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The next 100 million crypto investors. |
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Health, Wealth, and Happiness |
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"Reality is a projection of your thoughts or the things you habitually think about."
- Stephen Richards
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New Downloadable: Most and Least Volatile Cryptocurrencies for 2022 |
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Which crypto investments have been the most stable in 2022?
Which have been roller coaster rides?
In our new downloadable report, our analysts measured the top crypto assets with a new metric, %RSD, that shows which have been the most stable.
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(You may be shocked to learn that even stablecoins can be more or less volatile: our report lists those, too.)
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Must Read
Today’s most important story for crypto investors.
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Free Money for Everyone (Bankless): As The Merge draws closer, many Ethereum miners are threatening to spin off a fork of Ethereum that maintains proof of work (even though we already have one -- it's called Ethereum Classic).
This article unpacks all the problems with this plan, along with one big benefit: if miners do fork Ethereum, a duplicate copy of the chain will be created, as well as all your ETH tokens.
In short: free money.
Investor takeaway: This is exactly what happened with previous forks of major chains (Bitcoin Cash, Ethereum Classic, etc.) Token holders kept their original investments AND received duplicate investments on the new chains.
Whether you believe in the new chain or not, you can immediately sell your duplicate tokens, but to play this game, you've got to hold Ethereum in the first place before the fork happens. If it does, free money.
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The Complete Guide to Fundamental Analysis
by Preetam Kaushik
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Summary: Our thesis is that the performances of crypto investments can be measured similarly to traditional stock investments. The key fundamentals for crypto investments are active users, fees and revenues, and hash rate – like the customers, revenue, and health of a company. Our new guide, excerpted below, shows you where to find them.
When it comes to analyzing crypto investments, there are two broad schools of thought: fundamental analysis (measuring the strength of the crypto “company”) and technical analysis (using tools like Bollinger Bands, Relative Strength Index or RSI, and Stochastic Oscillators).
At Bitcoin Market Journal, we’re big believers in fundamental analysis, which gives us deep insight into a crypto project’s strengths and weaknesses. Done well, fundamental analysis shows us the “real” or “fair market value” of a cryptocurrency. Here’s how to do it well.
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What is Fundamental Analysis?
All investments have an intrinsic value. A company’s stock, for example, is influenced by its revenue, customers, market position, and so on. The discipline of studying the economic and financial aspects of a stock or security is called fundamental analysis (FA).
Fundamental analysis involves looking at microeconomic and macroeconomic factors. At the micro level, the value of a stock can be affected by the management team, recent earnings, scandals, employee unrest, etc.
At the macro level, we have issues like regulatory changes, economic climate, inflation, and so on.
A fundamental analyst will try to decide whether a particular stock is overvalued or undervalued in the present market by looking at these internal and external factors.
This information can be beneficial in making investment decisions, namely whether it is the right time to buy or sell. Crypto assets are no different.
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Applying Fundamental Analysis to Crypto
The fundamental analysis of securities and stocks is a discipline that has evolved over the decades. We can trace its roots back to the publishing of the legendary book Security Analysis, written by Benjamin Graham and David Dodd in 1934.
Many of the metrics propounded by the authors are still in use to this day in fundamental analysis. For instance, when looking at the value of stocks, knowing the earnings data of the company can be a huge help. You can use this to calculate earnings per share or EPS.
This is possible due to the stringent rules on financial reporting and investor protection in the corporate world. Firms listed on stock markets have to report their earnings in a consistent, easy-to-understand manner.
Cryptocurrencies are different.
For starters, they are often decentralized networks, not traditional companies. Bigger cryptocurrencies often have centralized agencies at the helm, like foundations or teams of developers. However, these organizations do not have to follow any existing standards on reporting (no quarterly reports).
Instead, most crypto teams publish transparent roadmaps of their projects and keep communities updated about major changes. Furthermore, thanks to the nature of blockchain technology, all transactions are public and can be audited by anyone.
While they are traded very much like stocks and securities on the market, tokens have different DNA when compared to stocks or securities. Still, we can use common FA metrics as jumping-off points.
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Premium members get our Top 10 Fundamentals every Thursday, including Top Blockchains by Protocol Revenue (pictured here).
Common Metrics
Despite the challenges, applying the basics of fundamental analysis to cryptocurrencies is still possible. The only difference is using a new breed of metrics unique to crypto tokens. These can be broadly divided into three categories: on-chain metrics, project metrics, and financial metrics.
On-Chain Metrics
Blockchain technology is based on a core concept of transparency and decentralization. All the essential data is available freely on the chain. You just have to pull the data manually.
Out of the several metrics available on the blockchain data, three are significant from a fundamental analysis perspective: active addresses, revenues and fees, and hash rate (or total staked).
Active Addresses
Active addresses refer to the number of active blockchain addresses over a specific period (like customers of a traditional company). Because blockchains have network effects, more active addresses tend to lead to more developers, which lead to more users, in a virtuous circle.
Conversely, a drastic fall in the number of active addresses can indicate fewer users on the blockchain; a project that’s losing momentum over the long term. Note that active addresses will nearly always drop across the board during crypto bear markets and rise during boom times. The key is looking at long-term performances to see if projects are starting to turn the flywheel.
Revenues and Fees
This refers to the value of any transaction fees or other value generated by a blockchain. When revenue is climbing, it generally indicates a healthy blockchain with more users receiving more value. Try looking at daily, weekly, or monthly revenues to spot short-term or long-term trends.
These are like the revenues generated by a traditional company and are a critical metric for understanding how a blockchain is making money. Note that revenues are not the same as profits. Generally speaking, revenues - operating expenses = profits.
Be sure to compare revenues between similar blockchain platforms as well to see how they are stacking up against the competition.
Hash Rate (PoW) or Total Staked (PoS)
Cryptocurrencies use different consensus mechanisms and algorithms. The two major types are proof of work (PoW) and proof of stake (PoS).
Bitcoin and several other major cryptocurrencies are PoW blockchains. On these networks, verification of transactions is based on solving complex cryptographic problems using high-powered computers. The individuals or organizations that do this are called miners.
This is where the hash rate becomes a valuable metric. It is the combination of all computing power used in mining on a PoW blockchain. If the hash rate is high, it is usually seen as a good sign. This is because it means more miners are on the network, implying it is more secure.
Conversely, a lower hash rate indicates reduced profits for miners. Thus, they might leave the network altogether and sell their hardware. When a blockchain suffers from a fall in hash rates, investors usually follow suit.
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By contrast, the stake rate tells you how many users are staking their cryptocurrency on a PoS network. As stakers have “locked up” their money for some period to secure the network, it's generally a good sign to see a stable (or growing) stake rate. Be careful when it falls.
Project Metrics
If on-chain metrics are focused mainly on the blockchain, project metrics try to look at the teams behind blockchains. While the former is a quantitative approach, project metrics is a purely qualitative approach that looks at things like a project's background, whitepapers, competitors, project roadmaps, and tokenomics.
Background Analysis
You can usually find information about a blockchain project team on the project's official website. Data may include profiles and credentials of the individuals involved in the project. It can also include both people who handle the technical aspects and any major backers.
The experience and past accomplishments of the people behind a project often provide good markers regarding the prospects of a crypto project. Likewise, the presence of influential backers is often a sign of the project's overall credibility.
The Whitepaper
A crypto whitepaper is a technical document that provides a detailed introduction to the blockchain project. It is the most significant of all official documentation regarding a blockchain. A competent whitepaper will contain the following information at the bare minimum:
- The purpose of the project
- Technology solutions used
- Use cases for the token
- A road map of planned features/upgrades
- Token economics
- Team background information
The contents of a whitepaper should always be taken with a pinch of salt. Developers can often make tall claims to drum up interest in their projects. Check the goals and technologies used to see if they are practical or realistic. Look for public discussions surrounding the paper. Reviews can also highlight notable red flags.
Competitors
The future prospects of a new crypto token hinge on many things. Chief among them is its utility. Does the new token provide innovative solutions to pressing problems? Or is it just another clone of a token that's already on the market?
Looking at competing tokens and comparing the features can give you a good idea about the value of a token. The new token may have limited prospects if the ecosystem is already filled with similar tokens with the same features.
Project Roadmap
Virtually all blockchain projects provide coherent roadmaps detailing their future trajectories. They will include timelines for milestones, test nets, and new features down the line. Roadmaps will also give you decent ideas about the future of the crypto projects. They should not be ignored during a fundamental analysis.
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Tokenomics and Utility
Tokenomics refers to the demand and supply economics behind a crypto token. The equation is straightforward: when the demand is high relative to supply, the token price rises.
The inherent value of a token is a more complex topic. It is driven by utility, or the real-world problems a token can solve for its users. Tokens with more use cases will have larger user bases, which can drive up their demand levels.
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ICYMI
In Case You Missed It
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Your weekly Crypto Market Outlook (premium members).
The top projects and their tokens.
How to reprogram your brain to achieve your financial goals (or anything else).
See the trends before the market does (premium members).
RIP, GPUs.
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Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It is created by John Hargrave, Preetam Kaushik, Nick Marinoff, Steve Walters, Anatol Antonovici, Daniel Joel, Stephen Robert, and Vlad Vronsky.
Premium subscribers get full access to our top crypto picks. Both free and premium subscribers get content to build them into better investors.
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