Fundamental analysis aims to arrive at the intrinsic or fair value of an asset versus the price. Price and value are not the same and this has never been truer than in the world of crypto assets, which have dramatically different total supplies, liquid supplies, token lock-ups, inflation rates, emission structures, token burning, and so on. Traditionally, investors can measure value with cash flows like dividends with stocks and coupon payments with bonds using P/E ratios. However, with (most) crypto assets, there are no expected future cash flows, making crypto-asset fundamental analysis totally different. While we have entered into an entirely new paradigm with the emergence of cryptocurrencies, valuation and fundamental analysis are not impossible, it just requires new mental models around the new asset class.
In traditional investing, investors buy equity in a company, ensuring that if the company’s value grows, so too does their investment. This is not the case in crypto assets. Crypto assets are not shares in a company. A true crypto-asset should not even have a company. Value accrual and value capture are not one and the same and this difference is at the heart of many struggling token projects. This is, in part, what separates Bitcoin from the ICOs and VC-backed coins of the world, but that is a topic for another post.
This current bull market arguably began after the March 2020 Covid crash last year. As the chart below illustrates, CryptoEQ's higher rated assets wound up returning a higher ROI than lower rated assets in 2020. This is encouraging to see even during all out mania phases. We look forwarded to updating this chart (with even more assets!) at the end of 2021.
CryptoEQ reviews hundreds of different factors, metrics, and parameters across 10 core categories for evaluating value, potential, and risk for crypto-assets by a human-led team. While simply using data scraping to aggregate on-chain/Github/node count/social media data is quick and helpful, it is only a small fraction of the total picture. This approach (the popular approach by many of the leading crypto “research firms”) is inadequate, lacking the necessary depth, context, and nuance needed to appropriately evaluate a crypto project. Most things in life are rarely so black and white and the wild, new world of crypto assets is no exception. Some examples of nuanced questions include:
- Project X has 25 developers and Project Y has 50. Which one has the “better” overall team?
- Project X has 200 Github commits in the last month while Project Y only has 20? Is Project Y stagnating? Is X gaming the system? Or are they having to do 10x the work because their original code was shoddy? https://medium.com/santiment/tracking-github-activity-of-crypto-projects-introducing-a-better-approach-9fb1af3f1c32
- Project X has staking reward of 10% and Project Y 5%. But what about inflation? Or pay-out times/lock ups? Our underlying currency risk? Is one losing value compared to the other?
- Project X has 100 nodes and Project Y has 1000. But are there master nodes? A permissioned system? Same consensus mechanism? What’s the node geographic distribution? The concentration of mining pools?
Our goal from day one has been to provide unbiased, high-quality, comprehensive research in order to deliver high signal-to-noise, practical, and impactful information you can immediately use to your advantage. CryptoEQ is a research platform and suite of products that bring a multi-factor, comprehensive framework to the complicated world of crypto but presents it all in an intuitive, user-friendly platform making crypto accessible to all.
The 5 Core Ratings
Gold - The highest rated assets with notable advantages across the 10 Core Categories and has earned the analysts’ highest level of confidence. Considered the lowest risk.
Silver - The second highest rated assets with advantages across many but not all of the 10 Core Categories and gives the analysts a high level of confidence. Considered moderate risk.
Bronze - The third highest rated assets with advantages that outweigh the disadvantages across the 10 Core Categories and gives the analysts a sufficient level of confidence. Considered high risk.
Neutral - Assets that have scored below average on the 10 Core Categories but do not display any obvious deficiencies .
Deficient - Assets where at least one major issue has been identified in the 10 Core Categories that outweighs any benefits.
10 Core Categories
- The core analyst rating is a forward looking qualitative research system that uses the 10 Core Categories to derive a rating based on the asset’s current use case.
- The core analyst rating is based on the analyst’s conviction in the asset’s ability to fulfill its stated use case, capture value, and grow its network effects.
- Our Core Ratings are separate from technical analysis and price actions.