How to carry out a Crypto Fundamental Analysis
We’ve mentioned before in this blog that there’s “safety in numbers” when you’re choosing which Cryptocurrency or Stablecoin to invest in.
There are over 3,000 coins of which 1,000 have already failed (and more will fail imminently). So how do you work out which ones are Snow White and which ones are the Big Bad Wolf?
“Fundamental Analysis” is the answer.
We’ll explain as best we can, but if the idea of you being able to analyse a Cryptocurrency is at the same level as you being able to understand quantum theory, then you can skip to the last paragraph where we reach an utterly unsurprising conclusion that you should stick with tried and tested Cryptocurrency for the safest profit, and probably earn some interest on it too.
How to Analyse a Cryptocurrency
This is the idea that a stock/share (or in this case, Cryptocurrency) can have an underlying value based on objective data.
Applied to the stocks and shares of a company, there is usually published data and metrics about that company to be able to decide whether it’s undervalued (in which case, buy it!), overvalued (stay away, people!) or valued at the right price (hmm, let’s wait until it’s undervalued for a bargain!).
The stocks and shares of a company are what’s known as “securities”. These are heavily regulated to make sure that shady behaviour that misleads investors is punished.
Securities Insecurity – an important point!
Cryptocurrencies are currently unregulated. However, many of them behave like securities.
In fact, regardless of the other fundamentals, a Cryptocurrency behaving like a security is a huge red flag, because it means that Crypto will be under threat from regulators. Regulators move slowly, but they tend to get there in the end. Many thousands of Cryptocurrencies are under threat.
Note: the following section refers to US Law. Why? Because the US SEC (“Securities and Exchange Commission”) is the big global beast in bringing Cryptocurrency to account, and if one single token has been sold to a US citizen, it claims jurisdiction. This could easily bring down a Cryptocurrency for everyone worldwide.
How can you tell if something is a security? The SEC in the US has its “Howey Test”:
- An investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
If you buy something from a group and expect them to work on your behalf to make you a profit: it’s a security. If a Cryptocurrency falls under that test and it’s been sold to US citizens, then it’s been trading illegally.
The good news? BTC and ETH are safe!
OK, so what about Crypto that isn’t a security? Bitcoin (BTC) and Ethereum (ETH), the two biggest digital assets, have been definitively classed as “not securities”, along with other similar Cryptos such as Litecoin (LTC). There are other tokens that are decentralised enough to be safe too such as Decentraland (MANA) – the clue’s in the name!
We do advise that you do your own research though, before making any purchases.
So, what measurements can you use to measure whether a Crypto project is worth your time?
In Crypto, the three areas that deserve attention are the finances, the project itself, and the activity on the Blockchain. All three have to be deemed worthy because a project will fail if one of these is inadequate.
How big is a coin? The most common way is to use the last selling price and apply it to all the other coins. So, if you have 100 coins, and the last sale was at £100 per coin, then the “market cap” is £10,000. It’s a good measure of seniority, but small Cryptocurrencies can fake a market cap by issuing a load of tokens and then selling one to themselves for thousands of dollars. This is why you need to look at how many tokens are bought and sold in a day…
So, you’ve made a theoretical profit on something you bought. How do you cash in? If it’s hard to realise your profit because there aren’t enough buyers to sell to, then you’re in a “low liquidity” market. If there are plenty of buyers, then you’re in a “high liquidity” market. You should beware of low liquidity markets.
Of course, volume can be faked if you sell to yourself repeatedly, but reputable exchanges keep an eye on that. Less reputable ones… well, let’s say fake volume is a problem that hasn’t gone away.
Is the token supply infinite? Or is it scarce? Does it increase forever, or can it decrease too? All this is important information.
The whitepaper for a coin is an important measure of its worth. In time gone by, a white paper would often be copied from another project entirely. Sometimes they even forgot to remove the footers! What the white paper is supposed to do is describe the project in detail: its aims, how it works, what its target market is, who its competitors are, and its financial plans. There should be no questions unanswered.
Is the website badly written or copied from somewhere else? If you read the T&Cs of the website, do they refer to something else entirely? Are there dead links? Having a good website doesn’t mean a genuine project, but a badly written website can mean disqualifying incompetence – not a good look for someone that wants your money.
In the naïve days of 2017’s disastrous ICO (“Initial Coin Offering”) craze, the strangest people could be found on the “team” page of websites. These mostly non-existent people were often made-up names with photos taken from other ICOs. It’s a wonder they didn’t give them comedy names because investors at the time wouldn’t even have noticed.
Things aren’t as blatant now, but check the credentials of a project team. They may surprise you. And not in a good way.
Who is this coin competing with, and why should the world care? There are as many Crypto companies trying to be the next Ethereum as there are search engines competing to be the next Google. But the world has changed since those early days. It’s become more professional. Hackers are better. The industry is much less impressed by the technology, and more impressed by results and scale. Bigger is better… as long as the company isn’t lying to you! (see “Financial Metrics” above).
Blockchains are transparent. That’s good! But they’re also technical. That’s bad! The data you need for analysis is there for the taking… but you need to know where to look.
A Blockchain is powered by programmers and developers. You can get an idea of how many by visiting GitHub, searching for the Blockchain code repository, and seeing how many developers are contributing to the code. If it’s a one-person job, forget it. The Blockchain is toast as soon as they have a personal crisis!
Hashpower is a measure of how many people are mining the Cryptocurrency (if it’s a mineable one). The equivalent of “proof of stake” Cryptocurrencies is how much value is locked into (“staked”) the Blockchain. Is that growing or shrinking? Are people abandoning the Blockchain?
Although this metric doesn’t help you directly analyse tokens that live on a host Blockchain, the overall health of the Blockchain is important: a good token on a dying Blockchain is a bad token.
How many transactions were done with this token and what was their value? You can see this on the site “Etherscan”. Of course, the owner of the token could just transfer coins back and forth: the number of unique addresses holding the token might be a better guide. Nothing is 100% reliable in Crypto though.
This all seems terribly complicated…
You’re right, it is. Even Cryptocurrency old-timers don’t find this sort of thing easy.
This is why sometimes you need to rely on experts to sort the wheat from the chaff: for example, in only choosing the safest Crypto options. This is the strategy of the more reputable exchanges and finance apps such as AQRU.io.
At AQRU (an app and website), we offer interest on your Crypto but only deal with the safest coins: BTC, ETH, and a basket of US Dollar Stablecoins. This allows you to invest in Cryptocurrency to earn interest with more confidence. Sign up for free today to start earning high rates of returns on your Crypto!