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Fundamental Analysis for Crypto: Does It Make Sense?

November 19, 2021 Single Broker Academy

If you have ever read any educational materials about markets, you will be familiar with the terminology. Even a newbie trader knows that there are two critical approaches to market analysis: fundamental and technical. However, the relevance of the fundamental analysis for the cryptocurrency market is questionable. Let's find out whether FA makes sense when predicting cryptos' direction.

Trading

If you have ever read any educational materials about markets, you will be familiar with the terminology. Even a newbie trader knows that there are two critical approaches to market analysis: fundamental and technical. However, the relevance of the fundamental analysis for the cryptocurrency market is questionable. Let's find out whether FA makes sense when predicting cryptos' direction.

Fundamental Analysis: Essentials

Let's begin with a general description of the FA concept. Fundamental analysis is a type of market analysis that uses internal and external, macro- and microeconomic factors that help analysts, traders, and investors to define whether an asset is over- or undervalued. Unlike with technical analysis, the fundamental one uses present data. Technical analysis relies on an asset's past movements.

What Does Fundamental Analysis Consist Of?

While technical analysis is based on indicators, chart and candlestick patterns that work for most securities, fundamental analysis includes different metrics for each market.


For instance, when analyzing stocks, analysts consider a company's data such as earnings, future growth, revenues, price-to-earnings (P/E) ratio, return on equity, and profit margins. Internal company events such as mergers and acquisitions or CEO dismissal will define how strong the company will be in the near future. It's also essential to analyze the industry in which the company operates. As for the fixed income market, dividend yield is one of the fundamental analysis metrics.


If we need to analyze fiat money, we will look at global economic and political news. For instance, the US dollar and Japanese yen are safe-haven assets that rise in value in times of global economic uncertainties. The monetary policy of a central bank will define the direction of a domestic currency. The economic calendar is full of economic releases that determine how strong a state's economy is.


What if we want to apply fundamental analysis to the cryptocurrency market? What metrics can we consider? Is it even possible to find any fundamental factor that would define the direction of a cryptocurrency?

Fundamental Analysis for Cryptos

When talking about cryptocurrencies, the first words that come to mind are decentralization and automatization. Do cryptocurrencies depend on any of the factors mentioned if they are decentralized? There is still no single definition for cryptocurrencies. Some countries consider them commodities. Others believe they are securities. Moreover, the period of investing affects the factors you should consider to define the price direction. It makes it more complicated to define which fundamental factors could affect a cryptocurrency value, but we will try.

Project

When talking about stocks, we consider internal company events. Although cryptos are decentralized, they are created by a team. Not every crypto creator is known, but for most projects, it's easy to find information about the team behind them. Expertise, reliability, and experience can tell a lot about the possible success of a cryptocurrency.


Whitepaper i's the first thing every article tells us about, but we have decided to put it a little bit lower on our list as it's time-consuming. If you are considering a short-term investment, it won't be the first thing you look at. A whitepaper reflects the goals of a project, its purpose, and technology. Looking at a whitepaper, you can predict how successful the project will be. Of course, an evaluation of this information is subjective as you won't find predictions like "this cryptocurrency will skyrocket" there. However, if you analyze the information wisely, you will find interesting data.


A whitepaper can reflect another factor that can affect the attractiveness of a cryptocurrency - supply. If a crypto's supply is limited, it means it can counteract inflation. At the same time, it may be less attractive for newbie investors.


Using a whitepaper, you can compare a cryptocurrency to its competitors. You can define projects with similar goals and technology and see how successful those projects are, and the obstacles they met.

Financials

Although a cryptocurrency isn't a company, there is financial data that can be considered when evaluating whether the crypto is under- or overvalued.

  • Market capitalization. Market capitalization shows the total value of a crypto in circulation. Assets with high capitalization are considered more stable, while coins with lower capitalization may have growth potential.
  • Liquidity. You can define how liquid a cryptocurrency is by measuring the spread between the bid and ask prices. The narrower the spread is, the higher liquidity is. High liquidity shows that it’s easy to buy and sell cryptocurrency; thus, it shows that it’s quite popular.

  • Blockchain. As cryptos are based on blockchain, we can use blockchain data to analyze the crypto market.

Hash rate is widely used to define security and miners' interest in cryptocurrency. A hash rate shows the speed of block mining. A higher rate signals a higher chance of obtaining a block reward. Decreased hash rates could indicate that miners have lost interest in a cryptocurrency. When miners turn away from a crypto asset, it may mean the cryptocurrency is no longer profitable.

Fundamental Factors for Short-Term Analysis

All the factors mentioned above are more relevant for long-term investments. However, as we said at the beginning of the article, you can consider long- and short-term investment approaches. If you care about the price direction in the near future, these fundamental factors may be more applicable for you.  

  • Crypto regulation. Crypto regulation is a vital factor that defines the crypto market direction. As soon as one country permits or forbids cryptocurrency operation, authorities close crypto exchanges or open more platforms for cryptocurrency applications, the market moves. However, these events affect the market movements shortly.If one of the giant companies accepts cryptocurrencies, the price reaches new highs. It happened with Bitcoin - when PayPal allowed British citizens to buy and sell Bitcoin, Ether, Litecoin, and Bitcoin Cash through its wallets online or on the mobile app, Bitcoin set a new all-time high.
  • Rumors. As it’s not a secret that the crypto market is highly volatile, fake news, speeches by key personalities, and social network posts can significantly drive prices. To be able to predict the price direction of a cryptocurrency, it's worth checking the news and looking for price predictions by cult figures such as Elon Musk. They can make the cryptocurrency either skyrocket or plunge. A purchase of significant sums of cryptos by big companies is another factor that can push the price in a short period. For instance, in December 2020, MicroStrategy bought Bitcoin for $650 million. As a result, the BTC price rallied.

Final Thoughts

Although fundamental analysis is still a questionable approach to analyzing the potential of the cryptocurrency market, we can't skip it. There are fundamental factors that can help you predict the price direction in the short term and cryptocurrency prospects for long-term investments.

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