the network, the team behind the project, monetization plans, the list goes on. By looking at the right set of factors, traders can determine the fundamental value of an underlying project before investing.

Here are the 10 steps that have been found to be most helpful:

Table of Contents

1. Read the white paper

Especially for long-term buy-and-hold investing, reading a token’s white paper is crucial. This is the document that provides an intentional and detailed overview of a project. A good white paper explains:

The project’s goals
The use cases and distribution
The team’s vision
The technology behind the token
Plans for upgrades and new features
How the token provides value to users

2. Consider the claims in the white paper

Be skeptical because the people behind projects can bend, or even break, the truth.

This happens more often than most people realize. For example, Michael Alan Stollery, CEO and founder of Titanium Blockchain Infrastructure Services, raised $21 million in an initial coin offering (ICO).

He later admitted to falsifying parts of the project’s white paper.

It’s important to ask some hard questions and get complete answers before putting your money into a project.

Some questions to consider:

Are the symbols really distributed as they promise?
Do they meet the expectations of the roadmap?
Do they invent a problem just to solve it?
What are others saying about it?
Are there any red flags?
Do the goals seem realistic?

3. Look at competitors

According to some industry sources, almost 40% of the cryptocurrencies listed in 2021 no longer exist.

It serves as an important truth investors must pay attention to; many projects – almost half and it may be even more – fail and fail completely.

Graph of deactivated cryptocurrencies on CoinGecko, by year listed. Source: CoinGecko

Examining a project’s white paper reveals the use case the cryptoasset is targeting and the problem it is trying to solve. One should then assess whether that use case is actually viable and desired.

Furthermore, it is important to identify competing projects and examine existing projects that this new one could replace, if successful. Bottom line: Smart investors are looking to see if this project is better than others or not.

4. Look at the team behind the project

A project is only as good as the team behind it.

The people offering the project must have exactly the right skills to make the project work. The white paper should have information about each member of the team, but doing some independent research can also be helpful.

Some questions to consider about the people behind any project:

Have they worked on other reputable, successful projects in the past?
What are their credentials? Are they experienced?
Are they recognized members of the crypto community and blockchain ecosystem?
Have they been involved in any dubious projects or scams?

What if there is no team? Then look to the developer community.

Find out if the project has a public GitHub. Check to see the number of contributors and activity levels. The more consistent development activity on a project, the better.

5. Look at calculations on the chain

On-chain calculations are available by looking at data on the blockchain.

Exchange inflow and outflow calculations. Source: Cointelegraph Markets Pro

The data can be obtained from websites or APIs – such as chain analysis, data charts and project reports – specifically designed to inform investment decisions.

Some of the data worth considering:

Number of transactions – a measure of activity taking place on a network. The more activity, the better.
Transaction value – how much value has been transacted over a period of time. The higher this number, the better.
Active addresses – how many blockchain addresses are active at any given time. Again, the more active addresses, the better.
Fees Paid – how demand for block space grows or shrinks for a token based on fees.
Hash rate – a measure of network health in proof-of-work cryptocurrencies. The higher the hash rate, the harder it is to succeed with a 51% attack.
Staking — the amount staked at a given time shows the level of interest, or lack thereof, in the project.

6. Look at tokenomics

Invest in projects that create useful tokens, otherwise the token may not be useful in the market.

Additionally, if the token is useful, it still needs to be determined how the market will embrace it, thereby making sense of the token’s price movements and allowing investors to profit on an ongoing basis.

Some questions to consider:

Is the token useful?
How do people get tokens?
What is the rate of inflation or deflation?
Was it an ICO asset?

7. Market value, trading volume, liquidity

Some of the most important analyzes are about the financial metrics of the token associated with a project, including:

Market value – the value of the network represented by the hypothetical cost of buying each unit of the asset. The “market value” provides insight into the growth potential of the network and is calculated by multiplying the circulating supply by the current price.
Trading volume – the amount of value that was traded in a certain time (daily, weekly, monthly). It indicates whether a token has enough liquidity.
Liquidity — an indicator that measures how easily a token can be bought and sold. The more liquid a token is, the easier it is to sell it at the current trading price.

8. Community

When a community gets behind a project, it tends to help the project’s token appreciate in value.

Social media, for example, can have a significant impact on a crypto asset’s price action. Meme coins like Dogecoin and Shiba Inu skyrocketed in price, partly due to social media excitement.

Recently, Solana’s BONK token saw a huge price increase as social media activity pushed interest levels in the asset to new heights.

NewsQuakes™ for BONK as social media excitement mounted. Source: Cointelegraph Markets Pro

A community supporting a coin is a powerful catalyst, so here are some questions to consider:

Is the community active and excited?
Are there many shilling accounts?
Is the sentiment good?
Are there many developers?

Remember that a token’s price goes up only if there is interest and market action. The more people talk about and invest in a token, the more likely its price will increase.

9. Marketing

There are currently approximately 21,910 cryptocurrencies for investors to choose from – that’s a lot of competition!

The team behind a project must actively market its token to stand out from the crowd, and industry insiders say it’s now harder than ever to stand out.

Additionally, with the continuous use of new tokens in the market, established cryptos are struggling to retain market share.

So the team behind the project must actively build brand awareness, gain customers and retain customers to improve sales and profits.

Some questions to consider before investing in a project:

Is the core team marketing the product well?
Do they have a dedicated marketing team?
Do they increase market share or not?

10. If the core product is available, test it out

This one can be a bit tough for someone who just wants to invest in the underlying token of a project. However, let’s say that one is considering an investment in Ethereum (ETH).

Since Ethereum is a decentralized global software platform, a functional, secured digital network technology will surely demonstrate how the platform actually works.

Knowing this can definitely help inform a potential investment decision.

After all, if the platform is difficult to use, time-consuming, or otherwise creates more problems than it solves, you may want to steer clear of investing in such a platform until those problems are resolved.

So there you have it – 10 steps to a good fundamental analysis to help evaluate the profit potential of any asset before any investment or trade.

See how Cointelegraph Markets Pro delivers market movement data before this information becomes public knowledge.

Cointelegraph is a publisher of financial information, not an investment advisor. We do not provide personal or individualized investment advice. Cryptocurrencies are volatile investments and carry significant risks, including the risk of permanent and total loss. Past results are not an indication of future results. Figures and diagrams are correct at the time of writing or as otherwise specified. Live-tested strategies are not recommendations. Consult your financial advisor before making any financial decisions.

All returns quoted are accurate as of 16 February 2023…