Cryptocurrency is a highly volatile asset and trading it requires some skills. You need to understand how to analyze digital assets by examining internal and external factors. It’ll help you predict future prices and the intrinsic value of an asset to make sure that you invest your money in the right place.
In this article, we’ll discuss how to analyze a cryptocurrency using crypto fundamental analysis. It’ll help you determine whether a cryptocurrency, you’re interested in, is worth investing in or not.
Understand Project Metrics of an Asset
Before you dive deep into a cryptocurrency, you’ll need to look at some technical factors that affect its market value.
Overview of a Project
The first step is to examine the high-level overview of a project. You can do it by going to the social media pages and the website of the cryptocurrency.
It’ll allow you to understand what the project is about and what services it offers. Your main focus should be on the project’s utility to determine whether or not it solves any real-world problem.
Developers
The experience and credibility of the project’s team play a big role in its failure or success. Reliable crypto projects always disclose their development team and the board of executives. If you don’t see any information about the project’s team, consider it a red flag.
Road Map and White Paper
All crypto projects that aim to solve real-world problems have a well-defined and strong roadmap, along with a white paper. It’ll provide you with information to determine whether the project has any merit or not.
A road map is basically a list of services and sub-projects that a crypto start-up plans to release in the future. Whereas, a white paper contains technical information about the cryptocurrency.
Investors
It’s a good sign if a crypto project has reputable investors. It shows that the team behind the project has performed its due diligence and it can increase in value in the future.
Community
Keep in mind that a crypto project can’t run without a strong community and following. The size, involvement, and enthusiasm of the community will help you understand whether a project is worth investing in or not. Exploring social media pages, especially Twitter, is the best way to assess the project’s community.
Dive into Financial Metrics
Once you have understood the fundamentals of a crypto project, the next step is to move to more technical indicators. It’s important to note that using technical analysis tools is a bit trickier when it comes to cryptocurrency.
However, the following key indicators will help you make the most informed investment decision.
Tokenomics
It’s important to look at the total, max, and circulating supply of the cryptocurrency. The total supply is the total number of tokens that are in existence (minus the tokens that have been burned).
Whereas the circulating supply refers to the number of coins currently available in the market. Lastly, the max supply is the number of coins that will ever come into existence. The max supply can be infinite or fixed depending on the project.
The higher the total supply, the less value per coin will be. Keep in mind that the total and circulating supply can be unreliable metrics sometimes as many tokens are sometimes considered in the circulating supply even if they’re stolen or lost.
Trading History
Examining the trading history of a project will provide you with a high-level overview of the performance and price of the cryptocurrency. You should look at the daily, weekly, monthly, quarterly, and yearly history of a project.
If there’s a steady increase in the price over a long period, then it’s a good sign for the project. But if you see many drastic ups and downs, it might mean that the crypto doesn’t have substantial long-term potential.
Market Cap
The market cap or market capitalization is the total value of a crypto project. The easiest way to calculate the market capitalization of a cryptocurrency is to multiply its current market price by the total number of circulating tokens.
Generally, the higher the market cap the safer the crypto asset will be for your investment. However, you must keep in mind that cryptocurrencies with a lower market cap have more potential to grow in the future.
So, if all the other metrics are good, you can consider investing in a crypto asset with low market capitalization.
Trading Volume
The trading volume of a crypto asset is one of the most important on-chain metrics that allow you to understand the activity level backed by raw data from the network.
The higher the daily trading volume, the more liquid a specific crypto token will be. It also shows a consistently high transaction value of the cryptocurrency.
Steer clear of coins with low trading volume as it shows that fewer people are buying or selling them. It also means that the crypto project has a poor community.
FAQs
Why is Analyzing Cryptocurrency Important for Investment?
Analyzing a cryptocurrency allows you to determine whether it’s overpriced or undervalued. It allows you to predict its future price and help you make the most informed investment decision. Not only does it increase the probability of earning more profit but it also minimizes the risk factor.
How Do You Know Which Cryptocurrency Will Go Up?
You need to examine the upcoming projects of a cryptocurrency by looking at its road map. If a cryptocurrency has an experienced and qualified development team and they have upcoming projects that solve real-world problems, it’ll probably go up. You’ll also need to analyze other projects and financial metrics to determine the future price of a cryptocurrency.
Final Words
Analyzing a cryptocurrency is about taking a deep dive into all the information you have at your disposal about the asset. You should choose a crypto asset that has use cases and solve real-world problems.
It’s also important to analyze the project’s team, community, investors, token distribution, trading history, market cap, and trading volume. It’ll help you determine whether or not a project is worth your investment.
