I've been posting here for a while and while I love sharing our research, content, and opinions here, it dawned on me that I have never elucidated CryptoEQ's mental models/thesis around crypto fundamental analysis. Below is an an excerpt from a larger document we share with new members of the CryptoEQ Fundamentals team. It explains our approach to fundamentals and why we think there is no shortcut to fully analyzing a crypto project. Understanding a project and having long-term conviction makes navigating these markets much easier!
Fundamental analysis aims to arrive at the intrinsic or fair value of an asset versus the price. Price and value are not the same and this has never been truer than in the world of crypto assets, which have dramatically different total supplies, liquid supplies, token lock-ups, inflation rates, emission structures, token burning, and so on. Traditionally, investors can measure value with cash flows like dividends with stocks and coupon payments with bonds using P/E ratios. However, with (most) crypto assets, there are no expected future cash flows, making crypto-asset fundamental analysis totally different. While we have entered into an entirely new paradigm with the emergence of cryptocurrencies, valuation and fundamental analysis are not impossible, it just requires new mental models around the new asset class.
In traditional investing, investors buy equity in a company, ensuring that if the company’s value grows, so too does their investment. This is not the case in crypto assets. Crypto assets are not shares in a company. A true crypto-asset should not even have a company. Value accrual and value capture are not one and the same and this difference is at the heart of many struggling token projects. This is, in part, what separates Bitcoin from the ICOs and VC-backed coins of the world, but that is a topic for another post.
CryptoEQ reviews hundreds of different factors, metrics, and parameters across 10 core categories for evaluating value, potential, and risk for crypto-assets by a human-led team. While simply using data scraping to aggregate on-chain/Github/node count/social media data is quick and helpful, it is only a small fraction of the total picture. This approach (the popular approach by many of the leading crypto “research firms”) is inadequate, lacking the necessary depth, context, and nuance needed to appropriately evaluate a crypto project. Most things in life are rarely so black and white and the wild, new world of crypto assets is no exception. Some examples of nuanced questions include:
- Project X has 25 developers and Project Y has 50. Which one has the “better” overall team?
- Project X has 200 Github commits in the last month while Project Y only has 20? Is Project Y stagnating? Is X gaming the system? Or are they having to do 10x the work because their original code was buggy?
- Project X has staking reward of 10% and Project Y 5%. But what about inflation? Or pay-out times/lock ups? Our underlying currency risk? Is one losing value compared to the other?
- Project X has 100 nodes and Project Y has 1000. But are there master nodes? A permissioned system? Same consensus mechanism? What’s the node geographic distribution? The concentration of mining pools?
- And hundreds more questions just like these
Our goal from day one has been to provide unbiased, high-quality, comprehensive research in order to deliver high signal-to-noise, practical, and impactful information you can immediately use to your advantage. CryptoEQ is a research platform and suite of products that bring a multi-factor, comprehensive framework to the complicated world of crypto but presents it all in an intuitive, user-friendly platform making crypto accessible to all.
