Are you interested in investing in cryptocurrency but don’t know where to start? Too much volatility? Too complex to understand? And don’t have a model to value a crypto token?
Whether you are a crypto beginner or a seasoned investor, don’t miss out on this beginner’s guide to a basic crypto fundamental analysis!
Crypto Fundamental Analysis: Part 1
This step-by-step guide shows you the essential techniques for doing a fundamental analysis of a crypto project, and it will be divided into two parts. Part 1 includes:
- Locate Our Crypto Niche
- Examine Crypto Whitepaper
- Compare Market Capitalisation
- Consider Crypto Legality
And remember to check out “Cryptocurrency Fundamental Analysis Part 2” for more tips!
Find Our Niche In Crypto
Okie-Dokie, where should I begin with? Searching cryptocurrency on Google and it seems there are numerous “gold mines” everywhere. How do I know which one to pick?
No worries, it is just like traditional investing – Find out your niches and interests at the beginning. Why? This helps you to narrow down your target because we don’t have endless time and effort on every project we come across.
Here are the fields that you can check out:
- Layer 1 chains
- Layer 2 chains
- DeFi
- NFTs
- Game-Fi
- Sustainability
Once we have chosen a field to focus on, try to find out the answers to these questions to understand a particular scene:
- What are the narratives in the space right now? What are the most talked about topics right now?
- What are the problems faced by the field? Any new regulations? Any new technical updates?
- Which are the leading projects in the field?
- Are there any new competitors entering the space?
These questions help us identify the potential trend that has yet to be discovered by the public.
Take NFT as an instance. We have seen that creative jpeg art can be put on NFT sales for a large sum of ETH. Bored Apes Yacht Club, valued at 1.2 billion US dollars as of writing time.
Then, what will be the next utility of NFT? Event ticket NFT? Game items NFT? Sustainability NFT?
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Crypto Whitepaper: Take A Through Look
A qualitative assessment of a cryptocurrency can provide insights into how well a project’s development is doing, and the crypto whitepaper is the right place to start with!
Study the whitepaper as the first step of our analysis, digging into the information about how the particular crypto works and why it is worth our investment. And the crypto project’s white paper can be found on the project’s official website or launchpad platform.
What Is a Crypto Whitepaper?
A whitepaper is a document that outlines a crypto project’s concept, roadmap, and how it plans to grow in the future.
Akin to traditional investing, newly released cryptocurrency comes with a whitepaper where we will find all information about the project, including:
Mission: This section tells what problems it plans to solve, the solutions with the project’s detailed description, and a market analysis justifying the need for the project.
Technical description: This is the backbone of a crypto whitepaper. This section provides the technical explanation behind the project.
Blockchain: Which blockchain network the project built on is crucial because it is the growing ground of the project.
Roadmap: This is the project’s development plan with a defined timeline.
Team and Advisors. This session introduces detailed information about the project members. The following questions can be used to evaluate the project’s team:
- Has any member worked in the past on respectable projects?
- What qualifications do they have?
- Are they trustworthy in the blockchain ecosystem?
How can we evaluate the project team? We can check them on LinkedIn, the official website, and open-source project platforms like Github, Bitbucket, and Google Cloud Source to ensure the team has the genuine expertise to kickstart the project rather than solely focusing on profiteering from crowdfunding.
The developers’ community is another crucial factor that determines a project’s success. Why? Because developers are the backbone of a project! Without experienced developers, a blockchain project can’t go far!
Here are a few suggestions to examine the developer community on open-source project platforms:
- How many active contributors are in the community?
- Do the team members have the necessary skills to complete the task?
- Have they completed any successful projects similar in nature before?
- Are they currently employed?
- Are they related to any questionable ventures or deceptive schemes?
Tokenomics. This is the part that includes token information:
- Total amount of tokens
- Pre-sale price
- Tokens Distribution
- Details on claiming tokens
- Remedies for the unmet funding target
The first thing we should notice in tokenomics is the Supply Mechanism. Whether the token is inflationary or deflationary decides how we invest in those projects.
- Inflationary tokens encourage public participation as the tokens are kept at a low price for a lower entry barrier to attract investors. It is usually practiced in the beginning phase.
- On the other hand, deflationary tokens are favourable for long-term holders because the price is driven by a decreasing supply and an increasing demand with broader adaptation.
Take Bitcoin(BTC) as an example. Only 21 million BTC will ever be produced, which means the supply is fixed. Given the halving BTC rewards event happening every four years, plus the lost coins no longer available in circulation, BTC is deflationary with the supply decreasing with time.
And don’t forget to check token distribution! This shows how much and how long the team will hold the tokens. And usually, a lock-up period applies to the team to avoid rug-pulling. So the team can’t move and run away with the fund.
Competition: Competitors may kill our investment. So remember to check the competitor analysis in the whitepaper. While a project may seem appealing, if other cryptos are more impactful and widely used, it may not last long.
So, it is better to ensure the chosen project has an exclusive advantage in competing in the market.
Compare Market Capitalisation
Market capitalization is an essential metric in examining a cryptocurrency. It’s the total worth of currency expressed in US dollars, implying how much space the project value can grow.
Market Capitalization = Circulating Tokens x Current Market Price
Here is the benchmark for a market cap according to Coinbase:
Large-cap cryptos
- Market cap of more than $10 billion
- Lower risk and higher liquidity
- Include Bitcoin and Ethereum
Mid-cap cryptos:
- Market caps between $1 billion and $10 billion
- Higher risk but with a significant potential upside
Low-cap cryptos:
- Market cap of less than $1 billion
- The greatest risk with extreme volatility
- Most prone to market sentiment, news, or rumors.
Among the three types of market capitalization, mid-cap cryptos are considered a balanced option between risk and potential upside.
Even so, remember that market capitalization is inadequate on its own to be a valid signal. Why? When other indicators, such as liquidity, are not taken into account, market capitalization can provide misleading valuations under market manipulation.
Crypto Legality: Is It Legal To Invest?
Besides finding the hidden gems, don’t forget to ensure our legal responsibility to join those projects.
According to the Securities and Futures Commission (SFC) of Hong Kong, there is no specific legislation or regulation of cryptocurrencies or ICO in Hong Kong. However, it does not receive legal status either. We need to consider the legal risk when we decide to put money into new crypto projects.
Additionally, some projects have eligibility for specific regions. Make sure you are eligible to participate to avoid legal issues!
Summary: Don’t Forget The Risk!
Last but not least, before we end this chapter of our research journey, there are two facts we need to know:
- Almost all cryptocurrencies are still in the early stages and have limited real-world applications, so there is no track record to date.
- Cryptocurrencies’ value relies on speculations on the future’s utility. So, there is no guarantee of returns on investment.
Don’t go all in on a crypto project since it is exceptionally risky! Risk management is vital in crypto investing because it ensures you survive in the market. Stay educated and alert! If you lose everything, your game is over!
Besides, remember to check out “Cryptocurrency Fundamental Analysis Part 2” for more fundamental analysis tips on cryptocurrency!
Investment involves risks. The information on this website is for educational purposes only and should not be construed as investment advice or recommendations. Therefore, it should not be considered as the basis for making any investment decisions or taking any investment actions.
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