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Fundamental Analysis of Cryptocurrencies

Updated on :  

08 min read.

Cryptocurrency is a highly popular yet volatile digital asset. It is difficult to anticipate the prospects of this asset by looking at its present demand, return, or market valuation. Digital currencies can bring in monstrous returns and witness massive, sudden slumps. 

 The most popular of these, Bitcoin and Ethereum, have also seen unpredictable downfall and upwards trends in valuation over the past years.

So, to measure the actual worth of a cryptocurrency, you need to undergo a fundamental analysis of cryptos. It focuses on measuring a cryptocurrency’s intrinsic/fundamental value, which can guide you to know whether it is worth buying or investing in.

Want to know about the fundamental analysis of cryptos in detail? Read on.

Why is fundamental analysis of cryptocurrency important?

Fundamental analysis is a way of measuring a cryptocurrency’s risk and future potential. It examines whether a digital currency is undervalued or overvalued. By understanding these, you can determine whether you should invest in them. This way, you can make strategies after being thoroughly informed about the crypto.

Factors to be considered for fundamental analysis of a cryptocurrency

Here are three parameters based on which you can understand the prospect of any cryptocurrency. Find all these thoroughly discussed below:

  • Blockchain metrics
  1. Hash rate

It is quite difficult and tedious to decipher the raw data of a blockchain. However, you can get your required information about blockchain data from major APIs (application programming interfaces) to know real-time information about a cryptocurrency.

Following are some actionable parameters of this blockchain metrics that you need to look for while doing a fundamental analysis:

Hash rate is the overall computational power incorporated while calculating proof of work (PoW) and minting a coin. The higher this hash rate value is, the more a cryptocurrency is stable, secure, and powerful. More miners stay involved in solving its hash calculations to get incentives.

2. Active address

A low hash rate may indicate that investors are negative about the prospects of their cryptocurrency. In these circumstances, presuming the risk, miners leave that cryptocurrency network due to their less chance of profitability. This can have a detrimental impact on the overall performance of a digital currency.

Active addresses indicate the number of people transacting on the blockchain network within a certain period. You need to see this value of the active address of the cryptocurrency over a day, week, month, and year to know whether it increases over time. An increase in its value demonstrates that the cryptocurrency has significant demand, and people find it useful.

3. Transaction values

Transaction values reflect the extent of a cryptocurrency in circulation at a given time. You need to choose a cryptocurrency for investment having a high and consistent transaction value because it shows that users have confidence in that digital coin.

  • Project Metrics

Project metrics can guide you in evaluating the overall competency of a cryptocurrency. These parameters include factors such as the utility value of the digital currency. Following are some parameters that you need to check while deciding its strength before making your investment:

  1. White paper of the crypto

This white paper of a digital currency records information regarding the reason for introducing it. Here are some aspects you need to evaluate to understand the intrinsic value of this currency:

  • Use cases
  • Integrated blockchain technology
  • Upgrades and latest features
  • Information about the team
  • Economics regarding the token

Apart from these white paper details, you also need to follow customers’ reviews to understand whether the cryptocurrency succeeds in meeting its purpose comprehensively.

2. Utility value and demand 

A cryptocurrency needs to have a utility value and different use cases. All these make customers attracted to its platform thereby drawing in new consumers.

Further, while choosing a cryptocurrency, you also need to examine its demand and growth in users against the overall supply.

3.Cryptocurrency road map

You also need to find out the road map of the digital network to know whether it has well-measured plans to enhance overall features and use cases in future. This way, you can understand the milestone and projections of the developers.

  • Financial metrics

Apart from all these qualitative values, you also need to measure quantitative aspects of a cryptocurrency to know how strong-footed the digital asset’s future potential is. By analysing the following financial metrics, you can make an informed decision about your investment in a cryptocurrency:

  1. Market cap

Market capitalisation can help you have a rough idea about the overall strength of the infrastructure of its blockchain network. This market capitalisation is the multiplied value of all the coins in circulation with the price of one coin. 

However, a market capitalisation does not signify that a crypto is performing well. You also need to understand the number of transactions it succeeds in attaining on a regular basis. This transaction demonstrates its overall performance and demand.

2.Liquidity

High liquidity shows that a significant number of users purchase/sell the cryptocurrency on the blockchain network. You need to see whether there is an upward momentum in the transactions and overall trading volume of the asset.

3. Overall currency in supply

It is also an important financial parameter to understand the potential of a cryptocurrency. It is the total number of purchasable coins in supply. Nevertheless, since the coin is minted continuously, the supply also increases.

The overall demand and price of cryptocurrency are significantly volatile. Therefore, before you decide to invest in Bitcoin, Ethereum or other altcoins, you need to analyse the overall strength/weakness of the cryptocurrency through the lens of the factors mentioned above. This way, you can effectively compare different digital currencies and choose one to stay protected against market price fluctuations.