The main goal of a cryptocurrency trader or investor is to maximize the profits and minimize the losses. This could never be achieved unless the person has a well-established and structured strategy that allows him or her to generate consistent results and to beat the market. In other words, a strategy that can help define the perfect point where to enter and exit a trade.
For such a strategy to exist, it needs to incorporate many types of analysis methods and techniques. It must have elements of technical analysis, fundamental analysis, sentiment analysis, risk management and money management practices.
And today, we will be talking about the fundamental side of things.
As many of you must have already noticed, we are in times of turbulence. At times like these, fear and greed drive prices. This is why our focus will be on determining the fundamental value of crypto-assets. Because it’s an approach that takes into consideration the inherent volatility and riskiness of the different cryptocurrencies.
So, what are the factors that determine the value of a certain cryptocurrency?
No intrinsic value
Let’s get this out of the way. Intrinsic value is, by definition, the present value of all future cash flows generated by an asset. That’s why, in the case of a cryptocurrency like Bitcoin or Ethereum, there’s no intrinsic value to search for. Since there are no cash flows nor paid out dividends.
Supply & Demand
Cryptocurrencies can be assimilated to goods. From this perspective, we can consider supply and demand as value drivers. With demand being primarily driven by the cryptocurrency’s value as a medium of exchange, and supply being the current outstanding coins in the market.
Supply-demand interactions can have huge impact on the price of different cryptocurrencies. For example, in a recent study on The Economics of BitCoin Price Formation, they found that the price of bitcoin decreases with the velocity of circulation, but increases with the size of bitcoin economy and the price level.
In another example, let’s imagine that we have perfect market conditions. And that only what we do in this example can influence our thought experiment. And let’s take the example of Ethereum. Assuming we have 10 ETH with a required market capitalization of 50,000 USD. Each ETH would be worth 5,000 USD.
If you purchase 5 ETH for your long-term savings, then only 5 ETH remain on the network to maintain the transaction activity. Leading to an increase in value that reaches 10,000 USD per ETH. Because the required market capitalization always stays the same. It’s what’s required for the market to work!
Now, let’s take this a step further. If someone else decides to sell 15 ETH and put them back in circulation, the number of outstanding coins will increase. Which will adjust the price of ETH and take it down to 2,500 USD per unit.
This is why it’s very important to keep an eye on different events that could signify a large amount of a certain cryptocurrency being either taken from or put into the market. As well as keeping track of its transactional volume.
The cryptocurrency’s whitepaper
A crypto’s whitepaper is an important statement from its developers. It outlines the technology behind the project, as well as its purpose. It provides statistical data and crucial facts to attract investors.
Here are few examples of some of the most famous whitepapers:
Ethereum’s Whitepaper
Bitcoin’s Whitepaper
Ripple’s Whitepaper
Transaction count and value
Transaction count is obtained by plotting the number of transactions for set periods. Many blockchains support this display and by using a simple moving average it can give us a pretty good view on what changes occurred over a certain period of time.
Transaction value, on the other hand, gives us the volume exchanged over time. Which means how much value has been transacted. For example, if we operate 5 Ethereum transactions worth 100 USD each over the period of a day, then the daily volume will be 500 USD.
The Hash rate
To put it simply, the Hash rate is the measure of the computational power per second used for mining a cryptocurrency.
A high Hash rate means more calculations have to be performed in order to mine the coin. This has a very interesting consequence. It means that the higher the Hash rate, the more difficult it is that one entity could gain control over the blockchain. Aka the 51% attack. But at the same time, it can point to an increasing interest in mining.
Other factors
The list of fundamental indicators mentioned above is, by no means, exhaustive. Many other factors come in play. And only a good trader could see which ones to take into consideration and which ones are just noise.
For instance, it’s crucial to be informed about the team behind the cryptocurrency network that you want to invest in and its members' track records. As well as their competitors.
Try also to use fundamental analysis tools like Baserank, Crypto Fees and Glassnode Studio. They can provide some invaluable insights into cryptocurrencies and greatly improve the quality of your decisions while buying or selling cryptocurrencies.
And always, always, do your own research before trading your own money. The main goal of this article is purely educational and should not be considered as financial advice. So, please guys, be careful.
With this we come to the end of this article. I hope you liked reading it. You can also read about:
Trading psychology: It’s tricky
Is Ethereum the future of cryptocurrency?
