When choosing which cryptocurrency projects to get invested in one often comes across the terms “Fundamental Analysis” and “Technical Analysis.” Understanding what these are and how they apply to investment choices can be important in making informed decisions. In this article, we’ll break down Fundamental Analysis and see both what it entails and how it can be used effectively.
For starters, let’s define what we mean here. Fundamental Analysis (FA) involves looking at the most essential, literally fundamental, aspects of a project. This generally includes what the project claims to do, who is running the development team, what they have to show so far, current industry conditions, and much more. Alternatively, Technical Analysis (TA) entails looking at the patterns in price action and comparing against historical market data to try and glean insight on future movements, but that will be for a different article.
Now that we have broadly defined what we are looking for, let’s take a look at the different types of information you should be gathering and where it may be found.
The best place to start FA is kind of obvious and involves just looking at what is being offered. What are the main claims for this new asset? Is it a currency, a utility token, a digital collectable? To start getting these answers, look to the whitepaper. There’s no one absolute template, but a positive sign would be a whitepaper that is long enough and technical enough to explain what the project is doing, but still accessible and easily understandable enough so most can wrap their head around the basic uses. If a whitepaper is filled with empty rhetoric or is completely indecipherable, it may well be a red flag.
Generally speaking, you should find the whitepaper hosted on the project’s main website. Here is the primary place to look for information about this endeavor. Ideally, resources for all of the types of info we’ll cover here should be found or linked to somewhere on the website. Anything that is missing or obscured ought to be met with suspicion. Just because the site is clean and professional-looking isn’t nearly enough. It isn’t hard for most people to throw together a decent looking site these days, but it’s acce
ssibility to information and a transparency from the developers you should be looking for.
One more important tangible consideration is whether the project has anything functional to offer so far. Having a working testnet, for example, is a much better sign than just ideas and a roadmap that starts next year. Actually having something you can use means you can go assess how it works today. Is it a highly derivative and buggy system, or is it innovative and surprisingly smooth? These answers should weigh heavily into your investment choices.
After reading the whitepaper and generally checking out the site, it’s a great idea to start digging into the development team behind the project. Every major member really should be represented, including some type of contact info, even if it is just a social media account. It seems obvious but it can be very important to confirm that, at minimum, the team leaders have a real presence and real experience, and didn’t simply “pop-up” in the cryptocurrency space in the last year. Basically, if you’re giving someone your money, you should likely want to know not only who they are but how to reach them.
On top of this, while it isn’t necessary to do a full background check on every team member, it should be noted what the history of the big names looks like. Do they have past successes or failures? Look into those stories. If someone has been jumping from shady project to shady project (though they’ll probably try to obscure that), it is very different than if someone has clear proof of previous projects that went on to be successful in their area.
Another key aspect is just how transparent and communicative this team is. Do they have a blog? A Twitter account? Are they on GitHub? For legit projects the answer to all of these is plausibly “yes,” but the important thing is that the team is more or less actively engaged with the community. That doesn’t mean they respond to every troll on Twitter (which can be its own red-flag) but it does mean that there is some avenue for the community to ask questions to the developers and receive prompt responses in return. This brings us to the next place to look for project information, the people who support it.
If a project is real and communicative, it will often build a decent sized community around it. This comes in the form of project forums, subreddits, Telegram groups and more. These supporters should be relatively easy to find and fairly active around legitimate projects. Next you want to look at what those people are actually saying.
Ideally most members of the community should be excited, but not fanatical necessarily. People who support the project should, on average, be able to explain why. You want a sense of deeper concern for innovation than on getting rich. Make no mistake, every project will draw in people who mostly just care about “Lambos” and “Mooning,” but it shouldn’t be all you find. If it is, then the hype may be getting artificially amplified by bots and paid shills.
How the general community feels about the development team is also important. There will always be those who just complain that things aren’t going fast enough, but a team that is open and showing real progress will usually have a good amount of optimism and support surrounding it. If there’s an excessive amount of anger, it could be a sign that a project is falling behind or that it has simply built up a toxic following, but in any event it is not an encouraging discovery.
Even if everything looks good across all the previous categories, it would be wise to look at the project against the rest of the industry. Where does this asset fit in? Does it have direct competition? It probably should, if it serves a real need. How does it aim to be the best? Doing some quick FA on a project’s main competitors can certainly give insight into how feasible the path to success is. Maybe this project actually is the first to fix a problem, but is there a chance someone else can come in and do it faster and better? Could a broader change in technology make this obsolete? History is filled with failed endeavors that had good technology and well meaning teams behind them, but sometimes the industry conditions just aren’t hospitable.
This level of FA is the trickiest and involves having a pretty good finger on the pulse of technological innovation and the ebb and flow of financial markets. Things change fast in both realms, and this industry really is on the cutting edge of something new. Nobody quite knows what to make of cryptocurrency just yet, so paying very close attention to changing conditions is essential.
There is, of course, no smoking gun that can guarantee that any new asset will increase in value. Investing in new technology will always be a gamble, and there is no avoiding that. Still, with FA we can at least shift our strategy away from just throwing darts at a board and hoping for the best, to taking calculated risks based upon real information. Like so many things in life it really just boils down to taking the time to do your own homework, and not blindly trusting what others say. After all, “Verify, Don’t Trust,” is one of the basic tenets in the cryptocurrency industry, so why shouldn’t it apply to every investment?