Fundamental analysis, which is a mandatory and favorite factor for many by many as a factor for the growth or decline in asset value on financial markets, is not yet fully adapted for cryptocurrency. This is a fairly young class of assets and the fundamental basis for determining their market value has not been fully developed yet. Furthermore, a significant part of the market operates under the influence of speculation, news and narratives, which reduces the opportunity for its accuracy. However, without acquainting oneself with this tool, it is impossible to understand its usefulness or the opposite in the context of one’s own trading journey.

Starting the cycle of materials about trading, we aim to demonstrate how, from a practical point of view, our traders use certain trading tools in the work on the Manimama Exchange trading product – what they pay special attention to, and what they ignore. We hope that our many years of experience and the conclusions we have reached after years of work will also be useful for readers.

Technical and fundamental analysis are based on mutually exclusive factors. While technical analysis assumes that the market-determined price is considered fair and incorporates all possible factors influencing pricing, fundamental analysis questions this assumption. Fundamental analysis is rooted in the examination of factors underlying cryptocurrency pricing and the determination of the asset’s real value, as market price and value can differ. According to the results of the analysis, an estimated forecast of future growth or decline of the cryptocurrency is made.

The main challenge of conducting fundamental analysis (FA) regarding cryptocurrencies is that they constitute a relatively young asset class and lack sufficient tools compared to traditional assets. However, even disregarding this factor and assuming that the tools for conducting such analysis are available, it’s important to consider that FA primarily serves as a tool for long-term investments and is beneficial for holders. On the other hand, for traders focused on short-term profits, FA may be a futile use of time. Moreover, for investors interested in holding tokens for several years, analyzing past year’s charts may also be a futile use of time.

The long-term growth of a token’s price depends on many factors, including the project’s goals, the experience and quality of the development team, the innovations the project brings, and its tokenomics. All of these factors are crucial for predicting the token’s value in the future.

Key metrics

Another important thing to pay attention to when conducting fundamental analysis of the chosen token is the data available about it on metric portals. Websites that provide such services can be easily found through a search engine, so without focusing on this, let’s move on to the points that typically matter for analysis, which are:

Total Supply / Circulating Supply. The total supply is the maximum number of tokens that a project can create over the course of its lifecycle. On the other hand, the circulating supply is the sum of tokens available on the market at a given moment. By comparing these figures, you can deduce how many tokens will still be released in the future and assess how this might impact pricing.

Whitepaper and Roadmap. These documents allow you to assess what to expect from the project in the future. It’s important to evaluate both past achievements and the work plan – to what extent project development aligns with expected results. This can help draw conclusions about the project’s seriousness and the development team’s experience.

Engagement on social media. By this parameter and the level of user engagement and followers, you can assess the interest of real people in the project. In the case where there are only a few likes and very few comments on social media, this factor should raise concerns for potential investors.

Project decentralization. On-chain metrics allow you to see whether there are enough independent nodes verifying blocks. Greater decentralization is often seen as a path to success for blockchain projects.

In addition to these financial metrics, it is advisable to conduct On-chain analysis, a relatively new and cryptocurrency-specific method, to evaluate user behavior regarding a token using open blockchain data.

These include: the number and sums of transactions, the quantity of active user addresses (with a focus on growth dynamics), and transaction fees and their quantity. It’s important to note that each of these aspects should be considered separately, without direct comparison to other tokens. For example, transaction fees can vary significantly between different tokens, so a direct comparison may not yield meaningful results.

… And there can also be a Black Swan

When we talk about fundamental analysis, we cannot overlook a factor that has a direct impact on the prices of various tokens: news events. Drawing an analogy with the Forex market, it’s important to note that this aspect of cryptocurrency trading has significant differences. Trading in traditional financial markets has long established a stable release of important financial news, with a clear calendar, grading, and importance. As a result, market participants have the opportunity to adjust their open positions, pause trading bots for a certain period, and close some positions based on the significance of the news.

In cryptocurrency trading, the landscape is fundamentally different. Firstly, there is significantly higher market volatility, and news has a substantial impact on market conditions. Secondly, there is a lack of expert forecasts regarding news events, and there is also an absence of a calendar for such events.

News events that influence cryptocurrency prices are currently challenging to predict and track. The highly publicized incident of the FTX exchange crash in November of last year serves as a clear example. By retrospectively examining the situation, we can break it down into time intervals, using one of the most popular trading pairs, USDT/ETH, as an example:

1) A tweet by Binance owner Zhao Changpeng about selling all FTT tokens due to recent events. This fact caused significant turmoil in the market and a liquidity drain. In the end, there was a two-day period of ETH falling against USDT by 12%.

2) Optimistic messages at that time from Sam Bankman-Fried, stating that the assets were in order and reassuring that FTX had never used client assets, somewhat alleviated the panic. Additionally, the announcement that Binance had agreed to acquire FTX completely stabilized the upward trend. During this period, ETH recovered 6% from its decline and demonstrated a tendency to rise.

3) The evening news that began to circulate on the internet, stating that Binance had decided not to proceed with the acquisition, triggered an avalanche effect that couldn’t be contained. ETH, in a free fall, lost over 30% of its value, the internal token FTT plummeted by 90%, and Sam Bankman-Fried found himself under investigation.

Such a Black Swan event, which looked fantastical just a week before this incident, turned out to be a stark reality in an extraordinarily short period. The $10 billion debt owed by the exchange to creditors became an unexpected and astonishing phenomenon in the process.

Indeed, this is just one example of unexpected news that can impact the overall situation in cryptocurrency markets. We are currently in a phase where a single tweet from a responsible or authoritative figure, or an unexpected lawsuit from the SEC, can trigger a domino effect and chaos that renders traditional analysis tools ineffective.

As a conclusion

Despite the statement in the previous paragraph, it’s essential not to ignore any tool for analyzing asset price movements. If news emerges that XRP has successfully “fend off” from a lawsuit by a U.S. regulator, at the very least, you should take note of this market for further in-depth analysis regarding potential growth. Meanwhile, when news that could significantly erode trust in the markets surfaces, it may be worth considering opening short positions.

Regarding classic analytical tools, they all have their place to some extent, especially when it comes to long-term investments rather than short-term trading. In the context of our trading product at Manimama Exchange, we pay attention to fundamental analysis in choosing a token for work – we study its “base” and stability in detail. The main point of the analysis at this stage is to weed out unreliable tokens, which are predicted to drop sharply in the near future. However, after this stage, the mathematical algorithms on which our product is built come into full operation.

It’s important to thoroughly research your asset, and while doing so, understand and accept the unchanging rule of the trading game: the timing of growth or decline can depend on many factors, and it’s impossible to predict it with absolute certainty. However, by adopting a long-term perspective, utilizing analytical tools, and making adjustments during turbulent periods, your chances of achieving overall success increase.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.

photo source