Fundamentals

Where To Focus Your Research

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FUNDAMENTAL ANALYSIS WHERE TO FOCUS YOUR RESEARCH

By Cryptorangutang

 

A lot of people in crypto have problems with evaluating projects. There is a constant discussion on how important are fundamentals for the short and long-term growth of the investment. I would like to share some very fundamental thoughts on research and what I personally look for in a coin, to consider it valuable. Let’s begin:

Before we dig deeper into the research itself, we will explain why it is important to do a research in the first place and how important the fundamentals are for investments. In a market where most projects do not have a prototype and most investment decisions are not backed by real research, the question that arises is: Is it really necessary to understand coin’s fundamentals? The answer to that depends on the time frame a person will trade on.

If there is no product to evaluate a project’s basis, the price of that coin often results from a mixture of current developments and speculations about its future potential. The market is not rational when it comes to valuating the development — very often coins with a working product and sealed partnerships are worth millions of dollars less than platforms with nothing to show besides a whitepaper. A few team members working previously in a popular company, like Microsoft, might be more valuable to investors than several real use cases a coin possesses. A well-known advisor, like John McAfee, is often worth more than an experienced development team. We could go on like this forever, but the conclusion is simple — the market cap of the project is almost never a fair representation of the coin’s value. So, you might ask what influences the price so much in those projects that are far less developed than their competitors? The answer to that is also the reason why a lot of people in the Cryptocurrency world do not believe FA works — hype.

We have seen many coins during the past alt seasons that were basically changing lives with their growth despite (often unfair) scam accusations or lackluster technology (DigiByte, Tron and Verge come to mind as the classical examples of all-time pumps). It did not make a difference that Tron was accused of copying parts of its whitepaper from other projects or that DigiByte basically became a running joke with it “being very fast”. They were going up the value rankings, surpassing projects which are far superior in their utility or current development stage, as they were lacking more exposure. How is it possible that a worse coin has more hype around it? There are many different reasons for this:

– The idea is easy to understand and to market. Verge is a privacy coin — easy. Enigma, on the other hand, is a privacy protocol utilizing secret contracts — not so much (and it is the easiest description we found for it).

  • There is a big community behind it. Very often when coin experiences a rapid growth (like Verge did from 1 sat to over 1600) it is natural that the project gains a large group of supporters. In many cases, the community can have a larger influence than any other possible partnership or milestone reached. People around the coin provide the word-of-mouth marketing unmatchable with any other kind of promotion and it is especially powerful since the people are invested in the project as well.

  • There is a catchy highlight point inside of the project, whether it is Tim Draper on the investors’ page or a partnership with PwC. People very often tend to focus on these points while shilling a project because that implicates a sign of value and therefore, creates hype. Most people never go deeper than the main page of the coin’s website, so it is important that a project has a unique selling point to create better exposure. General rule that explains it — price is based on speculation, and speculation is fuelled by hype.

  • There is an important event incoming that builds up a lot of hype around the project. Meanwhile, the competitors are steadily delivering results on the side without any important catalysts coming up as they already possess a working product.

How important is fundamental analysis in decision making? As we mentioned earlier, it depends on the time frame. If you are planning to do a short-term trade (few days maximum) based solely on fundamentals, you will quickly become disappointed. Short-term moves are based on events and good TA setups — a strong team or a working product will have no influence here. For a mid-term trade (few weeks), it becomes a little trickier. The move still depends on upcoming news, but because of a longer trading period, knowledge of fundamentals can provide potential drawbacks. If the team had a history of not delivering on time or if you are aware of some FUD that might start circulating, it helps to decide how large a position in that coin should be, based on the risk associated with it.

Lastly, the long-term trade, which is the main time frame where FA really works. Deep analysis allows you to understand how big the potential is for the project during the next few months and beyond. This is where you decide if the coin is worth putting into a cold storage (remember chapter wallets) and storing it for a longer time. All elements such as the idea, team, coin metrics, development time frame matter. On that basis, you decide if the project will be able to reach its goals, generate hype and most importantly, if the coin itself will be able to gain value over time.

To sum it up, fundamentals are essential when evaluating a coin in the long-term. For shorter trade time frames, it is important to understand what is behind the coins, but the focus should be on the current development and events surrounding it. All projects which are in an early development stage and outside the bigger audience, are extremely easy to be manipulated by Cryptocurrency influencers (like YouTuber Suppoman, who notoriously causes price spikes when he talks about certain coins to his numerous followers). That is until the cryptosphere becomes more mature and coins will be evaluated not based on speculation but based on real development.

The next segment would present finding coins and the specific elements of research that are covered in great details. Here I will do a short explanation as that topic is simply too broad. Besides, you now where to find the rest.

Research is individual and depends extremely on the person doing it — different values are appreciated and the trade’s time frame is not always the same, that is why it is hard to have two people having the exact same opinion on a coin. On top of that, doing your own research brings something additional and almost as valuable as the knowledge about a coin itself — confidence in it. If you ever bought a coin without previously doing much checking on it, you probably know the feeling of urge to sell when it is not moving for some time — that is the lack of research.

My altcoin research (not to be mistaken with ICO research) is divided into two categories — all the elements in the Core section must show some potential before I even consider going through the Additional Research. This not only saves me a lot of time but also filters everything that in a long-term perspective has little to no chances of success.

 

Core Research

Team  — The team is what drives the project and is crucial for its success. You can have a lackluster idea, weak coin metrics and no product, but with a strong team there is a chance that in the end the project will be as valuable as it was projected to be. Things I am looking at precisely:

  • Experience of team members

  • Experience in the industry

  • Good diversity

  • Entrepreneurial background

  • Development team

Idea  — The idea is the foundation of it all. It is the first thing that is being discussed when presenting the project and the impression made by it should be good enough to encourage the investor to go deeper into it. Similar to the team, there are a few standards that should be met to consider it investment-worthy:

  • Blockchain requirement

  • Innovation

  • Easy to promote

  • Possible to implement

Development — We have talked about how hype can often outperform working products, but we should at least expect a company to have developed something in place. As a matter of fact, this should be one of the priorities when thinking about investing in an ICO and it is a great advantage for any coin already on the market. Along with the cryptosphere maturing, the projects that show development will be the ones that will be more appreciated than the ones built on empty promises (valued solely on speculation). The two points to check are:

  • MVP

  • Proof of work

Coin Metrics — Even the fundamentally best projects might not be a good investment because the chances of growth are simply non-existent due to unfavorable metrics (since the price in crypto is very volatile and follows market cycles frequently, purchases based only on fundamentals are often a recipe for disaster). Once you get to know what the project is about, these are the points you should check next in order to decide if the risk/return ratio is favorable:

  • Market Cap

  • Price

  • Supply

Additional Research — This category should confirm your bullish sentiment towards a certain project. Going through all those additional categories probably won’t change your decision on investing but can boost your confidence in it, especially if you are planning it to be a long-term play.

  • Community

  • Partnerships

  • Advisors

  • Token utility

  • Distribution

  • Competition

  • Roadmap

  • Presentation

  • Market liquidity

For the ICOs I’ve made some time ago a small cheat sheet. It is a shortened version on what you should be really looking for, but it gives you an overview on the essentials. Keep in mind that ICO research and regular research differ from each other.

 

Article written by @Cryptorangutang

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This article was originally posted on Medium.

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