Use Fundamental Analysis in Crypto Investing: The “Get Rich Slowly” Approach

Use Fundamental Analysis in Crypto Investing: The "Get Rich Slowly" Approach


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Fundamental analysis eschews the analysis of price charts (technical analysis) by looking at a broad set of indicators as well as some well reasoned  — but somewhat subjective — judgements of industry analysts. Before introducing how fundamental analysis relates to crypto investing, let’s look at how fundamental analysis is used in traditional investing spaces.

For stock market investors, fundamental analysts look for stocks that are trading below their “fair market value,” which means stocks that are trading for less than analysts perceive the company to be worth; this means that the current market cap (the number of stocks multiplied by the current price) is less than the analysts believe it is worth.

Fundamental Analysis Scenario

For example, let’s say a company has 5 million shares that are trading for $20 each. This equates to a market cap of $100 million. If analysts believe the company should actually be fairly valued at $140 million, this would equate to a stock price of $28 per share and would be a buying opportunity. Or, if they determined that the fair market value was $80 million dollars, this would equate to a share price of $16. This could also be taken advantage of by shorting the stock — or selling it if you already have it in your portfolio (in the belief the price will drop). Investing based on fundamental analysis assumes the market eventually realizes that a stock is not valued correctly and adjusts the price accordingly.

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Fundamental analysis predicts price movements over a longer time frame, while technical analysis tends to favor short-term price movement predictions.

If fundamental analysts determine that the current stock price seems to accurately reflect the company’s value (in this case they believe it is valued around $100 million), there is no actionable investing play. In this case, they would likely move on in order to see if there is an opportunity to profit off a different company that is overvalued or undervalued.

In general, fundamental analysis predicts price movements over a longer time frame (sometimes years), while technical analysis tends to favor short-term price movement predictions. When it comes to stock investing, metrics to consider include: the outlook of the industry (where the stock is), the state of the economy in general (bullish or bearish), the performance of the stock in question (earnings per share, profitability, and so on), and the quarterly and annual reports given by the company in question. 

Qualitative Fundamental Analysis

The use of hard numbers and metrics is called quantitative fundamental analysis. Using these standardized measurements is a core part of fundamental analysis, but there is another side to these longer term price predictions that utilizes what is known as qualitative fundamental analysis.

More subjective and less tangible in some respects, qualitative fundamental analysis measures the quality of a company by looking at its name recognition, leadership team, organizational structure, and other market differentiators such as more advanced — or patented — technology or products. While quantitative analysis is more of a science, qualitative analysis is more of an art. In general, it is often suggested to combine both types of fundamental analysis to get a clearer investing picture.

Crypto Fundamental Analysis

Fundamental analysts in the crypto sector use similar methods, but must rely on different data sets and qualitative measures. With no quarterly reports and blurred industry designations, these crypto analysts must look at other indicators. When it comes to quantitative analysis, looking at the tokenomics (covered in our previous article) is a good place to start. From there, you may want to delve into qualitative analysis by looking at the core team, early investors, the whitepaper, previous project accomplishments, and the trajectory of the upcoming roadmap — and their chances of success.

Opinions can certainly be mixed when analyzing some of these characteristics. Let’s take the leader or team of a project. Some analysts value a public and open team of well known individuals with past success. On the other hand, other analysts may value a leaderless project that may have a pseudonymous or anonymous team — or no leader at all. 

For example, Bitcoin doesn’t have a headquarters, board of directors, or even a known founder. While Satoshi Nakamoto created Bitcoin, no one knows who this person — or group — is. For analysts that may be concerned about the legal or regulatory risks that come with a crypto company or team, this could actually be considered a positive — not a negative. In keeping with this, other analysts may prefer the governance of a decentralized autonomous organization (DAO) over the centralized decision-making of a small team.

Partitioning Crypto Use Cases: Storage and Payments Examples

In much the same way that you wouldn’t compare CocaCola with Ford or McDonald’s with SpaceX (but you would compare Ford with Tesla), you need to separate crypto projects by their intended use cases — and their relevant sectors. Use cases for the blockchain include: cryptocurrency, oracles, decentralized finance (DeFi), gaming, AI, decentralized storage, real-world asset (RWA) tokenization, and much more. 

Once categories are established, you need to try to answer the following questions

What is the overall market for this use case?
How long will this market take to mature?
What percentage of the market is this project likely to capture?
Does this crypto project have major competitors?

Of course, the questions are the easy part of the test. The answers are what require some work; they get graded as time goes on and one’s predictions are validated — or proven wrong. When it comes to crypto, many of these sectors are expected to gain market share from centralized alternatives. Let’s look at cloud storage as an example.

The cloud storage market was valued around $90 billion in 2022 and is expected to surpass $300 billion by 2028. The crypto sector’s decentralized storage market is currently valued at around $4.75 billion. If you believe that decentralized cloud storage options will gain market share from centralized cloud storage alternatives in this burgeoning industry, you may want to crunch some numbers to see if investing in this sector makes sense.

 

Popular options for decentralized cloud storage include Filecoin, Arweave, and Storj. If you believe they are undervalued, you may want to select ones that you believe have the most promise, are undervalued relative to their competitors, or have higher market penetration. To reduce your risk, you may simply want to diversify your exposure into a number of these projects.

Likewise, many make price predictions for BTC using these questions:

What is the market for international remittances, decentralized payment infrastructure, and a fiat currency alternative?
If BTC captures (insert number)% of this market, what will that equate to in terms of market cap?
If that market cap prediction is correct, what would each BTC be valued at?
How many BTC have been permanently lost?
Is BTC likely to achieve market dominance for these use cases?
Will other cryptocurrencies rise to challenge BTC?

Many of the longer term BTC price predictions utilize fundamental analysis to calculate a variety of prices ($100,000, $250,000, or $1,000,000/BTC) at a variety of future dates. These numbers are generally not picked out of thin air; they are backed up by fundamental analysis. Of course, the difference in how you answer some of these key questions about BTC accounts for the large price disparities in these predictions.

Oftentimes, this analysis must accurately weigh BTC’s fundamental — or intrinsic — value. For BTC proponents, some view this technology as revolutionary and almost priceless. For crypto skeptics (Peter Schiff, Warren Buffet), many see BTC and other cryptocurrencies as being worthless and posit that they have no inherent or intrinsic value. Many fall between these two extreme viewpoints in some sort of fundamentally analysis-derived middle ground.

Analyzing a Blockchain’s Intrinsic Value

Knowing the core concepts about fundamental analysis can help you make more informed investing decisions. This may allow you to understand the rationale of price predictions given by experts — or to even make your own rough estimations on future price movements. Ultimately, the decision is up to you on how to assess the value of this burgeoning and dynamic space. While many have predicted the fall of Bitcoin, Ethereum, and the crypto ecosystem writ large, it is still continuing to be a major economic powerhouse with a combined market cap in excess of $1 trillion (down from a high of nearly $3 trillion in 2021).

As the crypto market is still nascent and very volatile, you may want to strongly consider reading and listening to the fundamental analysis of crypto experts and analysts. While it is often quite difficult to predict the crypto prices in shorter time horizons (days, weeks, and even months), using fundamental analysis can help you predict the future price of these assets in 5–10 years — provided the analysis is done correctly and the critical assumptions become reality.

Disclaimer: This investing series is strictly for informational and entertainment purposes. It should not be construed as financial or investment advice. Do not invest based on price prediction tools or forecasts laid out in this series. Please consult an investing professional or financial planner if you feel you need investment guidance.

Cheat Sheet

Fundamental analysis tries to determine the fair market value of a stock or crypto.
If the fair market value is different from the current market price, there is likely a profitable buying or selling opportunity for the asset in question (as the market price is expected to reach equilibrium with the assessed fair market value).
There are two main branches of fundamental analysis. Quantitative fundamental analysis looks at metrics and hard data. Qualitative fundamental analysis looks at characteristics related to quality and is more nuanced and subjective.
Fundamental analysis is typically used to predict price movements over a longer time period.
Analysts and traders use fundamental analysis to assess the future price of crypto assets based on their adoption, use cases, competition, predicted future market share, and various other metrics.

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