FUNDAMENTAL ANALYSIS

Fundamental analysis revolves around analyzing the true

value of an asset through valuation techniques that include
overall economic analysis, industry and sector analysis, and
analysis of a company’s financial data. Since fundamental
analysis relies purely on publicly available data, investors
can find investments through either a top-down or bottom-
up approach. In a top-down approach, the health and
direction of the economy are first considered, then each
sector, then each company. Investors select the best of each
stage and funnel down to find undervalued opportunities.
While this approach only works within the stock market
(since the market covers all the industries and sectors of
the economy), this same concept can be applied to top-
down crypto fundamental analysis. Investors can first
research the overall health of the crypto market, then
identify a specific segment that they believe is
undervalued. From there, the most undervalued companies
and projects can be sought out. For example: I think the
market will do well based on the data I’ve looked at. I think
that crypto companies in the virtual reality space will do
well since I believe the entire space is undervalued relative
to short-term and long-term potential. I’ve looked at all the
companies meeting the above criteria, and, upon further
research, the most undervalued company appears to be
Decentraland (MANA).
 Figure 7: Top-Down Analysis
In this way, a top-down analysis can be performed.
However, given the nature of the process, it requires a lot
of time spent sorting through all sorts of data, first for the
overall market, then through various sectors, and then
through all the ongoing currencies in that sector. The
opposite approach, bottom-up, first analyzes individual
assets. This works because, in the stock market, individual
stocks can easily outperform the overall industry or sector.
Within the crypto space, I’d translate this to be the same,
just magnified to a higher risk/reward ratio. So, how
exactly does one analyze fundamental value?
First, I want to really explain the core idea of fundamental
analysis, which is that coins have an intrinsic value that
should be reflected in the price and that, to some degree,
this intrinsic value should eventually be settled upon.
Therefore, one can conclude that any price under this true
value (remember, true value can change as new
information comes out) renders it undervalued, and any
price over the intrinsic value renders it overbought and a
sell. Although the concept of value and identifying value
may sound like an exact science (e.g., the true value of this
crypto is $20 and it is trading at $15, time to make $5!),
fundamental analysis is often quite speculative since people
can have different opinions on what a given asset’s true
value should be. The central idea is that all stock or crypto
investments are either undervalued or overvalued, and
your job as a fundamental analyst is to find the most
undervalued.
Fundamental analysts conduct research through a wide-
ranging multitude of sources, but most information can be
assembled through the following channels: on-chain
metrics, project metrics, sentiment, utility, and relative
value (quick note: the metric separation can be attributed
to Binance Academy—full credit to them with that). While
this list may sound lengthy, a full explanation of nearly
everything above is covered in the basic analysis section
shortly ahead. Take a look at the table of contents if you’d
like to get an idea of what’s discussed. So, I won’t delve
deep into the mentioned topics; all the basics are covered
later and should provide a platform for further learning, of
which there is plenty. For the moment, I’ll just briefly
describe each in relation to fundamental value. I also want
to highlight that fundamental analysis is often used in
conjunction with technical analysis: the pair can be used
first to determine whether to buy into a market or coin
(through FA) and then to identify good entry and exit levels
(through TA).

ON-CHAIN METRICS
On-chain metrics are data about the network behind a coin.
Basically, it’s technical jargon, however it is very important
jargon, and metrics such as average exchange deposits,
miner deposits sent to exchanges, transaction amount and
value, activity and value of addresses, hash rates, fees, and
so on, are all very applicable in helping you arrive at
investment decisions. That said, on-chain metrics are
typically better for short-to-mid-term investments, as
opposed to long-term and fundamental trading, since many
of the mentioned metrics can change based on a variety of
factors, such as through alterations in usage or various
scaling solutions (such as Ethereum version 1 to Ethereum
version 2).

PROJECT METRICS
Project metrics describe the big-picture and human
elements of a cryptocurrency. This involves the team, white
paper, events, and so on. This will be covered shortly.

SENTIMENT
Sentiment describes how people feel towards a given
project. While a full explanation and sentiment resources
are coming up, keep in mind that peoples’ perception of
value alters the value; hence, sentiment affects how
undervalued or overvalued a coin or token is, and,
therefore, sentiment is a part of fundamental value.

UTILITY
Utility is how useful a coin or token is and what real-world,
practical application it has. Utility, like relative value
(below), could be lumped into project metrics. However, the
concept of utility is really valuable since the coins that win
in the long term are the ones that are actually useful and,
in some way, solve a problem and hence create utility.

RELATIVE VALUE
Relative value can technically be lumped in with project
metrics, but given its importance, I feel that it should have
a dedicated section. Relative value is analyzing either the
true value and/or current value (basically, what you think it
should be at versus what it is at) of competitors and
comparing that to the coin or token you’re looking into. For
example, if you’ve done your research and concluded that 6
out of 14 virtual-reality crypto companies have experienced
massive, 200% moons and MANA hasn’t (please refer to the
earlier example on page 30), then you must ask yourself
why this hasn’t happened. Perhaps something is wrong
with the company, and MANA isn’t a buy, or perhaps it just
hasn’t happened yet, and therefore MANA is an extremely
undervalued buy. In this way, analyzing all sorts of metrics
relative to similar projects is a great way to gauge value.
This concludes our brief breakdown of fundamental
analysis. While this book is about technical analysis and
technical analysis certainly is a profitable and much more
adrenaline-inducing trading method, I believe that the best
long-term strategies and portfolios employ multiple types of
analysis, and fundamental analysis should certainly not be
overlooked in terms of its reliability and widespread use.

Figure 8: TA vs. FA Effectiveness Comparison

I’d like to make one more point before moving on using the
chart above. 10 Generally, the effectiveness and correctness
of technical analysis decreases with time, while the
correctness of fundamental analysis increases over time.
While it isn’t a linear relationship as portrayed on the
graph, this rule does hold true most of the time. Technical
analysts usually aren’t looking at indicators and deciding
whether or not to hold a coin or token for months or years,
while fundamental analysts aren’t looking at market data to
determine whether or not to buy a coin for a quick flip. By
no means does this mean you should put yourself in a box;
it just portrays the general difference in time frame
between TA and FA and hence provides some context on
the trading strategy you may choose.
 HYPE ANALYSIS
Hype analysis is not a commonly used term in the wider
crypto world as I define it (technically, it could be
categorized as part of the fundamental analysis), but it is
the term I have chosen to describe the phenomenon that is
analyzing real-world “hype” trends. Perhaps to a greater
extent than any other sizable investment vehicles, the
crypto market is driven by hype and trends. Elon Musk may
be the wackiest example of this, since his tweets about
cryptocurrencies are known to massively influence the
price of the subject, whether positively or negatively. For
example, Musk once tweeted just the word “Doge,” and the
price of Dogecoin (DOGE) proceeded to move from $0.036
to $0.082 in the following 5 days, a 220% gain. While this is
mostly unfounded, subcategories within the crypto market,
such as DeFi, FinTech, Gaming Coins, Web 3.0, and
numerous others, often blow up all at once and cause most
of the coins within the given area to experience massive,
positive surges. In this way, and others, trading on trends
and hype is a strategy that, historically speaking, is sound.
While I don’t necessarily advise this, and I’ll explain why
shortly, if it is done right, you can experience absolutely
massive results. However, you are much more likely to do it
wrong than to do it right, and I’d like to take a moment to
elaborate upon the risk versus reward of all types of
analysis, as well as provide a general introduction to risk
versus reward and specifically identify the risk level this
type of analysis.