Fundamental analysis and the valuation framework for crypto assets
- What is fundamental analysis
Fundamental analysis will reveal if an investment is worthy of long-term capital allocation, while technical analysis will assist with the timing of buys and sells.
Fundamental analysis involves looking at the intrinsic value drivers of an asset. For example, with stocks, fundamental analysis consists of the evaluation of companies operating health through close examination of their income health through close review of their income statement.
As it pertains to evaluating crypto assets, conducting fundamental analysis is different from stocks because crypto assets are not companies. As stated in “Cryptoassets The innovative investor’s guide to an entirely new asset class” Cryptoassets themselves should be valued more as commodities with markets priced by the balance of supply and demand.
Fundamental analysis to the founding characteristics of a cryptoasset includes.
- White paper
- Decentralization edge
- Community and developers
- Relation to digital siblings
- Issuance model
Where to start
White paper: A whitepaper is a document that’s often used in business to outline a proposal, typically written by a thought leader or someone knowledgeable on a topic.
As it relates to crypto assets, a whitepaper is a stake in the ground, outlining the problem the asset addresses, where the asset stands in the competitive landscape, and the technical details.
- Decentralization edge
When reading the whitepaper, the first question to ask is what problem does it solve? In other words, is there a reason for this crypto asset and its associated architecture to exist in a decentralized manner?
- The power of age: the lindy effect
Unlike humans, where the longer someone lives, the more likely death is approaching, the longer technologies live, the less likely they will die soon. The reason is technologies build momentum, and over time many other technologies are built around them, which continues to drive underlying support.
The same applies to crypto assets. The longest-lived crypto asset, bitcoin, now has an entire ecosystem of hardware, software developers, companies, and users around it. If a crypto asset has strong community engagement and achieves success early on, it can create a solid foothold that can benefit it over time.
- Understanding crypto asset valuation
One of the most common questions is what gives crypto assets value? After all, these assets have no physical manifestation. Since they are born of software, the value is derived from the community and the marketplace that naturally develops around the asset. Broadly, the community places two kinds of value on any type of crypto asset: utility value and speculative value.
- Utility value and speculative value
Utility value refers to the use of the crypto asset to gain access to the digital resource its architecture provisions and is dictated by supply and demand characteristics. For bitcoin, the utility can safely, quickly, and efficiently transfer value to anyone, anywhere in the world. Some investors may choose to exit their investments at a certain point because they feel that bitcoin has reached its maximum value. In other words, those investors no longer feel bitcoin has any speculative value left. There is no reason to continue holding the asset or much of it as it has reached its maximum potential and is unlikely to appreciate it further.
- Sentiment data
Crypto market sentiment analysis is a psychological evaluation of factors that influence the price movement of cryptocurrency. The way investors feel about a cryptocurrency can have tangible effects on the market cycles and price of a cryptocurrency.
Market sentiment analysis is a form of research that uses this information to try and predict price movements. By tracking the market dynamics with its participants’ overall attitudes, you can understand the amount of hype or fear surrounding a specific cryptocurrency. we will cover this topic later as it does not pertain much to fundamental analysis.
Get to know the community and the developers.
After a valuation analysis is done, or at the very least current value is contemplated, the innovative investor can do the best is to know and understand the crypto asset developers and surrounding community.
In getting to know the community better, consider a few key points. How committed is the developer team, and what is their background? Have they worked in previous crypto assets and, in that process, refined their ideas so that they now want to launch another?
- Issuance model
The current and ongoing supply increase rate is significant to consider. If a crypto asset has a high rate of supply issuance, as bitcoin did in its early days, that can erode the asset’s value if its utility isn’t growing in line with expectations.
The total planned supply of the asset is also integral to the crypto assets individual units preserving value over time. If too many units are ultimately issued, that will erode the asset’s value in the future.
Issuance models evolve as developers sort through the crypto-economics of releasing crypto assets to support decentralized networks. The issuance model for crypto assets is always subject to change.
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