Digital assets exist in an atmosphere of rapid innovation and high volatility. Learning crypto fundamental analysis is an essential tool for traders and investors to help manage risk and optimize profits within the exciting cryptocurrency realm.
What is Fundamental Analysis for Crypto?
- FA provides a DYOR assessment tool for crypto investors.
- Helps determine over- or under-valued digital assets.
- Includes token metrics like utility and vesting schedule.
- Uses on-chain metrics like active addresses or amount staked.
- Looks at project metrics, such as team or roadmap.
What is fundamental analysis?
The definition of fundamental analysis (FA) is that it’s an assessment tool that investors and traders use to determine the all-around (or “intrinsic”) value of a company or asset. By looking closely at many different factors such as company leadership, economic conditions and industry health, fundamental analysts try to spot buy and sell opportunities.
- FA helps investors discover crypto assets that may be valued too high or too low.
- DYOR (do your own research) is a key component of fundamental analysis in crypto markets.
- The difference between fundamental analysis vs. technical analysis is that FA involves the bigger picture and includes as many factors as possible, whereas TA uses historical price and volume data to try and predict future trends.
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How to do fundamental analysis for crypto assets
Conducting FA for crypto assets involves some of the same tools used in traditional finance, such as examining the team’s background or looking at the financials. But with cryptocurrencies, investors also have access to Web3 data, such as on-chain analysis and token metrics.
- Transaction activity
- Active addresses
- Fees paid
- Amount staked
Project metrics involve examining information from online sources such as the project's website, their whitepaper and Github repository, and 3rd party sources. This data helps to determine whether a project has the experience, market fit, and vision to succeed in the long run. Fundamental project metrics may include:
- Whether code is open source or not
- Past achievements by the team’s leaders
- A roadmap that demonstrates growth
- A competitive analysis of the industry
- Whether the smart contract code is audited
Financial metrics in the traditional sense revolve around the company's financial backing, its revenue numbers and other financial data. With digital assets, financial metrics are not complete without researching tokenomics, which provide an overall view of a token’s long term viability. Token metrics include:
- Does the token have utility?
- Is a vesting system set up for the team and early contributors?
- Does it have a token burning strategy for deflationary supply?
- Is the token distribution centralized to just a few parties?
Most digital asset projects post their tokenomics information in a whitepaper, on their website, or in some other form of public documentation.
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Limits of fundamental analysis
- FA used alone does not provide data as far as past price performance and does not help traders to Optimize Trends.
- Data sourced through fundamental analysis may be dated.
- FA in the digital asset markets requires quite a bit of DYOR in areas that may be very unfamiliar to new crypto investors.
Most investors would agree that it’s better to combine FA with TA for a more balanced approach to cryptocurrency analysis.
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Disclaimer: The content of this article is for general market education and commentary and is not intended to serve as financial, investment, or any other type of advice.