What is Fundamental Analysis?

What you’ll learn

1. A definition of Fundamental Analysis
2. A framework for analysing future value of crypto projects
3. Ways to quantify ambition & performance of crypto projects
4. The importance of lateral thinking in investing

Investing in a cryptocurrency is a very different discipline from Trading in it. Trading attempts to profit from short term Technical Analysis; interpreting price movement and volume (we cover Technical Analysis in a separate article).

Investing is an attempt to profit from a cryptocurrency’s  long term success, with the decision making process relying on Fundamental Analysis.

Fundamental Analysis within traditional finance will look at the opportunity to profit by investing in a  company – through both public or private equity – by referring to metrics that describe its financial health and forecast future earnings potential.

In relation to publicly traded companies – traded on a stock market – the most common metric is Price to Earnings Ratio (aka PE Ratio). 

PE Ratios are calculated by dividing the Share Price by Earnings Per Share and are a simple yet effective way of estimating whether a company is over or undervalued.

Unfortunately, cryptocurrencies don’t function like traditional companies, with few generating recognisable revenue streams. They also don’t (in general) raise capital by selling shares, but instead issue their own tokens; the value of those tokens fluctuates in relation to the future potential for revenue generation, as well as perceptions of the intrinsic value of underlying blockchains, networks of participants and users or underlying assets.

So any decision around long term investing in cryptocurrency projects, must use a framework that can assess the value of those things, which is what Fundamental Analysis boils down to.

Whereas Technical Analysis is very prescriptive, Fundamental Analysis within crypto is not just analysing the potential success of a given project but broader socio-economic change, which requires more lateral thinking and some creativity. 

As daunting as that might sound, when looking at a specific cryptocurrency project, you should always start with some simple, but fundamental questions.