Cryptotrading: Fundamental & Technical Analysis

In cryptocurrency fundamental analysis, though the approach is similar to that used in legacy markets, you can’t really use tried-and-tested tools to assess crypto assets. To conduct proper FA in cryptocurrencies, we need to understand where they derive value from.

In this slide, we will attempt to identify metrics that can be used to craft your own indicators and provide some tools you can use at the end.

Transcript

1. Cryptotrading Fundamentals and Technical Analysis II
2. Josiah Yahaya - Blockchain Engineering Manager at Patricia - CEO, ClinicBank
3. Introduction Crypto fundamental analysis involves taking a deep dive into the available information about a financial asset. For instance, you might look at its use cases, the number of people using it, or the team behind the project. Your goal is to reach a conclusion on whether the asset is overvalued or undervalued. At that stage, you can use your insights to inform your trading positions.
4. Fundamental analysis (FA) This is an approach used by investors to establish the "intrinsic value" of an asset or business. Intrinsic Value: The perceived or calculated value of an asset, investment, or a company and is used in fundamental analysis and the options markets.
5. It's important to note that there's no single measure that can give us a full picture of the network we're assessing. We could look at the number of active addresses on a blockchain and see that it has been sharply increasing. The problem with FA Cryptocurrency networks can't really be assessed through the same lens as traditional businesses. If anything, the more decentralized offerings like Bitcoin (BTC) are closer to commodities. But even with the more centralized cryptocurrencies(such as those issued by organizations), traditional FA indicators can't tell us much.
6. Metrics are measures of quantitative assessment commonly used for assessing, comparing, and tracking performance or production. Categories of crypto FA metrics 1. On-chain 2. Project 3. Financial
7. We could run a node for the desired network and then export the data, but that can be time-consuming and expensive. ON-CHAIN METRICS On-chain metrics are those that can be observed by looking at data provided by the blockchain. We can do this by pulling information from websites specifically designed for the purpose of informing investment decisions. E.g CoinMarketCap, CoinGecko e.t.c Key parameters to look out for: 1. Transaction count 2. Transaction value 3. Active addresses 4. Fees paid 5. Hash rate and the amount staked
9. Transaction Count Transaction count is a good measure of activity taking place on a network. By plotting the number for set periods (or by using moving averages), we can see how activity changes over time. Note that this metric should be treated with caution. As with active addresses, we can't be sure that there isn't just one party transferring funds between their own wallets to inflate the on-chain activity.
11. Transaction Value Not to be confused with the transaction count, the transaction value of a crypto-asset tells us how much value has been transacted within a period. For instance, if a total of 5 Bitcoin transactions, worth $40,000 each, were sent on the same day, we would say that the daily transaction volume was $200,000. We could measure this in a fiat currency like USD, or we could measure it in the protocol's native unit (BTC).
12. Active Addresses Active addresses are the blockchain addresses that are active in a given period. Approaches to calculating this vary, but a popular method is to count both the sender and receivers of each transaction over set periods (e.g., days, weeks, or months). Some also examine the number of unique addresses cumulatively, meaning that they track the total over time.
13. Fees Paid Perhaps more important for some crypto assets than others, the fees paid can tell us about the demand for block space. We could think of them as bids at an auction: users compete with each other to have their transactions included in a timely manner. Those bidding higher will see their transactions confirmed (mined) sooner, while those bidding lower will need to wait longer.
14. Hash Rate and the Amount Staked Hash rate is often used as a measure of network health in Proof of Work cryptocurrencies. The higher the hash rate, the more difficult it is to successfully mount a 51% attack. A 51% attack is a potential attack on a blockchain network, where a single entity or organization is able to control the majority of the hash rate, potentially causing network disruption.
15. Crypto project websites will include a list of their team members. Carefully researching team profiles and their track records can shed light on the likely success of the current project. PROJECT METRICS Project metrics involve a qualitative approach, which looks to factors like the performance of the team (if any exists), the whitepaper, and the upcoming roadmap. Key parameters to look out for: 1. The whitepaper 2. The team 3. Competitors 4. Tokenomics and initial distribution
16. The Whitepaper This is a technical document that gives us an overview of the cryptocurrency project. A good whitepaper should define the goals of the network, and ideally give us an insight into: 1. The technology used (is it open source?) 2. The roadmap for upgrades and new features 3. The supply and distribution scheme for coins or tokens 4. The use case(s) it aims to cater to It's wise to cross-reference this information with discussions of the project. What are other people saying about it? Are there any red flags raised? Do the goals seem realistic?
17. The Team If there's a specific team behind the cryptocurrency network, its members' track records can reveal whether the team has the required skills to bring the project to fruition. A project whose development has been constant may be more appealing than one whose repository hasn't been updated in two years.
18. Competitors A strong whitepaper should give us an idea of the use case the crypto asset is targeting. At this stage, it's important to identify the projects it's competing with, as well as the legacy infrastructure it seeks to replace. An asset may look appealing by itself, but the same indicators applied to similar crypto assets could reveal one to be weaker than the others.
19. Tokenomics and Initial Distribution Some projects create tokens as a solution looking for a problem. Not to say that the project itself isn't viable, but its associated token may not be particularly useful in this context. As such, it's important to determine whether the token has real utility. Focusing on the distribution might give us an idea of any risk that exists. For instance, if the vast majority of the supply was owned by only a few parties, we might reach the conclusion that this is a risky investment, as those parties could eventually manipulate the market.
20. FINANCIAL METRICS Information about how the asset currently trades, what it traded at previously, liquidity, etc. can all come in handy in fundamental analysis. However, other interesting metrics that might fall under this category are those that concern the economics and incentives of the crypto asset's protocol. Key parameters to analyze are: 1. Market capitalization 2. Liquidity and volume 3. Supply mechanisms
21. Market Capitalization Market capitalization (or network value) is calculated by multiplying the circulating supply with the current price. Essentially, it represents the hypothetical cost to buy every single available unit of the crypto asset (assuming no slippage). Slippage is the difference between the expected price of an order and the price when the order actually executes.
22. Liquidity and Volume Liquidity is a measure of how easily an asset can be bought or sold. A liquid asset is one that we'd have no problem selling at its trading price. Trading volume is an indicator that can help us determine liquidity. It can be measured in a few ways and serves to show how much value has been traded within a given time period. Being familiar with liquidity can be helpful in the context of fundamental analysis. Ultimately, it acts as an indicator of the market's interest in a prospective investment.
23. Supply Mechanisms To some, the supply mechanisms of a coin or token are some of the most interesting properties from an investment standpoint. Indeed, models like the Stock-to-Flow (S2F) ratio are growing in popularity amongst Bitcoin proponents. Stock to Flow (SF or S2F) model is a way to measure the abundance of a particular resource. The Stock to Flow ratio is the amount of a resource held in reserves divided by the amount it is produced annually.
24. Creating FA indicators Coined by analyst Willy Woo, the network value-to-transaction ratio has been called the "price-to-earnings ratio of the crypto world." In simple terms, it involves dividing the market capitalization (or network value) by the amount transacted (typically on a daily chart). Coin A Coin B Market Capitalization $100,000,000 $5,000,000 Transaction count (6mo) 20,000,000 40,000,000 Avg. transaction value (6mo) $50 $100 Active addresses (6mo) 30,000 2,000
25. Examples of Fundamental Analysis tools 1. Baserank 2. Crypto Fees 3. Glassnode Studio