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Can Fundamental Analysis Be Relevant For Cryptocurrency?

When valuing a specific crypto you might use a key fundamental tool: analyzing any external factors that have the potential to affect the asset’s performance.

By Cryptopedia Staff

Updated April 7, 20213 min read

Gemini-Can Fundamental Analysis Be Relevant For Cryptocurrency


For nearly a century, the field of fundamental research and analysis has been the primary approach for evaluating almost all securities. Fundamental analysis is rooted in the seminal text, Security Analysis, published in 1934 by Benjamin Graham and David Dodd. The authors warn investors not to rely on a handful of quantitative factors only, but to consider all of the business fundamentals surrounding a security to arrive at its true worth. Fundamental analysis forms the basis of Warren Buffet’s “value investing,” which many believe is prudent investing. Originally, fundamental analysis pertained just to stocks and bonds; later, analysts used portions of this discipline to study most other types of securities. And, although crypto assets are different from traditional assets, parts of fundamental analysis can help to discern their value, too.

Intrinsic Value: A Key Component of Fundamental Analysis

Fundamental analysis examines the internal and external, qualitative and quantitative factors of a business — usually the company that’s bringing a stock or bond issue to market, the “issuer.” Analysts study factors that can affect a security's value, from industry conditions and the economy to microeconomic factors like a management team’s effectiveness. Instead of trying to discern an asset’s future price movements, fundamental analysis tries to uncover an asset’s “correct,” or “intrinsic” value. Fundamental analysis posits that the market can price a security incorrectly in the short run, but that eventually the market will correct itself to reflect the true value of the security.

Once you arrive at a security’s intrinsic value, you can use it as a benchmark for determining whether a security is overvalued, undervalued, or fairly priced. Understanding an asset’s intrinsic value is essential to knowing whether to buy, sell, or hold it. For example, you may profit from buying an asset when it was “wrongly” undervalued by the market and then selling it once it reaches fair value.

Fundamental Analysis for Cryptocurrencies

The reason you can apply fundamental analysis to almost any asset is because of its focus on underlying value, which plays such a critical role in investment decisions. Fundamental analysis encompasses a wide range of disciplines, techniques, and concepts; but not all them are appropriate for every asset. It’s a matter of picking which tools to use for which asset class and why. For example, if you’re an equity analyst, you might choose to examine an earnings report: a company’s balance sheet, share price, earnings per share (EPS), and price-to-earnings (P/E) ratio, along with a host of other metrics and variables. But if you’re a foreign exchange (forex) trader, you’ll look at entirely different factors, like central bank data that helps to determine the state of a particular nation’s economy.

But cryptocurrencies are not issued by a corporation, so how can you use fundamental analysis to arrive at the underlying value of a crypto asset? As with any asset, you would look at the surrounding factors that could influence it. For example, you could evaluate the state of the cryptocurrency sector, the market as a whole, the domestic and global economic environment, supply and demand, and the competitive landscape, to name a handful of potential indicators.

Here are some other fundamentals that could apply to cryptocurrencies:

  • Whitepaper: A whitepaper in cryptocurrency is the equivalent of a company's prospectus. A company that’s issuing a new security will publish a preliminary, then a final prospectus, per the Securities and Exchange Commission (SEC). The prospectus contains the information you would need to decide whether to invest in the security. Similarly, a whitepaper in the crypto sector provides the details you’d need to understand the projected use case of the asset, its specifications, and the originator’s goals.

However, because crypto whitepapers are not yet produced in conjunction with a regulatory organization, it’s a good idea to validate any far-reaching statements they may contain.

  • Team (Project Creators): Does this cryptocurrency have a specific team behind it? If so, what are its members’ track records? How long have they been involved in the cryptocurrency sector? What other projects have they launched? What are team members’ backgrounds and skill sets? If there’s no team or website behind the asset, then you could look at the developer community or public GitHub, if the project has one.

  • Target Market: Who is the crypto asset targeting? If we know, then what is the size of the target market? What need or use case is the asset addressing? Is it trying to replace a legacy infrastructure? Or fill a certain gap?

  • Developers: It’s worthwhile to research the number of contributors and amount of activity surrounding an asset. Because some cryptocurrencies are still in development, the number of developers working on a project can often be a sign of its potential. It’s also an indicator of the executive team's commitment to realizing their ambitions. Bitcoin, not surprisingly, has the most developers working on its code in GitHub, followed by Ethereum. A project with few developers should ring a note of caution for new investors.

  • A Note About Rumors: Ad hoc discussions or things that you hear are not necessarily material to avoid when doing your research. It can be very helpful to know what respected colleagues think about either a team or a project, especially if there are any potential red flags. What is the general sentiment about this new project? Does the project seem realistic to others? How does it fit with everything else that’s happening in the sector? If you don’t normally “hear” this info, then look online. The grapevine, such as it is, can be found in messaging apps or on Reddit and Bitcointalk message boards. Be cautious about taking rumor into account when conducting your analysis.

A Work in Progress

1934 wasn’t just the year that Security Analysis was published. In 1934, the SEC opened its doors to try to restore the public’s confidence following the stock market crash and Great Depression of 1929. Those events had caused the public to view securities as being very speculative; the public was leery of financial markets, and the SEC’s first order was to regulate the U.S. securities industry. The SEC required extensive documentation from all market participants so investors could have access to basic financial information and understand the potential risks of investing in securities. As a result, we have an abundance of available data about publicly traded companies, investing techniques, rules and regulations, and so on.

The same is not the case with crypto, however. At just 11 years old, the sector is still very young. For perspective, consider that the first stock was officially traded on the
New York Stock Exchange (NYSE) in 1817 — that’s 117 years before there was any regulation of U.S. markets. Moreover, there seems to be growing consensus that cryptocurrency technology, networks, and cryptocurrency assets themselves do indeed have intrinsic value. How to properly define and quantify that value is a work in progress that can be enhanced by implementing some of the relevant principles and techniques of fundamental analysis.

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