Welcome to part 2 of our Fundamental Analysis (FA) Guide. Today we turn our attention to Project and Financial Metrics. Read, enjoy and share with your network. Let’s all build wealth together.
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Welcome to part 2 of our Fundamental Analysis (FA) Guide. Missed out on Part 1? No problem. Feel free to hop over to Part 1: On-Chain Analytics Guide before continuing your journey here.
Today we turn our attention to Project and Financial Metrics. An understanding of project metrics (whitepapers, teams, tokenomics) will take your qualitative skills to the next level. As for financial metrics, measures such as S2F and NVT are exploding in popularity and yet are not being fully deployed by many traders. As unpredictable as the crypto markets have been recently from a technical perspective, fundamental metrics such as S2F have been remarkably accurate.
📑 The Project Whitepaper
WHAT IS IT. A whitepaper is a technical document that gives us an overview of a cryptocurrency project. It lays out facts about the blockchain, protocol, or distributed application (dapp) that is being built, and describes how the tokens will work.
GETTING STARTED. For any project you want to invest it, it is highly recommended that you critically evaluate the whitepaper. Where, critically evaluate means: reading the document to gain an insight into predefined questions. At the very least, these questions should include: What does this project do? How does it work? Why do we need this project? If you’ve never read it, the original Bitcoin white paper is a great example.
❌ If you can’t answer these questions, there are likely two conclusions:
The project is very advanced so you’ll need more knowledge.
The project doesn’t have a clear goal, methodology or use case.
In both scenarios, you shouldn’t invest in the project until further clarity is obtained.
✅ If you can answer these questions, It is sensible to cross-reference this information with online discussions of the project. What are various Twitter, Telegram, Reddit and Discord communities saying about the project?
Accessing whitepapers. New whitepapers are typically issued as news so it is sufficient to regularly check crypto news websites or to follow their Twitter. Two examples: CoinDesk (@CoinDesk) and Cointelegraph (@Cointelegraph).
🎳 The Capability of the Team
WHAT IS IT. As is the case with Angel Investing, the success of a new project is heavily dependent on the team backing the project. The members’ track records convey whether the team has the required skills to lead the project.
GETTING STARTED. Use the project website or details to find out who the team members are. Begin investigating the main questions: have the members undertaken previous successful ventures? Do they have the technical or commercial expertise required to reach their projected milestones? And, very importantly: have they been involved in any scams? There is no shortage of ponzi schemes in this space, so beware. If there is no team, you can gauge what the developer community looks like if the project has a public GitHub. This website allows you to see how many contributors there are and how much activity there is. Failing all that, the funds supporting a project can be a testament to the quality of the team. Highly reputable funds such as Alameda Research and Three Arrows Capital have thorough due diligence measures. If the project passed these, you can interpret it as a good sign.
WHAT IS IT. Some projects create tokens. Tokens are usually created, distributed, sold and circulated through the standard initial coin offering (ICO) process. Tokenomics is the topic of understanding the supply and demand characteristics of the cryptocurrency.
GETTING STARTED. Where tokens are at play, there are a few factors to consider. Does the token have utility? And as an additional question, is that utility something that the wider market will recognise and value? How were the funds initially distributed? If it was done via an ICO, how much was kept for the founders and the team compared to how much was made available to investors. If it was done via mining, is it possible that the asset’s creator engaged in premining (mining on the network before it’s announced?) You should be able to find all this information in the project whitepaper. Be sure you have an understanding of the distribution because it will determine your level of risk. If the supply is monopolistic (vast majority owned by a few parties) then those parties could move or even manipulate the market. They would do this to their benefit and your detriment.
🌊 Market Capitalisation and Liquidity
WHAT IS IT. Surprising how many people don’t have an understanding of market capitalisation given how regularly it is cited in the crypto world. Market capitalization (or network value) is simply calculated by multiplying the circulating supply of a crypto with the current price. A different way to think about it would be the hypothetical cost to buy every single available unit of the crypto asset. Liquidity is a measure of how easily an asset can be bought or sold. The main problem with an illiquid market is that we are unable to sell our asset at a “fair” price.
GETTING STARTED. Market capitalization alone can be misleading. For all it would take is for a useless token to have a supply of millions of units. Without a strong value proposition, this metric would be misleading. Further, coins can always be burned or supply reduced. In general, however, you can view “small-cap” coins to have more growth potential and “large-cap” coins to have stronger network effects. To determine liquidity, we can use trading volume on many crypto exchanges. FTX and FTX.US provide great data for this. To learn more about how to navigate the exchange for volume as well as how you can use volume to profitably trade altcoins: check out our tutorial.
🧮 Stock-to-Flow (S2F) ratio and Network Value-to-Transaction (NVT) ratio
WHAT IS IT. Certain ratios can be used to ascertain the financial health of the underlying markets supporting projects. S2F is elegant in its simplicity. You simply divide the current supply (stock) of a commodity or asset by its annual production (flow). It shows how much supply enters the market each year for a given resource relative to the total supply. The higher the S2F ratio, the less new supply enters the market relative to the total supply. As such, an asset with a high S2F ratio should, in theory, retain its value well over the long term. A similar ratio has seen popularity in crypto markets and is the NVT ratio. The network value to transaction ratio divides the market capitalization (or network value) with the amount transacted (typically on a daily chart)
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