If you’re thinking about investing in crypto, you need to ensure you’ve done all the necessary research before you buy the coins you want. Failure to adequately study the coins you’re purchasing is a sure-fire way to lose your capital.
Technical analysis of crypto is similar to equities and other assets. Fundamental analysis, however, is its own beast.
Here are 10 important crypto fundamentals to consider before you invest.
1. Circulating Supply
Circulating supply refers to the number of tokens that currently exist for a given coin. Any lost coins (for example, in inaccessible wallets) are included in the figure.
The higher the number of circulating coins, the lower the price in satoshis. Lower prices in satoshis can clog up the order book, making analysis harder.
To give you an example, the current circulating supply of Bitcoin is 17.7 million.
2. Maximum Supply
Maximum supply is the number of coins that will exist in the future once no more coins are left to mine. Consider the ratio between the circulating supply and the maximum supply to understand the potential inflation pressure on a specific coin.
3. NVT Ratio
The NVT ratio is the ratio between the network value and the number of transactions on the network. It is analogous to the P/E ratio in the equities space.
The network value—more commonly known as market cap—is the circulating supply multiplied by the current price.
In straightforward terms, a lower NVT ratio typically indicates more potential value for investors. Higher NVT ratios indicate more risk.
4. Pre-Mined Coins
Many coin developers pre-mine their tokens before public release. There are lots of reasons for pre-mines, but often it’s so the creators can sell the coins in the future to help fund further development.
However, pre-mined coins carry a risk for investors. They make it easier for the developers to manipulate the price and for unscrupulous developers to pull exit scams on shitcoins.
5. Developer Engagement
Developers engage with their audiences across a range of platforms. There are the usual mainstream social media channels, apps like Telegram and Discord, sites like Reddit, and the most popular crypto forum, BitcoinTalk.
Because crypto prices are still so heavily driven by speculation, social media engagement is critical for a coin to succeed. Without an effective social strategy, a coin is unlikely to receive the hype and word-of-mouth support that it needs to get off the ground.
6. P/BE Ratio
Another aspect of fundamental analysis that’s alien to equity investors is the concept of mining.
Mining is the process whereby network nodes validate blockchain transactions in exchange for a number of tokens. Consequently, without miners, a coin cannot exist.
But mining has a cost. Miners need to at least break even on their coins in order to keep mining. The P/BE Ratio measures the relationship between the current price and the cost of mining. You can calculate it by dividing the current price by the mining breakeven price. A ratio of less than 1.2 is bullish; more than 3.2 is bearish.
7. Exchange Volume to Network Value Ratio
The Exchange Volume to Network Value Ratio can indicate the level of interest in a coin over the previous 30 days.
To calculate the figure, firstly find out the average exchange volume (total volume/30) then find out the average market cap (total cap/30). Finally, divide the average volume by the average network value.
A ratio of more than 0.5 is bullish.
8. Annual Inflation Rate
Crypto investors too often overlook inflation. High inflation will provide significant downwards pressure on price.
It’s easy to calculate a coin’s annual inflation rate. Use the block reward schedule to work out how many new coins will come into existence in the next year, the divide the number by the circulating supply.
9. Rich Lists
Crypto is unique in that you can see exactly how many coins are held in individual wallets. Block explorers will provide lists of the top wallets.
The higher the percentage of a coin held by the wealthiest wallets, the easier it is for whales to manipulate the price with pump-and-dump schemes.
You can also use the rich lists to establish whether the biggest holders are accumulating or distributing. Much like inside trades analysis (SEC Form 4) can predict stock movement, so too can rich lists predict crypto movements.
10. Network Unique Addresses
A network unique address is a wallet that has a non-zero balance. In simple terms, it gives insight into how many people are using the network.
If a network is popular, more addresses will be in use. Look at trends over more extended time frames for better insight.
Beware; high fees can artificially inflate the number of unique addresses. People might be unwilling to pay the costs to consolidate their balances.
Don’t Rely on One Indicator
As much as we might want there to be, there is no golden bullet. Taken individually, none of the fundamental analysis indicators can provide you with certainty about whether you’re making a sound investment.
You need to balance the different indicators to find a level of risk you are comfortable with. Almost every time, that means you will need to make compromises. You also need to add some technical analysis, but that’s beyond the scope of this piece.
And remember the primary rule of investing in crypto—there is always a chance that you’ll lose all your money. Never invest more than you can afford to lose.
(Note: Blocks Decoded does not offer financial advice. Nothing included in this article should be construed as such.)