How to Perform Fundamental Analysis on Digital Assets?

The crypto markets were the superstars of 2020, and 2021 FOMO is driving investors wild with speculation. The most risk-averse, conservative, and experienced investors previously allowed emotive cynicism to dissuade them from the markets.

If they aren’t objectively analytical early in 2021, they could make costly mistakes with their actions and omissions.


If you are a novice in investment, you need to understand how the markets work. Crypto markets may be significantly different from traditional ones, but investors rely on some similar analytical methods. You need to appreciate old methods that are performing well for investors in new markets.

Money markets and securities exchanges are investment fields requiring thorough analysis. Just like in traditional finance, DeFi investors can carry out either:

  • Technical analysis.
  • Fundamental analysis.

Investors use technical analysis to project investment outcomes by studying historical financial charts. While this method is great for stock traders looking for short-term day trading, it isn’t ideal for young crypto markets.  

Fundamental analysis is better for crypto investors with a longer-term outlook. This analytical method exploits numerous tools and techniques, exhaustively studying assets to find their intrinsic value.

In this article, you will find out what causes asset prices to rise and fall. Learn how to perform fundamental analysis on digital assets if you want to beat crypto market volatility.

The Importance of an Analytical Approach

Did you know insightful traders make profits when some assets depreciate? Shorting is big in investment circles.

Markets are characterized by assets of different valuations. Some are overvalued because their intrinsic values fall short of the market prices. Some are also undervalued.

Undervalued assets are those whose intrinsic value is much greater than the market price. Investors love these assets because they buy low and wait for prices to go up.

Technical analysis tracks price patterns over time and makes pattern-based predictions. However, unlike fundamental analysis, technical analysis does not measure an asset’s intrinsic value.

Intrinsic value is a more stable, long-term indicator of price movements. It can predict the growth or decline of assets more accurately, but analysts must embrace its complex nature.

Without further ado, let’s look at some techniques of conducting fundamental analysis on digital assets.

Evaluate the Utility Value

Blockchain technologies are all about decentralized social aspects such as finance, supply-chain management, and social contracts like voting and inheritance.

Any asset, crypto or not, should solve problems, close market gaps, and have use-value that attracts customers. For example, Ethereum will continue growing because of its vast DeFi technologies. DApp users will always pay gas fees as more people embrace Ethereum-based smart contracts.

On the other hand, investors who rushed to buy Dentacoin didn’t gain in the long-term. The firm rose to a market cap of $2 billion in the short-run and plummeted to $30 million after its bubble burst.

The coin didn’t have many growth prospects because it doesn’t offer revolutionary innovations suitable for dentistry markets. If you wanted to invest in it, you’d probably wonder if dentists really need blockchain to better their care. They don’t and can do without Dentacoin.

Scrutinize Its Market Cap

Every coin is worth something, but it could be overvalued or undervalued. The market cap is the aggregate market value of a crypto company, and it can help determine the real value and growth prospects of an asset.

Interestingly, crypto firms with impressive innovations and low market caps are attractive to crypto because they prefer buying whole units. That’s why some investors prefer buying Ethers to Bitcoins, but it’s entirely psychological.

You can easily track the market caps of over 2,000 digital assets on CoinMarketCap.

Consider the Regulatory Background

It is essential to understand if the company and asset in which you are investing are based on legal, moral operations. Crypto markets are plagued by regulatory uncertainty. However, you can always tell if certain operations are legally sound or not by interrogating existing laws.

For example, the SEC sued Ripple Labs for running an unregistered securities exchange. Ripple Labs defended itself, asserting XRP as a commodity. The matter will go to court, but Ripple Labs could be in jeopardy if it can’t justify ICO expenditure.

The lawsuit saw XRP losing more than 50% of its price on exchanges, and major trading platforms like Coinbase temporarily suspended the asset.

Fundamental analysis could have warned investors of the impending price drop, but technical analysis showed that XRP was the fastest growing digital asset at the time.

This could be the best time to invest in XRP: when prices are at the bottom. Our laws seek to regulate, not obliterate. Ripple Labs is likely to survive the onslaught, but it could have to make compromises.

Every digital asset has a regulatory backdrop, and privacy wallets are also facing a different kind of legal storm.

Check the Coin Supply

Did you know that cryptocurrencies derive their value from demand-and-supply forces? Well, you should appreciate that limited supply makes assets more valuable as demand grows.

Bitcoins limits its coin supply to 21 million, and every bitcoin is mined through Proof of Work. Demand grows every time a bitcoin gets mined, depleting the supply left up for grabs.

Why else would bitcoins rise in value? As more people hold bitcoin for longer-term benefits, FOMO intensifies among investors. Moreover, digital currency is gaining popularity because of its transparency, security, cost-effectiveness, and convenience.

Vitalik Buterin issued a statement when the supply of ETH surpassed 100 million. He suggested Ethereum cap the maximum supply of ETH to 120 million, citing the need for egalitarianism.

Interrogate Whitepaper Roadmap by Comparing It against Age and History

You can tell a lot about the growth prospects of digital assets by reading their whitepapers. These publications outline all the technical, legal, and economic nuances of a project, addressing major market gaps. A whitepaper can tell you just how viable a product is, and it should also outline the roadmap set out for growth.

If you detect growth prospects on paper, you should find out if the company meant its words or if it was just mincing them. A company’s age and history are important, and they could reveal the credibility of implementing agendas.

A company that’s been around has maintained its underlying value, making it viable for the markets. However, long age means a company had time to implement growth plans. Just how fast did it grow?

Measure Trade Volumes

Trade volumes tell just how popular an asset is compared to competitors. Stiff competition means fewer growth prospects, and an asset should have impressive trade volumes within its niche. Trade volumes are great for indicating an asset’s growth, depreciation, or stagnation.

Parting Shot

We can safely conclude that technical analysis relies on hindsight, while fundamental analysis relies on foresight. Work hard to gain critical foresight that is necessary but elusive for crypto investors.

Fundamental analysis is time-intensive, but it is worth all the effort. As we’ve explained, a single market factor, internal or external to a firm, can cause asset prices to rise or fall. It doesn’t matter if you hold all other factors constant, but market dynamics are always fluctuating variables in volatility.

Conducting diligent, objective fundamental analysis helps you to identify short-term and long-term profit-making opportunities. It is best to conduct peer-to-peer discussions when doing fundamental research on digital assets. That’s why you should share this article with peers before you start investing.

How do you do your research when investing in digital assets? Let us know in the comments section.



By Edith M.

Edith is an investment writer, trader, and personal finance coach specializing in investments advice around the fintech niche. Her fields of expertise include stocks, commodities, forex, indices, bonds, and cryptocurrency investments.

Leave a Reply

Your email address will not be published. Required fields are marked *