We've all bought tokens at valuations that, in hindsight, seemed unwise. It's a common experience in the crypto world—a learning phase every investor goes through. Over the years, I've dedicated myself to deep research, which has significantly improved my investment approach. In this article, I’ll share my method for conducting fundamental analysis to help you avoid common pitfalls and minimize losses.
Fundamental analysis (FA) aims to determine an asset's intrinsic value—an objective measure of what it’s truly worth. This process helps you build long-term conviction, making it easier to withstand crypto market volatility. Below, I break down my personal investment process, which has helped me build early conviction in projects like ETH, AVAX, LUNA, LINK, and more recent ones such as POKT, MAGIC, and GMX.
I categorize fundamental analysis into three parts:
**1. Project Analysis
- Financial Analysis
- On-Chain Analysis**
1. Project Analysis
This is where I usually start. The whitepaper is the most critical part of any project—it’s essential to read it thoroughly. It’s surprising how many people invest significant amounts without ever reviewing this document.
A well-written whitepaper should clearly outline:
- The problem the project aims to solve
- The technical solution proposed
- The utility of the token
- Tokenomics
- Background information about the team
A strong whitepaper provides a solid foundation for further analysis. It should inspire you to learn more about the project.
Dive deep into the team behind the project. Research their academic backgrounds and professional experience—LinkedIn is a great resource here. You need to determine whether the team is committed to long-term development or simply building a minimum viable product (MVP) before moving on, using retail investors as exit liquidity.
For anonymous teams, you can still assess their online presence. What have they written on social media or other platforms? If they are developers, check their GitHub activity. Don’t hesitate to reach out with questions—their responsiveness can be very telling.
Review the project’s roadmap and timeline. This helps you assess whether it’s the right time to invest. If a project isn’t planning to deliver its main product for two years, it might be wise to wait. Transparency and a history of meeting milestones are positive indicators.
Competitor Analysis
Identify key players in the sector and compare market capitalizations. What advantages does this protocol have over its competitors? Has it successfully attracted users? Why would users choose this project over others?
Social Media Analysis
How does the project communicate on social platforms? Is the marketing effective? Does the community actively promote the project? Join Discord and Telegram groups to get a feel for the community’s vibe. Are members discussing the project’s intricacies, or is the conversation dominated by FOMO? High-quality memes can indicate a passionate community, which often helps spread the project’s narrative.
Crypto Twitter (CT) can be both a goldmine and a minefield. Well-researched threads are worth reading—they might highlight details you missed.
Finally, evaluate the user interface and experience. Is the platform intuitive and easy to use? If users need to Google "how to use [project name]," that’s a red flag.
2. Financial Analysis
The next layer focuses on financial metrics. When evaluating whether an asset is fairly valued, consider its market capitalization and fully diluted valuation (FDV). This is where many investors start, yet surprisingly, many retail traders overlook it.
In 2021, for example, many bought Shiba Inu near all-time highs, expecting the price to reach $1—without understanding market cap dynamics. Shiba’s circulating market cap is $16 billion, with a price of $0.00003025.
Many dismiss FDV as irrelevant in bull markets, but that’s not always wise. Look at Solana dApps for valuable lessons. If a token’s FDV is significantly out of sync with its current utility, think twice before investing. Chasing overvalued assets rarely ends well.
Market cap can be misleading without considering liquidity. Liquidity refers to how easily an asset can be bought or sold. Which exchanges list the asset? How deep is the DEX liquidity? Assets with poor liquidity can be risky; large holders cashing out can drastically impact the price—remember Squid.
Tokenomics, tokenomics, tokenomics! It can’t be emphasized enough. Tokenomics is the economics of supply and demand. Higher demand relative to supply drives prices up. Does the product require the token to function? What is its utility? More real-world use cases mean more users and more demand.
While the whitaper may provide some answers, tokenomics can evolve. Check blog posts and Twitter threads for updated discussions. If information about token release schedules, allocations, or emission rates is hard to find, that’s often a red flag. Unawareness of potential team sell-offs can lead to significant short- to mid-term losses.
You need to understand a project’s annual inflation rate. New tokens entering the circulating supply must be absorbed by the market. If stakers earn large token rewards, significant selling pressure may follow. MIR and ANC, for example, had inflation rates around 200% in their first year to bootstrap their dApps and attract liquidity—this often led to short-term price declines.
This doesn’t apply to projects without a live product, but it’s crucial for active Layer 1s, dApps, and infrastructure.
Platforms like Tokenterminal provide valuable data, including:
- Protocol revenue
- P/E and P/S ratios for protocols and dApps
Using traditional equity analysis tools, you can evaluate whether a project is overvalued or undervalued based on current revenue. If a protocol shows strong growth potential, demonstrates significant traction, and has a low P/S ratio, it might be a solid long-term investment.
Some investors even use these figures to build discounted cash flow (DCF) models. This popular valuation method estimates the present value of expected future cash flows. Key variables include the expected growth rate and the discount rate. By weighing these factors, you can derive a fair valuation.
One DCF model suggested a fair value of $10,200 per ETH, indicating severe undervaluation at the time. While such models don’t account for future changes—like how L2s might affect demand—they remain useful tools for asset assessment.
For those looking to dive deeper into valuation techniques, you can explore more strategies here.
3. On-Chain Analysis
The final layer involves examining on-chain data. Platforms like Glassnode, Nansen, and Dune Analytics offer insights such as:
- Number of addresses and active addresses
- Number of addresses holding balances above certain thresholds
- Ratio of long-term holders to short-term holders
- Exchange supply data
- Whale wallet activity
The goal here is to identify reasons why it might not be a good time to buy. For example, if a significant portion of the circulating supply has recently moved to exchanges, it could indicate impending selling pressure.
By compiling all this information into documents or spreadsheets, you create a single source of truth for your investment thesis. Don’t rely on memory alone—especially during market downturns, having detailed notes will help you stay confident in your decisions.
Frequently Asked Questions
What is the main goal of fundamental analysis in crypto?
Fundamental analysis helps determine an asset's intrinsic value by examining qualitative and quantitative factors. It aims to provide an objective basis for long-term investment decisions, beyond short-term price fluctuations.
How important is the whitepaper in project analysis?
The whitepaper is critical—it outlines the project’s purpose, technology, token utility, and team background. Skipping this often leads to poorly informed investments. A well-structured whitepaper sets the foundation for all further research.
Why is liquidity important in financial analysis?
Liquidity determines how easily an asset can be bought or sold without significantly affecting its price. Low liquidity increases risk, as large trades can lead to high volatility or even rapid devaluation.
What are some reliable sources for on-chain data?
Platforms like Glassnode, Nansen, and Dune Analytics provide valuable on-chain metrics, including active addresses, holder distribution, and exchange flows. These tools help investors gauge market sentiment and potential price movements.
How can tokenomics impact an investment?
Tokenomics defines the supply and demand dynamics of a token. Factors like emission rate, distribution schedule, and utility directly influence its value. Poor tokenomics often lead to inflation or selling pressure, negatively affecting price.
Can traditional valuation models be applied to cryptocurrencies?
Yes, models like discounted cash flow (DCF) can be adapted for crypto, though they require careful consideration of unique factors like network adoption and technological changes. They provide a useful framework but shouldn’t be used in isolation.
For further insights into advanced analytical methods, feel free to view real-time tools here.