It seems like everyone wants a piece of Crypto now. In this first issue of 'Things to know before buying a cryptocurrency', we look at the Fundamental Analysis for cryptocurrencies.
1) What are Fundamentals?
Technical Analysis is to trading, what Fundamental Analysis is to investing.
Trading mostly requires hour-to-hour or day-to-day changes; but long term investment required more than that. Fundamentals give us an idea about how any cryptocurrency can perform in the long run.
In case of stocks/businesses, analysing fundamentals is quite easier as we have the quarterly and annual reports of the companies, and we are quite used to the sectors they work in. But when it comes to crypto, it can be a bit cumbersome
2) Why fundamentals?
When you see a coin boom in the market, what's the first thought that comes to your mind?
For most people, it is either "Why didn't I invest in it before?" or "Let me buy that coin now." The former question is quite harmless, but the latter can lead to huge losses if your strategy turned out to be a "Buy-High" one.
Fundamentals help you find out if any coin is undervalued, how it is better than the competition, how high can the price of the coin go, how useful it is to the public, how reputable are the people and companies behind them, etc. Let's delve right in:
3) The Whitepaper
If you are planning for long term investment, never buy a coin without reading their whitepapers, unless it is Bitcoin or Ethereum (just buy them, you won't regret later)!
Check for the following :
A) Aim and Use case : what is the project about? What are they trying to solve? Just check this point with meme coins, and you'll know why investing in them may not be a good idea
B) Roadmap : How are they planning to go about the project. Is it realistic targets that they have kept? Remember how Cardano kept on postponing their dates? But it didn't fall apart because their other fundamentals were pretty strong
C) The technology and how is the blockchain secured : In the crypto world, an open source software is always considered better. Also check if the blockchain uses Proof of Work (PoW), Proof of Stake (PoS), or any other method, and research on if it is a novel method, or an age old, energy consuming ones like Proof of Work!
4) The Tokenomics
The Tokenomics is one key area that can decide how high the price can go. Check the following in Tokenomics:
A) Is it a fixed supply?
There exist coins like Bitcoin with 21 million fixed supply, and ones like Ethereum with unlimited supply. If the supply is limited, we can very well assume that the coin is not inflationary (after the release of entire supply).
The problem arises when the supply is unlimited. Then you will have to do research if there is a chance like the coin can become deflationary, just like how Ethereum is estimated to become deflationary after the London Hard Fork!
It is also important to see the rate of release of tokens, and how it is distributed.
B) Who holds and how much?
Very important! Decentralisation is very important in a crypto. A low market cap coin where the top 3 addresses hold about 60% of the entire coin supply is an immediate warning to stay away from them. They can just sell their coins for a profit, and the coin will be blown to dust. (Do check Dogecoin holdings, while we are at it)!
Does any company own much of the coins or take part exclusively in the decision making process? Is it owned by an exchange? ...are some of the other questions you need to find answers to.
C) Name , symbol and design
Not a big deal, but still helps in the initial stages to gain traction if the coin has a catchy name, symbol and design!
5) The Competition
Once you research on the Use-case of a coin, you need to check for its direct rivals; the coins that are trying to solve the same issues, or provide similar utilities!
Eg. Smart contract : Ethereum, Cardano, Solana, Polkadot etc. They are already the big names in the market. So if the coin you are researching is providing similar features, compare them against their direct rivals and see how the new coin is better or worse. Then take the decision whether to buy or not!
The more unique its Use-case is, the better.
6) Market Capitalisation
Commonly called as Market Cap, gives us an idea about how much adoption the coin has got, and how much market share it holds.
In simple terms:
Higher the market cap, lesser the room for growth, lesser the risk
Lower the market cap, more room for growth, more risk associated
The other fundamentals can help you decide to buy the lower market cap coin to reduce the risk!
7) The founders
A research about the founders of a coin is always a good choice. Check for :
~How reputable are they in the crypto space
~How many members are there, and has anyone resigned, and if yes, for what reasons
~Was anyone involved in any cases or scams in the past
~Have they created anything similar in the past
PS: There are many coins where founders have not revealed themselves. Back off from those projects immediately, unless its Bitcoin (Dammit Satoshi, I can't write one sentence without an exception)
8) Social media interactions
Check their official pages in Twitter, Reddit, YouTube and Telegram. Check for the following
~How frequently are the project founders interacting with the community
~Number of followers
~Active members and their take on the projects
~How good are they taking criticisms
9) Performance in the past
When was the All Time High of the coin? Why did it plummet and not reach there again? How well has it survived bear markets?
PS: Farther the ATH of a coin, I usually stay away from them!
10) Where are they listed
TL; DW (Too long didn't write) : The lesser exchanges they have listed, more is the room for growth and market!
11) The hidden world
As I have mentioned above, if they haven't listed in any exchange, how the hell are we going to find them?
Most of the coins do their 100x or 1000x runs before they get listed on big exchanges. So how do we find them and do their fundamental analysis? More on that in the next issue of 'Things to know before buying a cryptocurrency'
PS : Not Financial Advice
Thanks for reading till the end
Hope you find real jewels
Cheers 😊
