Understanding Fundamental Analysis

Fundamental Analysis (FA) is a strategy employed by investors and traders in an attempt to establish the intrinsic value of an asset or business. Fundamental analysts use publicly available information to study a business's internal and external factors (micro and macro factors) to understand whether a business is overvalued or undervalued.

Basics of Fundamental Analysis?

Analysts create different models to determine the estimated value of a company’s share price or a cryptocurrency’s coin price. The estimated value arrived through FA is referred to as the intrinsic value. There are two main models for approaching FA:

• Bottom-up Approach: With this model, the analyst selects the company or project they would like to invest in and starts by looking at the company’s earnings, balance sheet, financial health, company structure & management, etc.; these are considered micro factors. Then they zoom out and compare the company’s performance against other companies within the same industry or sector. The analyst may further zoom out to consider the general economic position, like the rate of inflation, interest rates, or imminent political and regulatory decisions that may affect the broader market.

• Top-down Approach: With this model, analysts follow the same procedure as with a bottom-up model but in the inverse direction. Therefore, the analyst would begin their investigation by looking at the broader market, then narrow it down to a specific sector and industry. Finally, they will pick a company to analyze before investing.

Moreover, when conducting FA, there are two main sets of data that analysts collect:

• Qualitative data: These values are usually intangible and not measurable by numbers. The indicators include quality of management (board, directors, executives), brand recognition, and intellectual property, among others.

• Quantitative data: This data can be measured and represented by numbers with great precision. This is usually represented by revenue, profit, assets, P/E ratio, etc.

Fundamental Analysis and cryptocurrencies

FA with cryptocurrencies generally carries the same idea and motive as analyzing with traditional investments (stocks, bonds, commodities, etc.). Although crypto projects are structured slightly differently from traditional stocks; thus the terminology and indicators may vary.

• Whitepaper: A white paper is almost the equivalent of a prospectus provided by traditional companies. It provides a roadmap, project goals, use cases, and technology. It may also be supplemented with research that provides an insight into how the project will be made possible.

• Team & Developers: It is also important to consider the people behind the project. One may ask questions such as, what are the member's track records and experience in cryptocurrency? What are their skill sets? The performance of their past projects. Essentially, one should try to know the people behind the project.

• Active addresses: Blockchain technology offers a new level of transparency, such as being able to view the people active on a network. Looking at the number of active addresses and transactions on a specific blockchain can reveal information about network activity and utility.

• Tokenomics: These mainly consider the economic structure of a project, including values of; Total Value Locked (TVL), Network Value to Transactions (NTV), Market Capitalization against Fully Diluted Market Capitalization, and Circulating Supply over Max Supply, among others.

Pros and Cons of fundamental analysis

Pro

FA mental analysis is beneficial in the long term as it considers multiple bases that affect a project. Hence, it enables investors to identify undervalued projects that, if invested early, can bring an x100 return on investment. Moreover, it is the strategy adopted by the most successful investors, such as Warren Buffet and Benjamin Graham.

Con

On the other hand, FA can be time-consuming because it involves a wide range of factors to consider. Additionally, the wide range of factors includes analyzing micro and macro factors simultaneously; this can be complicated, especially for novice investors.