Fundamental analysis is the cornerstone of understanding an altcoin’s potential by evaluating the underlying technology, market adoption, the team, and other fundamental aspects.
This article provides a step-by-step guide to analyzing altcoins fundamentally, using “the four essential questions” and comparative metrics.
This article is not about finding new coins. It’s just about analyzing them. Read this article instead if you want to find new altcoins with huge upside potential in five minutes or less.
What is Fundamental Analysis?
Fundamental analysis focuses on evaluating the intrinsic value of a cryptocurrency based on its project, technology, adoption, and competition. Unlike technical analysis, which examines price trends, fundamental analysis delves into the “why” and “what” behind a project.
Here’s how you can perform a fundamental analysis of altcoins, step by step.
Step 1: The Four Fundamental Questions
The first step is to choose an altcoin and answer these key questions:
1. What problem is the project solving?
Every successful cryptocurrency addresses a specific problem.
For example, Chainlink tackles the “Oracle problem” by connecting smart contracts to real-world data such as sports results, commodity prices, or weather conditions.
Understanding the problem gives you insights into the project’s relevance and potential.
2. How is the project solving the problem?
Examine the solution the project offers. Chainlink solves the Oracle problem using decentralized Oracle networks (DONs), which aggregate data from multiple sources to ensure accuracy and reliability.
A detailed understanding of the solution shows how innovative and effective the project is.
3. Why does the project need a token?
Not all projects require tokens. In Chainlink’s case, its token, LINK, is crucial for payments, staking, and incentivizing data providers to ensure the network’s security and accuracy.
Projects that genuinely require tokens often have stronger value propositions. Be aware of tokens without a clear use case. These tokens seldom go up in price even if the project’s adoption increases.
There needs to be a clear link between the demand for the solution they provide and the demand for the token, which is the fourth question:
4. Is the token capturing value?
A token’s value should increase with the project’s adoption. For Chainlink, increased demand for its services leads to higher demand for LINK tokens, as they are used for payments.
Additionally, staking LINK reduces the circulating supply, further supporting value appreciation.
Step 2: Evaluate Sector-Specific Metrics
Once you’ve answered the foundational questions, dive deeper into the metrics specific to the project’s sector.
For example, Chainlink is in the Oracle sector. Specific key metrics for Oracle projects include:
- Total Value Secured (TVS): The total value of assets secured by the project’s infrastructure.
- Protocols Secured: The number of applications using the project’s services.
Using a platform like DeFi Llama, you can compare metrics for similar projects. For Chainlink at the time of writing, TVS is at $50 billion, dwarfing competitors like WinkLink and Pyth Network. In fact, it’s more than all other Oracle projects combined.
Step 3: Compare to Competitors
Using your insights from Step 2, compare the project you’re analyzing to its competitors.
Chainlink, for example, has five times the TVS of its closest rival, WinkLink, and secures more protocols than all other Oracle projects combined.
Such comparisons highlight market dominance and the potential Chainlink to increase in value as the Oracle sector gains traction.
Step 4: Document Your Findings
Write down your analysis to solidify your understanding. Summarize the answers to the four fundamental questions and include key metrics. This practice ensures that your insights are clear and actionable.
Tools for Fundamental Analysis
Use resources like:
- Official websites like chain.link for whitepapers and use cases.
- DeFi Llama to track metrics like TVS and protocols secured.
- Blockchain explorers like etherscan for data on token supply and transactions.
- CoinMarketCap to find new coins and compare market cap, price, volume, price history and more.
- The Block for aggregated data on various metrics and trends.
- Crypto Rank for finding new coins in the sectors of the altcoin market.
Many altcoin sectors also have unique tools, so tailor your research accordingly.
Why Fundamental Analysis Matters
Fundamental analysis is invaluable for identifying strong altcoins with real-world use cases and market potential. Projects like Chainlink, which excel in adoption and innovation, often outperform others over time.
By thoroughly analyzing an altcoin’s fundamentals, you minimize risks and maximize your chances of success.
Building a portfolio of fundamentally strong altcoins is the first of three steps of the system I used to 20X my money in 16 months by trading “the altcoin cycle”.
Next Steps: Combining Analysis Methods
Fundamental analysis tells you what to buy, but technical analysis tells you when to buy it. The next step is to analyze price trends, entry points, and risk-reward ratios.
Once you’ve found fundamentally strong altcoins, it’s time to swing trade them for outsized gains.