Fundamental Analysis in Cryptocurrency

Fundamental Analysis in Cryptocurrency

Fundamental Analysis in Cryptocurrency

Fundamental Analysis in Cryptocurrency

Trading cryptocurrency can be both a less risky and more enjoyable endeavor when armed with the skill of fundamental analysis. Through fundamental analysis, you can effectively sift through the noise of hype and unearth tokens from lesser-known projects that hold genuine potential. This guide delves into the significance of fundamental analysis for crypto traders and explains its role in identifying trends ahead of the curve, even for day traders.

Understanding Fundamental Analysis

Fundamental analysis seeks to address the question of why prices move in a particular manner. This is different from the approach of utilizing historical prices to predict short-term price fluctuations (a practice known as technical analysis).

For instance, consider this question: Over the long term (a span of 10+ years), what factors could propel Bitcoin’s price far beyond its present value?

Well, the total supply of Bitcoin is capped at 21 million units. At the time of writing, approximately 19.4 million units are in circulation, with more to be mined in the coming years. Given that only about 3% of the global population utilizes Bitcoin, a 100% surge in its user base, all vying for the limited 19.4 to 20 million Bitcoins available, could trigger a surge in its price.

In this example, tokenomics represents one of many approaches to fundamental analysis. Naturally, various approaches exist. The following section highlights some of the most prevalent approaches within the realm of fundamental analysis.

Approaches to Cryptocurrency Fundamental Analysis

Fundamental analysts believe that past prices don’t necessarily predict future prices. Prices are the result of various factors, such as technology, utility, tokenomics, on-chain analysis, and the regulatory and economic landscape, which collectively shape the market’s perception of a given crypto asset.

Technology and Security

Though blockchain operates on the principle of decentralization and trustlessness, heightened security often emerges from networks boasting numerous validators and/or miners. Notably, both Bitcoin and Ethereum have amassed a diverse and substantial community of validators and miners, safeguarding their networks against potential attackers.

However, smaller crypto networks implement distinct security measures. Some opt for a limited number of trusted validators alongside a larger pool of “ordinary” validators or delegators who monitor and counter any collusion attempts. Such networks employ mechanisms like Proof of Authority or delegated Proof of Stake.

Furthermore, numerous crypto tokens are built upon existing networks and operate as decentralized applications. These applications rely on meticulously audited smart contracts to eliminate bugs and vulnerabilities. Ultimately, crypto technologies and applications prioritizing security, despite lacking the aggressive marketing seen in hype-driven counterparts, tend to persist over the long run – Bitcoin serves as a prime example.

Male network engineer works in studio
Technology and Security are key essentials of a blockchain. Photo by ThisisEngineering RAEng on Unsplash

Utilities and Use Cases

While Bitcoin remains a secure and prominent cryptocurrency, its current utility is limited. The Taproot Upgrade has kindled speculation of Bitcoin emulating Ethereum by enabling the creation of “BRC-20 tokens” and NFTs on its network. Certain crypto assets offer passive income through staking or participation in liquidity pools. Given the widespread interest in profit generation through cryptocurrencies, the rate of passive earnings from such activities can provide insights into the relative value of a crypto token.


Tokenomics, briefly introduced in the outset, holds more intricate mathematical facets. Token developers seek to strike a balance between adoption and inflation. Inflation, contrary to misconceptions, serves as a means to incentivize newcomers within the network.

Bitcoin incorporates built-in inflation mechanics via mining rewards. These rewards incentivize miners to secure Bitcoin transactions cryptographically, underpinning the network’s integrity. The reward halves every four years until the total supply of 21 million Bitcoins is mined, resulting in Bitcoin’s deflationary nature in the long term.

On the other hand, Ethereum lacks a supply limit for ETH coins. Since 2021, Ethereum introduced token burning at a rate linked to network activity. Should Ethereum operate at full capacity, the burn rate surpasses its inflation rate, rendering ETH a deflationary asset.

Numerous smaller tokens, comprising 50% to 90% of their supply limits, exhibit varying levels of risk. Generally, tokens closer to their supply limits entail less risk in long-term holding. In scenarios of market crashes, tokens with prolonged issuance periods may struggle to regain their pre-crash value.

Regulatory Environment

The regulatory landscape plays a pivotal role in shaping the crypto market’s trajectory. Favorable regulations from governments can facilitate significant investments by large corporations and provide easier access to crypto for various investors. Increased investment drives up demand, which in turn can lead to higher prices.

As of the time of writing, several key economic regions that wield substantial influence over the global economy have embraced crypto-friendly regulations. These regions, including countries like Singapore, the United Arab Emirates, Brazil, France, New Zealand, and Australia, have streamlined the process of obtaining business licenses for crypto-related services, fostering an environment conducive to crypto growth.

However, the participation of major economies capable of creating a substantial impact on the global financial landscape remains limited. Regulatory scrutiny has cast a shadow over crypto businesses in nations such as the United States, United Kingdom, China, Russia, and India. These adversarial regulatory climates hinder the growth of crypto businesses within their jurisdictions.

Businessman opening a paper
Crypto is still very much linked to the global economic stage. Photo by Adeolu Eletu on Unsplash

Economic Environment

Irrespective of governmental stances, crypto has experienced periods of growth that coincide with fluctuations in the stock market. Both crypto and the stock market are classified as risk-on assets, and they often exhibit periods of heightened trading activity in tandem.

During the COVID-19 pandemic in 2020, government stimulus efforts injected excess liquidity into the global economy. This influx of funds prompted many investors to avail of cheap borrowing to invest in businesses, stocks, and cryptocurrencies. However, this surge in activity was short-lived, as governments worldwide grappled with mounting inflation and consequently scaled back borrowing rates. This eventually led to simultaneous crashes in both the stock and crypto markets.

Anticipating government actions within the context of the broader global economy can confer a distinct advantage to traders. Positive economic expectations might lead to more favorable conditions for long trades, whereas negative economic forecasts could prompt an increase in short trades.


In conclusion, fundamental analysis serves as a foundational tool for enhancing the safety of cryptocurrency trading. This approach empowers traders to cut through the noise, discern promising ventures, and make informed decisions.

By delving into essential aspects such as technology, utility, tokenomics, regulatory frameworks, and economic conditions, traders gain a comprehensive perspective on a crypto asset’s potential. Crucially, fundamental analysis isn’t exclusive to long-term investors; even day traders can leverage its insights. By mastering these facets, traders are equipped to navigate the complex and dynamic crypto market with greater efficacy, ultimately optimizing their trading strategies.

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