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So, last week I said that fundamental analysis (FA) as it’s defined by traditional stock market investors doesn’t really apply to crypto. When I learned FA, it relied on examining a company’s business and the general conditions of its sector, its competitors and the economy overall. A big part of the analysis of the company was through earnings reports, dividends, balance sheets – all things that a cryptocurrency doesn’t have. There’s no company at all.
But a very smart colleague of mine pointed out if you take a step back and think of a cryptocurrency, say bitcoin, as the “company” in this regard, you can indeed look at things like general market conditions, how future economic reports or government decisions would affect the price or the perception of supply and demand. In these ways, FA does still apply.
The thing that I think is more interesting, personally, is that there are different fundamentals in crypto. The underlying elements that make a cryptocurrency valuable, from a token’s supply to how it’s issued to if it is designed to be inflationary or deflationary to its utility all come together to create what’s known as its tokenomics, a portmanteau of token + economics.
Tokenomics are key because a project that has smart and well-designed incentives to buy and hold tokens for the long haul is more likely to succeed. There are blockchains with finite amounts of tokens like Bitcoin – the supply will be capped at 21 million bitcoin. Scarcity can be one factor that creates value. By contrast, Ethereum allows a limitless amount of ether, its native token, to exist. That said, each one has mechanisms in their design to control the supply or new coins created and each has a different value proposition, or utility, that makes it unique.
In stock analysis, the focus is often on earnings per share; in crypto analysis, it typically comes down to supply and demand for the token directly.
Read on to understand more of these underlying fundamentals:
The other thing I love about cryptocurrency and blockchain is there is so much data that is public and available for anyone to dig into.
You can see if there’s a lot of trading volume, how long people are holding (aka HODLing) their coins, if a coin’s circulating supply is held by a lot of people or just a few big “whales” or see the flow of money moving in and out of exchanges. Once you start to understand what you’re looking at, it adds an invaluable layer of signals you can use to inform your investing decisions.
For instance, if most of the circulating supply of a coin is held by a few big whales, it tells you a few things: first, the whales could have an undue amount of influence on the coin’s price and can manipulate it to their advantage. Second, it indicates that the coin may be illiquid, meaning that if you buy and later want to sell it, there will be few people holding up their hands to take you up on your offer.
To keep you from getting overwhelmed, here are two key articles to get you started, one on the overall idea of on-chain analysis and another on a specific (and free) analytics platform I really like playing around with:
One kind of scheme that was incredibly prevalent during the initial coin offering (ICO) boom of 2017 – and are still a problem – are pump and dumps. This is where nefarious scammers create a new coin and then use social media and messaging platforms – such as Twitter, Discord, Telegram and Reddit – to “pump” (or promote) the coin as going “to the moon!”
The reality is it’s very easy to create a new coin and even get it listed on exchanges and sites that make it seem legit. The basics of the pump and dump are just what they sound like: pump up the price and then dump your bags of coins at the peak price before everyone realizes that there’s no value to the coin.
Luckily for you, with your new knowledge of how to evaluate a coin and dig into a project’s white paper, you are ahead of the scammer’s game. We’ve got more tips to help you stay out of trouble here:
Next week we’ll dive into technical analysis and the basic patterns and tools advocates of the technique use when looking at crypto assets.
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Disclaimer: The information contained in this newsletter, and any information linked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. You should seek additional information regarding the merits and risks of investing in any cryptocurrency or digital assets.
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