How to Conduct Fundamental Analysis - Reading time: about 4 minutes
Before delving into crypto, it is essential to develop a framework to evaluate potential trades and DYOR. Assessing core value propositions, functionality, community size, uniqueness, and market opportunity are a few of the many areas you can explore in great detail.
Due to cryptocurrencies’ volatile nature, profitable market plays surface every day — but not without inherent risk. Be sure to have stablecoins in your arsenal to deploy at a moment’s notice to capture market opportunities that present themselves.
In This Article |
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Getting Started
Familiarizing yourself with the market and learning about the leading and emerging currencies along with their varying market sectors can help you build a resilient portfolio to weather the inevitable storms ahead.
Once you’ve narrowed down your crypto prospects, start by checking online to see if the project has released a white paper, as typically these provide a roadmap and tokenomics for the cryptocurrency and details regarding the team developing it. They also outline how the cryptocurrency works and unpack the unique value propositions.
The following are some high-level questions you can ask yourself prior to your next crypto purchase to assess its quality early in the research process:
- How deep did you have to dig to discover this currency? Do they have a strong marketing presence?
- Is the token founded on sound models of tokenomics? Do early investors hold a substantial proportion of the total supply and if so, are there strategic vesting periods in place?
- Do the team and advisors excite you? Have they had success before? Are they involved with the community on Twitter or appearing in technical conferences?
- What have you heard on the grapevine? What is the current market sentiment towards your pick and is the news coverage positive or negative?
- Does this cryptocurrency have a strong community that believes in it or is the support base primarily driven through speculation?
- While reading the whitepaper did you get the impression the team has a pipe dream that claims its token will do everything? Coins that promise the moon may not have the underlying capital, may be based on underdeveloped or unreliable technology, and likely do not understand the trade-offs between specific algorithms and protocols.
Given the sensitive, unregulated nature of the crypto space coupled with common, dramatic price fluctuations you should come prepared. Stay on top of the market with research and analysis to stabilize your entry and hedge exposure during volatility.
If you want to analyze your targets even further, you can ask yourself the following questions:
- Are these tokens well established or in their infancy?
- Are these projects disruptive or an alternative to an existing project?
- Do they have similar levels of risk? If so, am I comfortable with that?
It’s up to you to determine your values, risk appetite, and chosen level of diversification — strive to find your happy medium.
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Assessing Risk Factors
Familiarity with the market and diversifying over myriad industries is a great start, but assessing the outlook of a potential purchase can go far beyond qualitative analysis. What are some other ways you can evaluate a cryptocurrency?
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Market Cap
One of the first steps when assessing cryptocurrency is by understanding its market capitalization, which reflects the current market share. This can be done on Coinmarketcap or Coingecko, among several other services.
The consensus among the crypto community is that the bigger the market cap of a coin, the fewer risks it may pose. On the flip side, those with smaller market caps can represent significant opportunities but may be associated with a higher range of volatility.
Market cap can be calculated by multiplying the current market price of a coin or token by the total circulating supply.
Market cap = Current Price x Circulating Supply
You can use the market cap of a token or coin as a tool in your crypto toolbox to roughly forecast what the market cap will be a year or two from now. However, it is vital to keep in mind the protocols surrounding token production and circulation.
This can be significant as if you expect a 20% growth in market cap over the next two years but the total emissions continue to outpace that number, the value of the coin and its long-term potential will inevitably decrease.
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Transactional Volume
You’ve found a solid cryptocurrency and it has a healthy market cap but its transaction volume is at ATLs. Analyzing the transactional volume of a cryptocurrency can illuminate how holders use a cryptocurrency.
Tread carefully with cryptocurrencies exhibiting low, infrequent, or irregular trading activity and volume as this could indicate a lack of legitimate use-cases, insufficient community support, low liquidity, or possibly a dead project.
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Total Development Activity
One of the more advanced tactics when analyzing a cryptocurrency’s growth potential resides within public code repositories.
Conducting an evaluation of how organized the repository is, the total number of contributors, and how frequently serious problems have been reported offers invaluable developer competency insight. The total number of active contributors is also a significant metric to measure progress as a lone developer resolving issues or bugs is not sustainable and could lead to an abandoned cryptocurrency.
For those with an in-depth understanding of well-written, future-minded code, exploring the code and reviewing how well it's documented, checking if there is a robust test environment, and observing if the code is designed in a logical and precise manner is a sure-fire way to get into the creator’s head.
You can determine the developers’ competency and commitment based on the quality of the code and conclude whether this is a viable project.
Once you’ve conducted thorough due diligence, you will want to familiarize yourself with the basics of trading on ProBit Global if you haven’t done so.
