Trading 101: A Guide to Cryptocurrency Fundamental Analysis
This article will help broaden your understanding of Fundamental Analysis (FA) in cryptocurrency markets and how to trade efficiently with Bitget analytics.
Defining fundamental analysis
The more familiar approach adopted by traders in traditional financial markets is Technical Analysis (TA), which relies solely on historical price data of an asset to forecast future price movements. However, in the crypto markets, this strategy has to face challenges from:
(i) High Bitcoin’s market dominance
There have been times when Bitcoin’s market dominance fell to over 32%, meaning Bitcoin market capitalisation accounts to at least one-third of the total crypto market capitalisation and exerts profound influence on all other digital currencies. Technical analysis for individual assets must take into account fluctuations in Bitcoin prices, thus making it more troublesome.
(ii) The innovative characteristics of cryptocurrencies
Cryptocurrencies are the native asset of decentralised networks and protocols. In the case of decentralised networks, they are able to host several projects on their blockchain and as a result increase usage for the coins.
Furthermore, most cryptocurrencies have a limited supply and community plays an important role. Both the projects and their community should work towards a mutual agreement, otherwise the native asset’s value will be enormously affected.
Another thing to consider is the nature of decentralised fundraising: Investors can get access to early investment opportunities, which also means technical analysis is impossible.
(iii) Lack of historical data
There are countless new crypto projects springing up every single day, they can conveniently call for crowdfunding in the form of an ICO/IEO/IDO. There is of course no historical data available at early stages, and even if the token/coin is listed, acquiring sufficient data for price forecasting remains tedious.
Fundamental analysis (FA) incorporates other financial and project metrics to give traders a thorough and more accurate picture of each investment. Therefore, it is more applicable for the multi-faceted crypto markets, obviously alongside the help from technical analysis.
Financial metrics: General metrics
There are two types of financial metrics useful for fundamental analysis: general metrics and on-chain metrics. General metrics are the basic, easy-to-read metrics that help traders decide whether to buy a cryptocurrency, while on-chain metrics examine the strength of particular blockchains in detail.
(i) Market capitalisation
Market capitalisation is the total dollar market value of a company or project. A large market cap will earn investors’ trust more easily, but a smaller market cap indicates there is room for growth. Crypto market cap is calculated as follows:
Market cap = Curren t price * Current circulating supply
Consequently, the market capitalisation will change according to changes in the market.
Top 5 cryptocurrencies by market cap. Source: CoinMarketCap
(ii) 24-hour volume
The 24-hour volume shows the total dollar value of all transactions in the last 24 hours. This is the key indicator for liquidity, i.e. how easy it is to buy/sell the asset. Investors will feel more confident in projects with larger 24-hour volume because of the intense activity. Low liquidity also suggests that one single transaction can end up influencing the asset price greatly.
(iii) Unit price
Short-term traders care about unit price (mostly referred to as price). This is an essential indicator of buying low and selling high activities, but is also used as an input for the technical analysis and provides an overview of the recent market sentiment.
(iv) Price correlation with Bitcoin
Bitcoin is considered the “safe haven” in the crypto market. The higher the correlation between a digital asset and Bitcoin, the higher the potential benefits on sunny days. In addition, traders can develop suitable diversification and risk management strategies based on this metric.
(v) Total exchange inflows/outflows
Exchange inflows illustrate the amount of coins deposited into exchange wallets and exchange outflows the amount of coins withdrawn from exchange wallets. Investors tend to withdraw assets to their personal wallets (for holding) when market conditions are not favourable and deposit more into their exchange wallets for easy trading.
Digital asset investment products saw the second largest weekly outflow of 2022
in the beginning of April. Source: CoinShares
Financial metrics: On-chain metrics
(i) Active addresses and transaction counts
Active addresses count the number of unique blockchain addresses conducting a transaction of a given asset on any given day. This metric does not necessarily imply new market participants but gives hints of rising asset usage. It can be inferred that the increase in Ethereum’s daily active addresses over the last five years responds to the bull cycles in the same period.
Ethereum’s daily active addresses since 2017. Source: YCharts
Transaction count is another metric measuring the level of activity on a given network. Similar to active addresses, an increasing transaction count may very well describe a broader set of network participants, but be careful as one can own multiple addresses and transfer assets between their own to inflate the network activity.
(ii) Transaction fees
Active traders who make transactions on a frequent basis will suffer from high transaction fees. Exorbitant transaction fees are the direct result of network congestion, together with the high dollar value of the blockchain’s native asset, for example Ethereum. Even though the transaction capacity of Ethereum is approximately 4-5 times larger than that of Bitcoin, DeFi expansion has pushed ETH gas fees to new records.
Transaction fees on Bitcoin and Ethereum blockchains. Source: CoinMetrics
(iii) Hash rates
This metric applies to the proof-of-work-based cryptocurrencies only, with the most prominent name being Bitcoin. In a proof-of-work network, miners take the responsibility of verifying transactions and performing encryption for network security. They complete this task by solving complex mathematical puzzles using specified, powerful computers. Hashing data means finding the solution for each puzzle, hence hash rate is a measure of the total computational power used to process transactions. A secure network will have a higher hash rate, and in the case of Bitcoin below, hash rates are positively correlated with Bitcoin mining difficulty and tend to follow the course of its price.
Bitcoin hash rates and mining difficulty.
Bitcoin hash rates versus Bitcoin price (in US-Dollar). Source: BitInfoCharts
(iv) Network Value to Transaction Ratio (NVT Ratio)
This metric was originally introduced for Bitcoin by Willy Woo. It is sometimes dubbed “the P/E Ratio of cryptocurrencies”. The NVT formula is given below:
NVT = Market Cap/Transaction Volume (in US-Dollar)
In other words, NVT describes the relationship between the two value propositions of a network’s native coins, an asset class (market cap) and means of payment (transaction volume). Ideally the NVT should remain constant after a market direction (bearish/bullish) is well established, as it suggests a sustainable growth trend. Too high, the network is overvalued (the coin is not usefully employed) and vice versa.
Bitcoin NVT Ratio by Willy Woo. Source: Woobull Charts
(v) Market Value to Realised Value Ratio (MVRV Ratio)
Another metric that tries to justify the value of an asset is MVRV. The name itself already explains the formula:
MVRV = Market Cap/Realised Cap
Realised capitalisation measures the value of coins that are actually present in the network economy based on the price when they were last moved. As a result, it is equal to the value “stored” in a particular asset. Using realised cap as the fair value and market value as the deviation, MVRV estimates the market profitability. High MVRV implies significant unrealised profits and the probability that investors will sell their coins to lock in the current price. MVRV lower than 1 signifies late stage bear accumulations.
Bitcoin MVRV Ratio by Willy Woo. Source: Woobull Charts
These following project metrics help traders assess a project’s performance.
When information about the team members is available on the project’s website, you should take a look at their profile to see if they have previous experience in the industry, do they qualify for what they do, are there any possible weaknesses (for example the marketing team is well established but the developer team looks kind of inept, that is a big red flag). Otherwise you can check out their GitHub page for the number of contributors and their activities there. Frequent updates suggest that the team is still working on project developments.
In addition, projects backed by big names should be more appealing. Renowned backers are considered vetters of such projects, giving retail investors more confidence.
White Paper is simply a self-introduction document that highlights the key features of a project. It is highly recommended that investors take a look at the whitepaper and compare it to current discussions about the project.
(i) Solution and competitors
In order to survive the business competition, a project must propose and produce a solution that is either unique or extremely effective or both. It will have higher chances of success if it can differentiate itself from competitors, or even better, come up with a first-of-its-kind idea. Understanding its competitors is an ingrained part of this articulation.
(ii) Tokenomics and distribution
The supply and distribution scheme of a cryptocurrency has a great impact on its value. Most cryptocurrencies have a limited supply and/or a deflationary mechanism to regulate their value. Logically, inflationary coins or tokens should provide a control scheme such as coin/token burn or emission reduction.
Token distribution indicates the balance between several groups of stakeholders. If the scales tip in favour of the team or backers, the community will be less inclined to participate in the public fundraising, reducing the marketing efficiency and later on the native asset value.
Last but not least are use cases. The more use cases, the higher the asset value.
A reasonable roadmap will, to a certain extent, guarantee the performance of a project. Rather than making promises that they are less likely to hold, the team sets a moderate pace, allowing them to respond quickly to any problems that may arise.
There are several useful metrics for holder activities, including wealth concentration, active addresses and unique addresses.
The term “large holders'' in crypto describes addresses holding more than 0.1% of the asset’s circulating supply. Concentration tracks their position changes to give traders a glimpse of whale sentiment. Furthermore, single trades made by these addresses can overpower activities of other traders, causing a change in the asset price. Active and unique addresses are other indicators of liquidity and network activities.
Community plays a crucial role in crypto as it is directly linked to the level of adoption. The number of Telegram, Discord members, Twitter followers, hash tags, etc. all provide a clue about the public interest in a project, but it is more important to read the actual posts and discussions because these data can be fabricated or inflated.
Fundamental analysis with Bitget
Bitget is your one-stop shop for crypto investment. Launched in 2018, Bitget is now the dominating crypto derivatives trading platform with multiple innovative products for every type of traders: Bitget USDT-Ⓜ Futures for cautious traders, Bitget Coin-Ⓜ Futures for crypto-geeks and Bitget Copy Trade for those who want to generate a passive income stream with minimum risk.
Recently, we have introduced Bitget Launchpad to give our users easy access to early investment rounds. Investors can conveniently skim our summary of the project’s whitepaper right on Bitget Launchpad to keep themselves informed. For more details on Bitget Launchpad, please read our Launchpad Intro here.
Bitget Futures products have integrated analytics by IntoTheBlock, efficiently assisting traders with the fundamental analysis. We commit to working with the biggest names in the industry only.
Bitget users can do a quick check at the Analytics tab.
As one of the only crypto derivatives exchanges with the Copy Trade function, Bitget makes sure that the followers are fully informed about the experts (“traders”) before copying their trades. Check out our guide to Bitget Copy Trade here: The Basics
In general, followers (users who copy trades of seasoned traders on Bitget Copy Trade) should consider a wide range of metrics (see picture below) to choose the most suitable traders:
(ii) Total Equity: The total dollar (USDT) value of the trader’s personal asset;
(iii) ROI (Return on Investment): Showing the efficiency of a trader’s strategy by measuring their performance;
(iv) Total P/L 3W: The total difference in the trader’s account in the last three weeks (in USDT);
(v) Win Rate 3W: Trader’s success rate in the last three weeks, calculated by dividing the number of orders with a positive return by the total number of orders;
(vi) Total P/L: The total difference in the trader’s account since the opening;
(vii) Accum. Followers (Accumulated Followers): The total number of followers since the trader’s account opening. Please note that cancelling subscription and re-following counts as one new follower;
(viii) AUM (Asset under Management): The total assets of one trader’s followers;
(ix) Followers (Current Followers/Maximum Followers): The total number of followers one trader is currently having/The follower limit;
If the Operation says Full, that particular trader has reached his/her follower limit at the moment. Bitget users can, however, sign up for alerts so that they’ll receive notifications from Bitget whenever someone unfollows that trader.
Bitget’s ranking of traders by popularity.
Ready to start your crypto journey? Open your Bitget account today and take advantage of the provided data!
Don’t forget to follow Bitget Academy to get acquainted with crypto markets faster:
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