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In a world where most are doing speculative investing in cryptos based on news, social media, and Elon Musk’s tweets 😜, talking about how to do fundamental analysis of cryptocurrency may sound weird.
However, if you see cryptocurrency as a long-term wealth creation opportunity and not a short-term get-rich-quick scheme, knowing the fundamentals of the coins you invest in is essential.
There are many similarities and a few differences in the fundamental analysis of stocks and cryptos.
As of today, there are more than 8,000 cryptos listed on https://coinmarketcap.com/.
Coinmarketcap is a crypto fundamental analysis website where you will find almost all the details of every cryptocurrency; it’s like https://www.moneycontrol.com/ for stock analysis or even better than that.
Finding the right crypto to invest that will become a huge wealth creator in a few months is almost next to impossible in this rapidly changing and highly volatile market.
Many cryptocurrencies lose their value every year because of bad fundamentals leading to heavy losses to their investors.
However, a few traits might help you find a diamond in the dust if you are lucky.
We will discuss a few characteristics of promising cryptocurrencies in detail; you can refer to this article as a crypto fundamental analysis checklist in the initial research of any token.
#1. Consider each Cryptocurrency as a Startup
Innovation and problem solving are the basis on which any startup is built.
Consider any new cryptocurrency as a startup and understand what problem it is trying to solve.
Crypto made just for fun without any product-market fit will not survive long.
What problems does Bitcoin solve?
Due to the heavy printing of fiat currencies, inflation is shooting up, and cash is losing its value, so Bitcoin solves the problem of the store of value.
Gold is also a good store of value, but Bitcoin holds the upper hand since it’s easy to buy, sell and store.
What problems does Ethereum solve?
Ethereum solves the problem of centralization or involvement of the third party in any transactions.
It replaces the third party with smart contracts and decentralized applications dApps.
From these examples of the top 2 cryptocurrencies, we can understand that for any token to become big, it should solve a real-life problem like a promising startup.
#2. Token Market Cap
Market cap is the first parameter to look for any token. The ones with a high market cap are the ones that have proven their usability and have a use case and intrinsic value.
These are the bluechip tokens with significant adoption, but that doesn’t mean that they cannot fall by 50% any day.
Crypto space is extremely volatile and even big tokens can see heavy falls anytime.
Some investors might believe that a higher market cap guarantees good adoption and network of that token, whereas others might view a small market cap haves more growth potential.
However, the market cap should not be the only criteria to invest in any token.
#3. Token Circulating Supply
Circulating supply is the number of tokens in circulation out of the total supply.
The circulating supply can increase and decrease depending on increased mining and tokens burned, respectively.
More coins in circulation is a good sign.
The tokens with a limited supply like Bitcoin are known as deflationary tokens; Bitcoin can have a max supply of 21 million tokens, out of which 90% is already in circulation.
Every cryptocurrency should have a dedicated website where one can find all the details about the Business, Developer, Whitepaper, Resources, Community, Social Media profiles, Events, etc.
You can find this website link on https://coinmarketcap.com/, as shown below.
Please go through the website and resources of the token you are analyzing and try to understand the genuineness and problem they are trying to solve.
For good crypto, the project whitepaper should be readily available and accessible.
You can find the whitepapers for significant projects on https://coinmarketcap.com/, as shown below.
Whitepaper gives more detail from the developer’s point of view.
The whitepaper is where you can understand what the team is trying to develop within the timeframe and what is going to be the development path.
It should contain all the data points along with use cases of the project, and if it doesn’t, it’s better to stay away from the token.
#6. The Team Behind The Project
Team research is the core of the fundamental analysis of cryptocurrency.
Try and access their qualifications, previous work experience, and social profiles, and interview their views about the project.
An average idea executed by an excellent team is always better than an excellent idea executed by an average team.
Even though the idea is excellent, if you are not confident about the team, it’s better not to invest in it.
You need to understand whether the team members are trustworthy or have been lifted on social media just for this project.
#7 .Social Media
Track the core team, most notably the founder on social media platforms.
How active they are on various social media platforms and how often they share the critical updates and progress of the project.
Do serious investors and prominent handles follow the founders?
Also, check for the token’s community profile on the social media platforms and their activity.
Are the community members passionate about the project and are active on Twitter, Telegram, Discord, or other platforms?
Attend the community AMA events or sessions to understand better and even ask questions directly to the team if possible.
You can find the holder’s information quickly on https://coinmarketcap.com/, as shown below.
You can see on the right-hand side, the holder’s information for Bitcoin, Top 10 holders own just 5.34%, and Top 100 holders own 13.7% of total bitcoins.
That is because Bitcoin is well spread among investors and is not concentrated or controlled by a few team members.
Now let’s see the same holder’s information for one of your favorite tokens 😜 Shiba Inu.
As you can see, the Top 10 investors hold 64.6%, and the Top 100 have above 80% of the coins, which shows how concentrated this coin is with few investors.
It’s always better if the token is spread across more investors and not be controlled by a few.
If you are planning to invest in cryptocurrency, it is important to understand how to do fundamental analysis of cryptocurrency.
Fundamental analysis is an essential part of cryptocurrency investing. It is simply evaluating a cryptocurrency based on its merit, a merit not found in price speculation.
Cryptocurrency is a high-risk, high-reward investment; it’s important to take calculated exposure in this asset class.
At this point, I would suggest taking exposure of only 5-10% of the portfolio in cryptos.
Through this article, I have shared some of the essential points I go through before investing in any crypto project, and I hope this will help you in your analysis.
Let me know your thoughts.
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