How to perform fundamental analysis?

We’ve all bought tokens at stupid valuations, no one can be surprised. It’s the tuition you have to pay in the crypto space, so for many years I’ve been addicted to this research and made me a better crypto investor. I hope that in this article, I can help you avoid some losses and take some detours. The following is my method for fundamental analysis.

Fundamental analysis seeks to determine the intrinsic value of an asset, which is an objective measure of its value. This is how you should find long-term beliefs about an asset. A good FA can help you withstand the volatility of cryptocurrencies over the long term. I’ll walk you through my own investing process and how I did it. This helped me build my early beliefs in projects like ETH, AVAX, LUNA, LINK, and more recently POKT, MAGIC, and GMX. 

I divide fundamental analysis into three categories: 1. Project analysis 2. Financial analysis 3. On-chain analysis 

Project Analysis

This is where I usually start. The white paper is the most important part of a project, and I will read it first. I am amazed how many people are pouring huge sums of money into crypto projects without reading the whitepaper. 

The white paper should outline the following:

  • – Problems being solved
  • – explain their technical solutions
  • – Use of Tokens
  • – Token Economics
  • – Background information of the team 

This white paper alone provides a solid foundation for your continued analysis.

A good white paper makes you want to have the urge to learn more about the project. Go deep into the team, really dig deep, check the team’s academic references, check their LinkedIn for their experience so far.

You have to decide if the team is there for the long term, or to build an MVP (sometimes they don’t even get that far) and use you as an exit fluid. These people are responsible for delivering the project, and they need to have enough enthusiasm.

For anonymous teams, you can still gain insight into their online status. What did they write on social media or elsewhere?

If they are developers, please check their GitHub contributions. DM them and see if they are willing to answer any questions. Double check the roadmap. Take a look at the timeline to assess whether it is the right time to deploy funds. If a project doesn’t deliver its main product within two years, there may be no rush to invest. Use the roadmap to assess whether teams are delivering on time or achieving their milestones. Transparency in this regard is also important.

Then, start doing competitor analysis.

Who are the pioneers in the industry and how does the market cap compare? What are the advantages of this protocol compared to competitors? Are they successful in attracting users? Why would users use this project instead of a competitor’s solution? 

Then there’s social media analytics

How does the project communicate on social media? Is their marketing in place? Have they cultivated a strong community willing to help with marketing? Are there a lot of social activities related to the project? Join Discord and Telegram and get a feel for the project community. Are they discussing the complexity of the project in depth? Or is it just producing FOMO sentiment for no reason? Has the community made great memes? Meme demonstrates a passionate and strong community and helps spread the narrative of the project. 

CT is one of the best and worst places to do project analysis. Compiled tweets are always worth reading to see if you missed any key details in your own research. 

What does UI/UX look like? This is like a subjective analysis category. But you have to decide if it’s a good experience for the user, if the interface is intuitive and easy to use without someone going to Google “how to use _______”.

Yearn in 2020 VS Yearn in 2022

68ba4fc5c3acc68fcfc35828a82f9bf.png

01bd147a1d2a4df8ab04d5945b3fee7.png

financial analysis

On the second level, let’s focus on financial metrics. I think it goes without saying that when trying to assess whether something is fairly valued, you should look at the market cap and fully diluted value of the project. This is where most people start. However, there are still many retail investors who do not. 

In 2021, we have a lot of retail investors buying Shiba near new highs, and they are yelling “the price will hit $1!” because they don’t understand the market cap. For reference, Shiba currently has a circulating market capitalization of $16 billion at a price of $0.00003025.

2edb3c0baf708491340341fc3b472ee.png

Everyone likes to say that FDV is the meme of the bull market, sometimes it is, but sometimes it really isn’t. Check out the Solana dApp, they provide valuable experience with FDV. If the FDV of a token is seriously out of sync with the current situation, don’t go in and buy it, imitating the Solana dApp in the crazy FDV has no good results.

Market capitalization can provide misleading valuations if you don’t account for liquidity. Liquidity is a measure of how easy it is to buy and sell an asset.

Which exchanges are the assets listed on, or how liquid is the Dex? 

Very illiquid assets can be very dangerous, as prices can change dramatically if large holders decide to cash out. 

For example Squid:

14c66ccb4d5a66918342507c15a9d51.png

Token Economics, Token Economics, Token Economics! Say important things three times. Token economics is the economics of token supply and demand.

Supply and demand drive the value and price of cryptocurrencies. The higher the demand relative to the supply, the higher the price. 

Do products need tokens to work? What is it used for? More real-world use cases means more users and more demands. Reading the whitepaper might give you some answers about the coin.

In some cases, the project may have changed from the original white paper. Check out the blog and do a Twitter search to see if anyone has written about token economics. At times, it is difficult to find the time of issuance, distribution and release rate of tokens. This is usually not a good sign. Not knowing your team’s potential supply sales can cost you some big losses in the short and medium term. You need to know the annual inflation rate for a project each year. New tokens entering the circulating supply need to be absorbed by the market.

If stakers earn a lot of tokens, then there can be a lot of seller pressure. $MIR and $ANC have around 200% inflation in their first year as developers look to bootstrap dApps and attract liquidity. So prices are always trending down in the short term.

caa82932e756a9ba15c7239d1471ba9.png

2f87aa6c2f41b9d776984549c6ab26f.png

This doesn’t work for projects without products, but for real-time Layer 1, dApps, and infrastructure.

You can use Tokenterminal to get:

  • – Income from the agreement
  • – P/E and P/S for protocols and dApps 

You can then apply more traditional stock analysis tools to help you measure whether you are objectively overvalued or undervalued based on current earnings. If a protocol clearly has huge profit potential, is showing huge growth and has a very low P/S, then it could be a solid long-term investment.

cadfd6d845b7bc39074c7c5bd78267c.png

You can even use these numbers to help model your discounted cash flow. This is a popular stock valuation model that discounts the current value of a business by the future cash flows the company can generate. Because these two interest rates are key – the expected growth rate and the current discount rate. Based on the pull of each factor, determine the cash flow and arrive at a fair valuation. 

Here is an example of a discounted cash flow model trying to find out what the minimum price of $1 ETH is.

03b6f53c04fae1433e8e252be1ab314.png

The model shows $10,200 per ETH, which suggests that Ethereum is severely undervalued.

Obviously, this model does not take into account future changes in Ethereum, how L2 affects demand, etc., but it is still another useful deployment tool when evaluating assets. 

About On-Chain Analysis

Finally, I try to find out what’s going on on-chain. 

Platforms like Glassnode, Nansen, and DuneAnalytics can tell you:

  • – Number of addresses and active addresses
  • – Number of addresses whose balance exceeds a certain amount
  • – Number of long-term and short-term holders
  • – Exchange Supply
  • – Whale wallet address activity

……

What I’m trying to say is, try to find any reason that might not be a good time to buy. For example, if most of the circulating supply has been moved to exchanges recently, that could be a sign that people are planning to sell. 

You now have a wealth of information about projects and tokens that can help you decide if this is a good long-term investment. I compiled all of this into a combination of documents and tables so that I could have all this information in one place if I needed to refer to any of them. Don’t try to keep all this information in your head. Write it all down. You’ll want to reassure yourself about your investments at different times, especially when prices plummet. 

I would also like to say that I invest a lot of time researching projects just to decide not to invest.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-to-perform-fundamental-analysis/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2022-03-22 09:47
Next 2022-03-22 09:49

Related articles