Crypto veteran takes you to analyze the crypto market from a fundamental perspective

We have all bought tokens at stupid valuations. No one is surprised. This is the tuition you have to pay in the cryptocurrency world. Therefore, I have been obsessed with this research for many years and it has made me a better crypto investor. I hope that in this article, I can help you avoid some losses and take fewer detours. Here is my method for fundamental analysis.

Fundamental analysis seeks to determine the intrinsic value of an asset, which is an objective measure of its worth. This is how you should find long-term conviction in an asset. A good FA can help you withstand the volatility of cryptocurrencies over the long term. I will walk you through my own investment process and how I did it. This helped me build early conviction in projects like ETH, AVAX, LUNA, LINK, and more recently POKT, MAGIC, and GMX.

I divide fundamental analysis into three categories: 1. Project analysis 2. Financial analysis 3. On-chain analysis

1. Project Analysis

This is where I usually start. The whitepaper is the most important part of a project and I read it first. I am amazed at how many people invest huge amounts of money into crypto projects without reading the whitepaper.

The white paper should outline the following:

– Issues being addressed

– Explain their technical solution

– Use of Tokens

– Token Economics

– Background information of the team

This white paper alone should provide a solid foundation for your continued analysis.

A good whitepaper makes you want to learn more about the project. Reach out to the team, really dig deep, check the team’s academic references, check out their LinkedIn to understand their experience so far.

You have to determine if this team is in this for the long term, or is it just to build an MVP (sometimes they don’t even get that far) and use you as exit liquidity. These are the people who are responsible for delivering the project, and they need to be passionate enough.

For anonymous teams, you can still gain insight into their online presence. What are they writing on social media or elsewhere?

If they are a developer, check their GitHub contributions. DM them and see if they are willing to answer any questions. Double-check the roadmap. Take a look at the timeline to assess if it is the right time to deploy the funds. If a project hasn’t delivered its main product in two years, there may be no rush to invest. Use the roadmap to assess if the team is delivering on time or achieving their milestones. Transparency in this area is also important.

Next, we started to analyze competitors.

Who are the early movers in the industry and how do market caps compare? What advantages does the protocol have over its competitors? Have they been successful in attracting users? Why would users use this project over a competitor’s solution?

Then there is social media analytics

How does the project communicate on social media? Is their marketing on point? Have they fostered a strong community willing to help with marketing? Is there a lot of social activity related to the project? Join Discord and Telegram to get a feel for the project community. Are they discussing the intricacies of the project in depth? Or are they just talking about it and creating FOMO for no reason? Does the community make great memes? Memes indicate a passionate and strong community and help spread the narrative of the project.

CT is one of the best and worst places to do project analysis. It’s always worth reading the compiled tweets to see if you missed any key details in your own research.

What is the UI/UX like? This is kind of a subjective category to analyze. But you have to determine if it is a good experience for the user, and if the interface is intuitive and easy to use without requiring someone to Google ‘how to use _____’.

Yearn in 2020 VS Yearn in 2022

2. Financial Analysis

Second layer, let's focus on financial metrics. I think it goes without saying that when trying to assess whether something is fairly valued, you should look at the market cap and fully diluted value of the project. This is where most people start. However, there are still many retail investors who don't do this.

In 2021, we have many retail investors buying Shiba near new highs, and they are shouting "The price will reach $1!" because they don't understand the market value. For reference, Shiba's current circulating market value is $16 billion and the price is $0.00003025.

Everyone likes to say that FDV is a meme in the bull market, sometimes it is, but sometimes it really isn't. Look at Solana dApp, they provide valuable experience about FDV. If the FDV of a token is seriously out of sync with the current situation, don't buy it anymore. Imitating Solana dApp in crazy FDV will not have good results.

Market capitalization can provide misleading valuations if you don’t take into account liquidity, which is a measure of how easy it is to buy and sell an asset.

Which exchanges is the asset listed on, or what is the Dex liquidity like?

Very illiquid assets can be very dangerous because prices can change dramatically if large holders decide to cash out.

For example, Squid:

Token economics, token economics, token economics! Token economics is the economics of supply and demand for tokens.

Supply and demand drive the value and price of cryptocurrencies. The higher the demand relative to supply, the higher the price.

Does the product need a token to work? What is its purpose? More real-world use cases means more users and more demand. Reading the whitepaper may give you some answers about the token.

In some cases, projects may have changed from their initial whitepaper. Check blogs and use Twitter searches to see if anyone has written about token economics. Sometimes, it can be hard to find token release times, allocations, and release rates. This is usually not a good sign. Not knowing the team's potential supply sales could cause you to incur some significant losses in the short and medium term. You need to understand a project's annual inflation rate each year. New tokens entering the circulating supply need to be absorbed by the market.

If stakers earn a lot of tokens, there could be a lot of sell-side pressure. $MIR and $ANC have inflation rates of about 200% in the first year as developers look to bootstrap dApps and attract liquidity. So prices always trend down in the short term.

This does not apply to projects without products, but does apply to live Layer 1s, dApps, and infrastructure.

You can use TokenTerminal to obtain:

– Income from the agreement

– P/E and P/S of protocols and dApps

You can then apply more traditional stock analysis tools to help you gauge whether it is objectively overvalued or undervalued based on current revenue. If a protocol clearly has huge profit potential, is showing great growth and has a very low P/S, then it may be a solid long-term investment.

You can even use these numbers to help build a discounted cash flow model. This is a popular stock valuation model that discounts the current value of a business by the future cash flows it can generate. Because two rates are key - the expected growth rate and the current discount rate. Based on the pull of each factor, determine the cash flows and come up with a fair valuation.

Here is an example of a discounted cash flow model that attempts to find out what the lowest price is for $1 of ETH.

The model shows $10,200 per ETH, which shows that Ethereum is severely undervalued.

Obviously, this model doesn’t take into account future changes to Ethereum, how L2 will impact demand, etc., but it is still another useful deployment tool when evaluating an asset.

3. About on-chain analysis

Finally, I try to find out what is happening on the chain.

Platforms like Glassnode, Nansen, and DuneAnalytics can tell you:

– Number of addresses and active addresses

– The number of addresses with a balance exceeding a certain amount

– Number of long-term and short-term holders

– Exchange Supply

– Whale wallet address activity

......

What I am saying is, try to find any reason why it might not be a good time to buy. For example, if a large portion of the circulating supply has moved to exchanges recently, then that could be a sign that people are planning to sell.

You now have a ton of information about the project and the token , which can help you decide if this is a good long-term investment. I compiled all of this into a combination of documents and tables so that I could have all of this information in one place if I needed to reference any of it. Don't try to keep all of this information in your head. Write it all down. You'll want to reassure yourself about your investments at different times, especially if prices plummet.

I would also like to say that I have invested significant amounts of time researching projects only to decide not to invest.