Understanding Cryptocurrency Analysis: The Basics | Vitaliy Dubinin

Posted On December 10, 2022

A thorough investigation of the information available about a financial asset is required for fundamental crypto analysis. Vitaliy Dubinin suggests that you consider looking at its use cases, the number of users, or the team working on the project.

The object of any analysis is to determine if the asset is overvalued or undervalued. One can then utilize these observations to guide their trading positions.

Investing in cryptocurrencies can be a wonderful way to diversify your portfolio, but it can take time to determine which ones are right. A common misconception among newcomers is that because of the considerable market volatility; cryptocurrencies cannot be evaluated using fundamental research. Even while the item can be at the whims of international traders, one might still generate a well-informed opinion on its worth.

Knowing fundamental analysis enables you to decide whether purchasing or selling a particular coin is better. We’ll go over the basic analysis process for analyzing cryptocurrencies, the important aspects to take into account, and how analyzing cryptocurrencies differs from typical asset analysis.

However, Vitaliy Dubinin believes examining cryptocurrencies is crucial if you want to make a wise investment choice.

What Do We Mean By the Term “Fundamental Analysis?”

A security’s intrinsic value is calculated through fundamental analysis, and it is meant to be an impartial estimate of the asset’s true worth. By evaluating the project’s underlying data, we can tell if a cryptocurrency’s coin is undervalued or overvalued.

The markets for cryptocurrencies are typically unpredictable. Bitcoin and Ethereum are well-established monies that are yet vulnerable to price swings. If you need to know what you’re doing, investing in a cryptocurrency less than a decade old is risky.

With the use of fundamental research, both novice and seasoned traders can confidently trade the market’s fluctuations. Traders might improve their chances of success by developing methods based on fundamental analysis.

Technical analysis is useful for traders and investors with an open interest in predicting the direction of the financial market using technical indicators like the Bollinger Bands, RSI, and Moving Average Convergence-Divergence (MACD).

What to Look for in a Fundamental Cryptocurrency Analysis

When analyzing a cryptocurrency, Vitaliy Dubinin believes fundamental analysis is performed to assess the asset’s potential for profit and lower the investment risk.

The three primary fields of inquiry into which fundamental analysis may be put are:

KPIs for the Blockchain (On-chain Metrics)

While the information stored on the blockchain is invaluable, extracting it manually from the raw data can be time-consuming and costly. Fortunately, numerous APIs offer resources that aid in making informed financial decisions. Market leaders in cryptocurrencies have created reporting tools that provide useful data, such as the total number of users, the volume of transactions, and the dollar worth of those transactions.

Hash rate, status, active addresses, transaction values, and fees are the three most essential parameters for any fundamental examination of a cryptocurrency. Let’s look more closely at how this information can provide trading advantages.

• Hash Rate

Blockchain is crucial to network security, and analyzing its raw data can shed light on the fundamentals of cryptocurrencies.

Proof-of-Work (PoW) blockchains power cryptocurrencies like Bitcoin and Ethereum. Proof-of-Work (PoW) systems need crypto miners to solve a computational problem that verifies each transaction and prevents bad attackers from acquiring 51% majority control of the blockchain. Because of this, the entity in control might double-spend their own money, alter or halt transactions that don’t belong to them, and so on.

The hash rate is the miners’ total processing power put into PoW blockchain calculations. It is possible to make educated guesses about hash rates by using readily available data, but it is impossible to determine an accurate hash rate.

A high hash rate is considered a positive sign by many bitcoin speculators. The more profitable mining is, the greater the hash rate and network security. A miner’s profitability can be estimated by computing its hash rate.

However, the drop in hash rate could make mining this cryptocurrency unprofitable for miners, causing them to abandon it. In a downward-spiraling market, miners may be forced to “capitulate” and sell off their equipment. Investors lose interest if the hash rate drops.

• Status and Active Addresses

The quantity of functioning blockchain addresses is quantified by “active addresses.” One option is to tally up the total number of addresses used for sending and receiving messages throughout all periods. The amount of activity and value of a coin or token can be estimated by keeping a running tally of the addresses that have sent or received transactions over a set period, be it days, weeks, or months.

One alternative is to count how many different addresses there were at certain time intervals and then evaluate the differences between the groups.

• Fees and Transaction Value

Fundamental analysis prioritizes the evaluation of transaction values more than technical analysis does. The daily transaction value would be $1,250 if there were five $250 Bitcoin transactions on the same day.

While comparisons provide information about potential future market movements, consistently high transaction values indicate a currency in steady circulation.

The number of transactions paying to have their transactions added to blockchains as quickly as possible is reflected in fees as the blockchain’s demand. The gas used by Ethereum is an example of a fee, but transaction fees can vary from cryptocurrency to cryptocurrency.

We can determine a coin or token’s security by analyzing fees paid over time. Over time, transaction fees may inevitably rise as the block subsidy or block reward declines concerning the difficulty of mining the block. Cryptocurrency miners would start operating at a loss and disappear from the blockchain if it kept the payout the same.

• Accounting Metrics

The objective of fundamental analysis is to generate a quantitative value an investor can use to evaluate an asset’s prospects. Understanding the trading conditions of assets, such as their liquidity, external influences, and market reaction, is necessary for evaluating cryptocurrency financially.

These are useful components of cryptocurrency fundamental research, particularly when evaluating the prospect before creating an investing strategy.

• Capitalization of the Market (Market Cap)

A network’s value is represented by its market capitalization value. One can figure it out by dividing the current cost by the number of used coins. Market capitalization can provide deceptive valuations if one ignores other criteria like liquidity. After all, just because an unpopular altcoin has a 50 million coin supply and a few $1 exchanges, it doesn’t necessarily follow that each coin is worth $1.

Investors may assume that coins with lower market caps have greater growth potential in general, though high market caps can also indicate a more solid foundation and long-term strength. Even though we’ll never truly be able to determine the exact number of coins in circulation due to forgotten money, misplaced wallets, and irretrievable keys, market capitalization provides a rough estimate of a coin’s network value.

• Bitcoin White Paper

The crypto white paper is a technical document describing the project’s goal and operation. It is the most crucial project document and must, at the very least, include the following details:

• solutions using blockchain technology
• Applications of the Currency
• planned enhancements and features
• Economics of tokens and sales data
• Organizational Data

Vitaliy Dubinin recommends you consider the white paper with a healthy dose of skepticism and keep an eye out for reviews of the project from outside sources.