Fundamental analysis is a method of evaluating an asset by researching various factors that affect its value.
For comprehensive analysis, investors examine everything that can impact the asset’s price. This includes studying macroeconomic and microeconomic factors.
By focusing on a specific project, an investor can assess the intrinsic value of an asset and identify entry points for buying or selling the asset. Investments pay off when the market catches up to the fundamental indicators.
Macroeconomic Analysis
- Economic Growth. Studying economic growth indicators, such as GDP, helps evaluate future economic development scenarios and their impact on asset prices.
- Interest Rates. Interest rates set by central banks significantly influence asset values. High interest rates make borrowing more expensive, potentially reducing investment spending and ultimately lowering asset values.
- Inflation. High inflation can reduce the purchasing power of money, which in turn can decrease asset values.
- Political Stability. The political stability and legal system of a country can impact asset values. Political risks, revolutions, and elections can greatly affect a country’s economy and, consequently, asset values.
- Global and National Events. Natural disasters, wars, pandemics, and even major sporting events can cause significant fluctuations in asset values.
In studying the cryptocurrency market, attention should also be paid to the regulation of crypto. Due to the lack of a unified approach and the acceptance of cryptocurrency at a global level, its local regulation can set a precedent or trigger a reaction from another regulator, impacting asset values. The main focus is currently on actions in the United States, particularly by the Securities and Exchange Commission (SEC).
Microeconomic Analysis
Microeconomic analysis focuses on studying the financial state of a particular company, its business model, industry trends, and competitive environment.
- Financial Reports. A company’s financial reports, such as the balance sheet, income statement, and cash flow statement, can provide important information about its financial condition. Analysts can use this data to calculate financial ratios like Return on Equity (ROE), current ratio, and debt ratio, to assess the company’s financial stability and profitability.
- Business Model and Strategy. Analysts should also understand the company’s business model, its products or services, its market, and competitors. They should also evaluate the effectiveness of the company’s strategy and how well it adapts to market and industry changes.
- Industry Trends and Competitive Environment. Analysts should also study industry trends and the company’s competitive environment. This includes understanding the impact of factors on industry growth and profitability, as well as the strengths and weaknesses of competitors. Researching industry trends can help determine which companies are likely to be successful in the future.
- Project Team and Company Management. Competent management can lead to increased profits and growth, while poor management can lead to losses and decline. When assessing the team, it is important to consider experience, strategic vision, track record, and incentives. The project team can be researched on social networks and personal accounts of team members, as well as on relevant services (LinkedIn, GitHub, etc.).
- Internal Documentation. It’s important not to neglect the study of publicly available company documents. In the cryptocurrency industry, focus should be on the whitepaper, lightpaper, roadmap, etc. The project’s tokenomics and asset distribution are also essential for research.
Fundamental analysis does not end here, and some additional aspects can be highlighted for research:
- Historical Perspective. History is known to be cyclical and prone to repetition. It allows for evaluating the overall interest of buyers and sellers in transactions regarding a particular asset. Therefore, it is important to analyze the past of the asset, if it has one. Pay attention to maximum and minimum values, their correlation with certain news or events.
- Social Analysis. The social life of an asset affects its supply and demand. Therefore, when studying a project, it is also necessary to consider its actions and audience response on social networks: Twitter, Discord, Telegram, Instagram, TikTok, YouTube, LinkedIn, and others.
Data on the project’s subscribers, its social activities, and celebrities involved can help determine the future of the project and its development prospects.
Moreover, social networks can contain a lot of information about the political, social, and other views of the project’s author, which also allows for a certain accuracy in predicting their reactions to significant international and local events.
Each investor chooses their own approach to data collection and analysis. It should be noted that such analysis takes a lot of time and requires a certain level of experience from the investor and understanding of many areas of activity.
Application of Fundamental Analysis
Fundamental analysis is used to determine the fair value of an asset, which is then compared to its current market value:
- If the fair value of an asset is higher than its current market value, the asset may be considered undervalued, and this could be a good time to buy.
- Conversely, if it’s lower than the market value, the asset may be overvalued, and this could be a good time to sell.
Fundamental analysis is also used in portfolio construction. This is especially useful for long-term investors who plan to hold assets for many years.
Fundamental analysis can be a very useful tool for evaluating assets and making investment decisions, but it is not infallible and should always be used in conjunction with other analysis methods and research.