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Fundamental analysis and cryptocurrency
The above criteria do not apply to cryptocurrency’s fundamental analysis. Instead, you can evaluate other factors to evaluate the project. In the following section, some indicators used by cryptocurrency traders are given.
Network Value to Transactions (NVT)
This ratio is usually considered the equivalent of the P / E ratio in cryptocurrency markets. The NVT ratio is rapidly becoming a principle in fundamental analysis.
- Daily trading volume/network value
NVT Interprets the value of a network based on the value of its transactions. Suppose you have two projects: Coin A and Coin B. both have a market value of $1,000,000. However, coin A has a daily trading volume of $50,000, compared to $1,000 for coin B.
The NVT ratio is 20 for coin A and 100 for coin B. In general, assets with a lower NVT ratio are valued lower than the actual limit, while those with higher ratios may be overvalued. This criterion alone shows that coin A is under its value compared to coin B.
Some people look at the number of active addresses on a network to determine how much they use. Although not as reliable as an independent indicator, it can nevertheless display information about network activity.
Overall price-to-mining ratio
The overall price-to-mining ratio is a measure of coin mine in the network. This ratio takes the costs associated with this process into account, i.e., the cost of electricity and hardware.
Coin extraction cost/coin price
This ratio can say a lot about the current state of the blockchain network. The overhead price refers to the cost of extracting the coin; For example, if it is $10,000, then miners usually spend $10,000 to build a new unit.
Suppose coin A trades at $5,000 and coin B trades at $20,000 both have a $10,000 breakpoint. The ratio of coin A will be 0.5, and the ratio of coin B will be 2.
Since the coin A ratio is below 1, it tells us that its miners are harmful. But mining coin B is profitable because, for every $10,000 spent on mining, they make $20,000.
For coin A, loss-making miners are likely to leave the network unless the price rises. Coin B has a good reward, so more miners are expected to join unless it is no longer profitable.
The effectiveness of this indicator is disputed. However, it does give you an idea of the economics of mining, which you can apply in your overall assessment of a digital asset.
Transparency, team, and roadmap
The most well-known method for determining the value of cryptocurrencies and tokens is conventional project research. By reading transparency, you can understand the goals of the project, its uses, and technology. Reading team members’ records gives you an idea of their ability to build and grow a product.
Finally, the roadmap tells you if the project is underway. This can be complemented by other research to determine if the project is likely to reach milestones.
Pros and cons of fundamental analysis
Positive points of fundamental analysis
Fundamental analysis is a powerful way to evaluate businesses in a way that is beyond the reach of technical analysts. For investors around the world, studying a wide range of quantitative and qualitative factors is an important starting point for any business.
Anyone can do fundamental analysis because it relies on tried and tested techniques and commercially available data; Or so it is in traditional markets. If we were to focus on cryptocurrencies (still a small industry), data would not always be available, and the heavy correlation between assets would mean that fundamental analysis might not be very effective.
If traders do the fundamental analysis correctly, it provides a basis for identifying undervalued stocks and ready to grow. Top investors like Warren Buffett and Benjamin Graham have consistently shown that careful research on companies can yield dramatic results.
Negative points of fundamental analysis
Fundamental analysis is simple, but providing good fundamental analysis is not so simple. Determining the “intrinsic value” of stocks is a time-consuming process that requires much more work than putting numbers in a formula. Traders should consider many factors, and the learning curve to do so can be effectively steep. In addition, fundamental analysis is more suitable for long-term than short-term trading.
This type of analysis also ignores strong market forces and trends that technical analysis can identify.
There is no guarantee that undervalued stocks will grow in the future.
Fundamental analysis is a proven practice that some of the most successful traders take. By modifying a strategy, not only can investors estimate the actual value of stocks, cryptocurrencies, and other assets, but also they can understand companies and industries.
Fundamental analysis, along with technical analysis, can give traders and investors a good understanding of which assets and companies are profitable. In both stock markets and cryptocurrencies, the combination of fundamental and technical analysis is of interest to many.
However, given the emergence of cryptocurrency markets, you need to understand that fundamental analysis may not be very effective. Always do your research and make sure you have a risk management strategy.