In this article, we’ll delve into how to conduct a fundamental analysis of different cryptocurrency projects. This involves evaluating these projects based on their core characteristics or, in other words, their fundamentals.
Fundamental analysis is all about determining the intrinsic(real) value of an asset. It’s about understanding the genuine worth of something—specifically, in this context, cryptocurrency projects.
1. Narrative and Catalyst
Let’s start with the narrative. A narrative is like the prevailing storyline within a certain niche. At any given time, it’s this narrative that drives the adoption of a particular technology or product within an industry. For instance, after the 2008 market crash, Bitcoin’s adoption narrative surged as it presented itself as a solution to banking issues, specifically censorship resistance, and immutable and permissionless money.
Then, in 2014, Ethereum’s birth shifted the narrative from mere permissionless money to programmable money, spawning various offshoots such as smart contracts, ICOs, STOs, decentralized finance, and presently, meme coins and reward assets. Understanding these narratives is crucial—they’re the stories that convince people to invest and can rapidly boost an asset’s value.
Following narratives, we’ve got catalysts. Catalysts are what trigger reactions, positive or negative, without being directly transformed in that reaction. For instance, if there’s a buzz around a meme coin, its listing on major exchanges like Binance or Coinbase can drive massive buying and surge its price.
So, in essence, while narratives drive interest, it’s the catalysts that really amplify the impact. It’s like a chemical reaction—it takes both the narrative and the catalyst to truly make an impact on the market, either positively or negatively.
2. People: Founders, Investors, Partners, and Community
Firstly, let’s talk about the folks involved—the founders, co-founders, and the entire team steering the project. Ensuring they have the capability and dedication to deliver what they promise is key.
Checking the project’s investors is also essential. Big companies backing the project like Binance Lab, Coinbase Ventures, or Dragonfly Capital signal trustworthiness. These backers often bring in skilled professionals who conduct thorough research.
Partner involvement matters too. Recognizable and respected names willing to affiliate themselves with the project add credibility. Lack of big-name associations doesn’t mean a project’s bad; it just means caution is warranted.
Lastly, the community. Investigate their engagement across platforms like Discord, Telegram, Twitter, and other forums. Real human discussions and active engagement matter more than just bots sharing greetings(GM, GM, GM).
3. Future Plans: Whitepaper, Roadmap, and Community Updates
Looking into a cryptocurrency project’s future plans is crucial. The whitepaper is a goldmine—it details the project’s purpose, technology, token usage, and more. A serious project always has a whitepaper; some offer a condensed version called a litepaper, usually around 10 pages, available online for easy access.
The project’s roadmap and milestones are equally significant. The roadmap outlines their upcoming goals for months or years, while milestones showcase their achieved targets. Sometimes, missing a roadmap target due to technical complexities isn’t alarming as long as the team actively works to resolve it.
Community updates reflect a serious project’s commitment. Regular communication via community channels signifies transparency and dedication.
In essence, understanding the people involved, their future plans, and community interactions gives a comprehensive view of a cryptocurrency project’s potential.
4. Products: Uniqueness, User Growth, Narrative Fit, and Replication Difficulty
Examining the project itself is vital. Look for uniqueness—does it offer something groundbreaking or just mimic an existing project? A good project must outdo its predecessors. It needs more: more benefits, features, advantages, and a superior team or technology.
Once you’ve spotted a unique edge, focus on user growth. A growing user base indicates a promising project, especially in blockchain, where a large user community holds significance. Also, ensure that the product aligns with the project’s narrative—whether it’s DeFi, NFTs, or Web3.
Lastly, assess the project’s replicability—does it have a “moat”? A moat signifies the project’s ability to maintain significance by being hard to replicate. If others can easily copy it, the project’s value diminishes rapidly.
5. Financials: Revenue, Comparisons, and Metrics
Moving on to financials, it’s not just about having users; it’s about having paying users. Look at the revenue generated from transaction fees. Compare this project’s revenue with its competitors. Is the revenue increasing along with them?
Another crucial metric is the Total Value Locked (TVL) for DeFi protocols. TVL represents the total amount of assets staked in a protocol. Identifying unique traction or activities specific to the project is also essential. To analyze these aspects, platforms like CoinMarketCap or CoinGecko come in handy, especially for DeFi or DApp projects.
Understanding the product’s uniqueness, growth trajectory, narrative relevance, and difficulty in replication, along with diving into the financial metrics, provides a comprehensive understanding of a cryptocurrency project’s potential.
Let’s delve into the tokenomics of cryptocurrency projects as we continue our analysis.
6. Tokenomics: Supply
Tokenomics, the fusion of tokens and economics, is crucial in evaluating a cryptocurrency project’s economy. How tokens are designed significantly impacts the project’s validity. Start by understanding the total token supply, available tokens, and how they are allocated among the team, project founders, and investors. An even distribution among these stakeholders is key to avoid potential exit scams.
Also, pay attention to vesting periods and token unlock dates for teams, founders, and investors. Sudden token releases can flood the market, affecting token values.
7. Tokenomics Demand Side: Utility, Yield, Discount, Governance
Now, let’s explore the demand side of tokenomics—how useful the token is.
Consider the token’s utility for users. Does holding the token yield benefits like interest or returns? For instance, tokens like Binance’s BNB offer discounted fees on their exchange. Some decentralized platforms leverage tokens for governance and voting on community proposals.
Ensure the cryptocurrency’s token offers practical utility, such as real yield from lending and borrowing, as opposed to mere speculation or creating new tokens.
Conclusion
Understanding these seven points—from narrative and catalysts to supply and demand side tokenomics—provides a robust framework for evaluating cryptocurrency projects. I hope this framework assists you in conducting fundamental analysis and selecting the right cryptocurrency project for you. Best of luck!
