The acronym ‘DYOR’ (Do Your Own Research) is used a lot in the crypto space, but how do you actually do your own research?? Admittedly, it’s not simple and learning to DYOR takes a lot of time, practice and commitment. But if you’re ready to learn, this series is a good place to start. Let’s start by taking a look at Fundamental Analysis.
But first, what is Fundamental Analysis (FA)?
The sheer number of assets in the crypto world can be overwhelming and confusing. Fundamental analysis or FA is a method used to determine an asset’s intrinsic value by looking at different internal and external factors. These include reputation, competitors, team, advisors, social presence, marketing, tokenomics and distribution, sector health, and market capitalisation.
What’s the difference between fundamental analysis (FA) and Technical Analysis (TA)? Click here to find out.
FA considers micro-and macro-economic factors that can affect a project’s performance. It is essentially the process of researching all aspects of a company, using the information gathered to determine its value and growth prospects.
What is it used for?
FA helps investors to identify early-stage projects that have promising futures and huge potential. Fundamental analysts look for assets that are not correctly priced by the market and are trading higher or lower than their intrinsic value, as this presents an opportunity.
A project may have strong fundamentals but a low market cap, meaning it may be a good opportunity to buy. On the other hand, if a project has a high market cap but weak fundamentals, it’s not likely to stay on top in the future, and it may be a good time to exit a position there.
DYOR (Do Your Own Research)
Doing your own research is so important- it’s never a good idea to just buy something based on what someone on Twitter is saying and simply hope for the best. You wouldn’t invest in a restaurant without knowing where it’s located, what kind of food it serves, whether it has been successful in the past, how many clients it has, who runs it etc. It’s the same when it comes to investing in crypto projects.
Fundamental Analysis is especially important for long-term trades. Deep research and analysis offer an understanding of how big the project’s potential to gain value is over the next few months or years.
But how do you actually put it into practice?
Let’s dive in and discuss the most important things to look at during the fundamental analysis of a crypto project. (Note that this is a beginner’s introduction to Fundamental Analysis.)
1. General Research
Start by researching the project online (through Google searches etc.) Try typing in the asset’s name and go at least 5 pages deep into Google, open anything interesting. Also, make sure to try different keyword combinations.
Check for independently written research articles too (written by anyone but the project’s team) for a more rounded overview of the project.
- Where does this project get its value?
- Does it have potential to grow over time?
- What exchanges is the crypto on?
- Who is the crypto partnered with? What do the partnerships actually mean?
On-Chain metrics can get pretty complicated, so for the purpose of this beginner’s fundamental analysis article, we’ll simply give a brief introduction to a few more basic metrics. You can check most of these details on Coingecko and CoinMarketCap.
Look at the crypto’s market cap to help you consider the potential for its future growth. Projects with larger market caps usually have less growth potential than lower cap projects. So, if you invest in a crypto that already has a huge market cap, it will be harder to get a significant return. However, note that projects with larger market caps are generally considered to be less risky.
While there’s no single universal definition, cryptos are usually split into Large, Mid, Small and Micro Caps. Note where the crypto you’re looking at lies in the market as this can give you an idea of how the price may move, and what the potential risk: reward ratio is.
Large Cap: > $10B (these tend to be more established, less risky, and move the least).
Mid Cap: >$1B & < $10B (relatively established but more volatile than large-cap, and prices change more often, which means they often have more potential upside but equally more risk).
Small-Cap: <$1B & >$100M (higher risk and more volatile than mid or large-cap).
Micro-Cap: Usually <$100M (usually relatively new and the riskiest, but also may be most profitable for early investors).
Maximum & circulating supply
What is the max supply? Does it have one? (some cryptos don’t). What is the circulating supply (the number of tokens currently in circulation)?
The basic laws of supply and demand have a significant effect on a crypto’s price, so having at least a basic understanding of what circulating and maximum supply is will help to give you an idea of how much demand is necessary to increase the price.
The circulating supply is the number of tokens that have been issued so far (the number of tokens currently in the market). The maximum supply is the total number of tokens that will ever exist.
What is the difference between the crypto’s circulating and maximum supply? If there is a big difference between the two, where are the remaining tokens and how will they be deployed?
Transaction count/value & active addresses
Also, take a look at the active addresses and transaction count/value to get an idea for the use of the project.
- Transaction count offers an indication of how much activity is taking place on a network. However, note that this should be taken with caution as there’s no way to tell that it isn’t just one party transferring funds to increase the activity.
- Transaction value tells us how much has been transacted within a certain period of time.
- Active addresses refer to the blockchain addresses active in a certain period.
Check the wallet holders of the token to make sure that no single wallet/individual owns too much of it (to avoid whale manipulation). If a few investors, or team members, hold a large amount of the tokens, it adds a high potential risk. They could have excessive swing over governance, or control the price by pumping and dumping to suit them.
- Blockchain explorers
3. Project Website
Click on and read through all the links on the project’s website. While having a great website isn’t completely necessary, a terrible website is typically a red flag. Pay attention to the finer details- spelling and grammar mistakes are usually not a good sign either.
The website should clearly define what the project is, what its goals are and what its value proposition is upfront. If you can’t easily understand what the project is trying to do, or the information is confusing or vague, that’s not usually a good sign.
Go as deep as you can into the project’s website to try to understand exactly what the project is. Be critical about the project, the team, their promise and whether they’re actually delivering on it. Look for the reasons why it may not be a good investment rather than blindly convincing yourself it is. Think of it like a business and ask yourself whether you would really want to back this business.
Note the project’s partnerships and backers, and research those too. Partnerships are important for adding value to a project. However, make sure to understand the details of the partnership before making a judgement.
- What is the website like?
- Does the website clearly state the project’s purpose?
- Are there any red flags?
- Who is the project partnered with?
- Project’s website
- Project’s blog
One of the most important things to look at when completing a fundamental analysis of a crypto is its whitepaper.
A whitepaper is basically the crypto project’s business plan. It is a detailed proposal written by the development team outlining the purpose and design of the project. It will typically include information about the team behind the project, the tools and technology used by the project, tokenomics, consensus mechanism, future goals, partnerships and use-cases.
A good whitepaper should have a clear explanation of the project’s goal. Do you understand exactly what the project is trying to do? If it’s not clear, it may be a red flag. Try to also understand the current stage of the project’s development. Consider what this project is doing differently- what will set them apart or make them successful?
Make sure to read through, scrutinise and understand all of the claims and promises made in the whitepaper. Be as critical as possible. This is essential to fully understand the project.
A whitepaper can offer a lot of information about the project and is where many red flags such as bad tokenomics, unrealistic promises, and an unclear roadmap can first be highlighted.
When looking at the whitepaper, also pay close attention to the project’s tokenomics and distribution model (for more on tokenomics, click here). If the tokenomic model isn’t good, you can rule it out as an investment!
Note that it’s a good idea to try and cross-check the information you find within the whitepaper with outside discussions about the project. Consider what other people are saying about it and whether there are any red flags.
- Is the whitepaper well written?
- Does the whitepaper clearly state what the project is trying to do?
- What does the tokenomics and distribution model look like?
- What stage of development is the project at? (Do they have a beta version available?)
- What will set this team/project apart or make them successful?
- Whitepapers can typically be found on the crypto project’s website
- Otherwise, check out allcryptowhitepapers.com
Research the team and their history. The team is what drives the crypto project and is essential for its success. Finding information about the team behind the crypto can be a good indicator of its long-term success. An experienced founder and sound team of developers is a good sign.
Check out the team’s Twitter, social media and LinkedIn pages, and YouTube interviews with team members.
Look at the team members’ experience (in general and within the industry). Note whether the team has developed something in the past (proof of work).
Also, note how much of the crypto the team holds and how much they’ve sold.
- Who is the team behind the crypto?
- What experience do they have?
- Do they have experience within the industry?
- What other projects have they launched?
- Have they been involved in any questionable projects or scams?
- Project’s website
- Project’s GitHub
Good crypto projects will have a clear vision and roadmap. Within the roadmap, you can expect to find information about upcoming features or upgrades, new partnerships or projects, events, or plans to improve the network.
If the crypto has a healthy history of releases or upgrades, that’s usually a good sign as it shows that the project can deliver on what they promise.
- Does the project have a clearly defined roadmap?
- What is their actual development timeline?
- Are the goals realistic?
- Does the crypto have a healthy history of feature releases or updates?
- Have they fulfilled their promises?
- What have they delivered so far? How has this affected adoption?
- Roadmaps can typically be found in the crypto’s whitepaper or on their website
7. The Problem
Consider whether this project addresses a problem currently faced by crypto. Or whether the project is creating a theoretical problem and offering a solution. Often it’s the latter and hence no traction is caught beyond hype. Find out more about this here.
- Is this an important problem currently faced by crypto?
- Is the project offering a solution to a real problem?
8. Value Accrual
Look at why this token will accrue value and consider what mechanisms are in play. What mechanisms are in play? Is it revenue sharing, supply locking, or is there a fixed supply? For more on this click here.
- Why will this token accrue value?
- Is it sustainable?
In the crypto space, a lot of different projects are trying to do similar things. So it’s important to look at the project’s competitors and how they compare.
The crypto’s whitepaper should give a good indication of its use case. It’s also useful to identify the projects it’s competing with, as well as the existing infrastructure it aims to replace/improve. Consider whether the market is already oversaturated with solutions, which may decrease the likelihood of adoption. Niche markets are small, but there may be an increased likelihood of adoption.
What subcategory does the crypto fall into? Payment, NFTs, Metaverse/Gaming, Smart Contracts, Layer 2 Solutions etc? Each category has active projects, so it’s necessary to check how the crypto is placed in comparison to its competitors.
Researching a crypto’s competitors can be extremely insightful. A crypto may look appealing by itself, but placing it beside its competitors could reveal it to be weaker.
- How many competitors are there?
- How does the crypto compare to its competitors?
- Is the product unique?
- What long-term prospects are there in the sector?
- What risks are facing this project?
- What differentiates this project?
10. News/Social Media
Sound projects usually have a decent online presence. This helps them to build a solid community and promote their product. Determine the strength of the community by looking at the project’s social media channels. If a crypto doesn’t have a decent online presence, it’s a red flag.
Read through the project’s Twitter, Discord and Telegram channels. Note how the team interacts with the community and see what others are saying about it. Evidence of a real, thriving community helps to add to an investor’s confidence in a project.
Also search LunaCrush and news websites and check to see if the project has suffered from any hacks or attacks in the past.
- How many social media followers does the project have?
- What is the engagement like?
- What is the general tone among the community?
- Does the team engage with the community?
- Has the project suffered from any hacks or attacks in the past?
Next up… Keep an eye out for our upcoming DYOR: Tokenomics series!
Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.
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