6 Easy Steps to Decide Which Cryptocurrency to Invest In

While there were only a handful of different projects in the early days of crypto, there are already several thousand of them today. Crypto fundamental analysis is not only about exploring the potential but also about identifying a fraudulent project. Several hundred exit scams have taken place, which may continue to rise.

Determining a ‘true’ value of a cryptocurrency is a problematic matter since many factors from different forms of analysis play a role here.

Fundamental Analysis (FA) is one of three essential tools to determine a future potential value of a crypto asset. The other two are technical chart analysis and sentiment analysis, with fundamental analysis certainly playing the most important role over the long term. In this article, we would like to explain what cryptoanalysis is all about and how to conduct it in 6 steps. But first, let’s find out what precisely fundamental analysis is.

What Is Fundamental Analysis?

Fundamental analysis is a form of financial analysis. It attempts to determine a fair or reasonable price of securities, i.e., intrinsic value. In contrast to chart analysis, it is not based on studying price developments but on business data and an economic environment of a company, a so-called fundamental data.

Fundamental analysis of crypto-assets differs somewhat from an analysis of stocks since one can draw on concrete figures, e.g., annual reports, and conclude capital flows.

Thus, fundamental analysis is an active process that takes time if properly managed. There are many aspects to consider to determine how a crypto asset’s price might change over the long term. However, it differs significantly from an analysis of cryptocurrencies and tokens — there are no annual reports with reliable key figures since these are not companies.

Key Steps to Analyze Crypto Potential

Since cryptocurrencies are a relatively new asset class, it is also difficult to compare them with existing projects, as these are only a few years old and do not allow conducting a reliable comparison.

Let’s take a look at the different factors you should consider in your analysis. You can work through these topics step by step to get a result. Let’s get started!

#1 Crypto Metrics

Metrics are the first thing you should check. It gives you the first sense of a specific cryptocurrency compared to competing projects. Even if crypto assets are not securities and there is no company behind them, there are still some key figures relevant for your analysis:

  • Market capitalization. Market cap is formed from the number of coins/tokens in circulation and the current price (number x price = market capitalization). This key figure is particularly important for new projects since it can be used to derive possible parabolic growth. If two similar projects have the same fundamentals, but the market cap of one is EUR 1 billion and the other only EUR 10 million, it is obvious which one has more potential.
  • Circulating and total supply. Supply is divided into circulating and total supply. It doesn’t matter if these numbers are high or low. It makes sense to have a high overall supply for many projects to ensure future scaling. Still, a maximum supply is crucial. For example, BTC is limited to 21 million coins.
  • Historical price history. While this is not an article on technical chart analysis, it is necessary to analyze historical price history. An investment that has already experienced significant growth is potentially riskier than one where a big price leap may yet be ahead.
  • Trading volume & order books. A trading volume of a cryptocurrency is not a criterion for the project’s quality. However, there should be enough liquidity to be able to open the desired position.

#2 Crypto Idea

An idea is an essential factor in every company. It is important to have an understanding of the different areas of application.

  • Is it a store of value like bitcoin?
  • Is it a currency suitable for payment processing, like Litecoin?
  • Or is it something else, e.g., a blockchain platform that allows launching other projects, such as Ethereum or Komodo?

What is important here is a step-by-step approach, from a micro perspective to a macro perspective.

Micro

Let’s assume it’s a cryptocurrency, similar to BTC. It is important to have a unique selling proposition from a micro perspective. A Bitcoin clone is not bad, but you have to ask yourself why someone would prefer BTC or why this specific coin should increase in value?

When it comes to a utility token, you have to ask yourself whether it really makes sense, i.e., whether a real problem is being solved and what role the token plays in the network. Could you run the same platform with Bitcoin, Ethereum, or something else?

Macro

A macro perspective tells you where your project is at any given time. For example, you should ask yourself: is a common problem solved? Are there enough potential users for stable or better-growing demand?

  • Understanding of an idea. You should have a basic understanding of your project’s idea. A quick look at a website of a respective project is suitable for this. There you should get a rough overview of the project’s idea and its areas of application.
  • Whitepaper. Reading a whitepaper allows you to get a deeper insight. An idea has to be feasible, and a whitepaper tells you how a respective team wants to achieve this.
  • Roadmap. A roadmap contains various milestones, mostly defined over a period of at least 12 months. Here it should be clear what the project’s status is in terms of content and what progress is planned in the near future.
  • Main competitors. Due to a large number of already existing cryptocurrencies & tokens, sometimes, there are a lot of significant differences between competitors. Thus, make sure to take a close look at these to see whether the idea has already been validated and whether competitors already have a working product.
  • Market size. The market size can be determined by market analysis and is particularly important. Here one does not limit oneself to the market of crypto/blockchain applications but, in many cases, also to the potential in the regular economic sectors.

#3 Crypto Technology

When it comes to the technology of a cryptocurrency or token, a few points are of high priority. You should find out whether the chosen coin/token uses a Proof-of-Work (PoW) or a Proof-of-Stake (PoS) mechanism. With PoW coins, it is advisable to identify the exact algorithm with which the coins are mined and whether it is ASIC-resistant, for example. Other key figures are the development of block rewards and difficulty.

In addition, even if you don’t have a technical background, you should take a closer look at the white paper to:

  • Determine the technology which a project is to be implemented with;
  • What unique selling points a project has, for example, when it comes to scalability.

If you want to delve deeper, announcement threads on bitcointalk.org are a good place to go, as there are also tech-savvy users who are happy to answer questions from newbies.

#4 Crypto Team

A team is an essential factor. As with start-ups, a promising idea and its feasibility are not enough — there is also a team with the necessary skills to implement it.

First, you should review the leading team members, i.e., the founders. You should find out what they did before and whether they can boast successful start-ups. This is not limited to the crypto market, many founders of crypto & blockchain projects come from completely different backgrounds. Useful resources are Google search and social networks (especially LinkedIn). If you have doubts about the authenticity of a team member and suspect a fake profile picture, you can eliminate these doubts with a reverse Google image search.

You should do the same research for other key team members who are critical to the project’s success. Many crypto projects can boast of having an excellent development team but poor marketing. There should be a certain balance between individual departments, which ideally complement each other well. This is the only way to ensure positive expectations of success.

#5 Crypto Marketing

Even the best product needs public relations & marketing so that as many people as possible can see it. Many crypto projects have difficulties with this, as their founders often have a solely technical background. Still, as the Tron (TRX) project shows, marketing is an essential part of success.

When analyzing this topic, you should check which marketing activities have already taken place. Did large platforms also publish press releases? Is there targeted online advertising?

If there are no marketing activities, take another look at the roadmap. Planned marketing measures are often mentioned there.

#6 Crypto Community

The value of crypto assets comes from the community trust. That’s why you should take a closer look here in your fundamental analysis. First, you should check the most important social media channels. In addition to quantity (number of followers & posts), quality is at least as important. Since many projects like to use purchased followers, especially on Twitter, a quick audit is recommended to verify that the number of followers is legitimate.

How the team communicates with the community is also important. A good team is in regular contact with its followers, engages with them, answers questions, and provides assistance with product issues.

Conclusion

We hope you now have a good overview of crypto assets’ fundamental analysis areas, and our article helps you assess the potential long-term success of cryptocurrencies with quality.

Do you conduct fundamental analysis before investing in crypto? Feel free to share your experience in the comments below!

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