What is Fundamental Analysis (FA)?

Fundamental Analysis is best described as the process of determining the future performance of a financial instrument by evaluating its intrinsic value. It refers to the evaluation of both the internal and external factors acting on the intrinsic value of tradable financial assets like stocks and digital currencies like production and historical earnings. When dealing with conventional instruments like shares and stocks, for instance, fundamental analysis involves the evaluation of the financial health of their native company.

The fact that most cryptocurrencies, however, have limited histories on revenues, earnings, and profits calls for a different approach to their fundamental analysis. It demands that you look beyond the coins past performance, most of which are rocked by massive volatilities, and into both socio-economic and political factors like a digital coin's adoption into the mainstream economy and possible regulations. You then have to interpret the potential impact they have on the future price of the coin.

It also is important to note that there is NO industry standard for fundamental analysis in the cryptocurrency market. Different investors have, over time, come up with various ways of determining whether digital currency is worth the investment. However, they all agree on the key role market capitalization plays in influencing this decision. This is achieved by multiplying the current price of the coin by its circulating supply. It has gradually evolved into one of the most significant indicators for investors looking to determine the coins potential for growth.

Bitcoin, for instance, has one of the most lucid market capitalizations and a clear growth roadmap. Initially, the legacy coin’s supply was subjectively limited to 21 million tokens, but with close to four million Bitcoins lost to the world forever, the number of coins that will ever exist has shrunk below 17 million. Given that it still has demand and supply as its biggest price influencer, industry operatives estimate that with the shrinking supply as mining becomes more expensive and more time consuming, the demand and price will increase implying that investors holding coins will trade them at a better price.

Trade volume is another critical tool in Fundamental Analysis that goes a long way in helping you understand the digital currency's popularity. Trade volume here refers to the number of crypto coins that changed hands for a specified period. It tells you how much a digital currency is bought and sold in cryptocurrency exchanges. Low trade volume means the demand is low, and vice versa. With over 2,000 digital currencies in the market, trade volume comes in handy in helping an investor identify the fast-moving coins.