The crypto market has been known for its volatility and soon becomes a favorable trading market for would-be investors. The volatility behind can be ascribed to the characteristic of an immature, yet rapidly growing market share the same. Generally, the fundamentals of cryptocurrencies are less known to the public and the trading in crypto market is often believed to be solely speculative. This beginners’ guide to fundamental analysis on cryptocurrency aims to give you an idea how to pick a cryptocurrency with potential.
The following are some criteria useful in selecting cryptocurrency.
Today we will focus on the first two criteria, Trend and Fundamentals. The rest will be covered in another article.
It is crucial to understand trends in the cryptocurrency market and identify how a potential crypto investment could benefit from the trends. A certain trend could benefit a specific sector of cryptocurrency while some trends are more general. Identifying which sector is in a decline/growth trend could help you to pick a good investment. One of the major trends in the crypto market is the growth of the DeFi (decentralized finance) and NFT space, supporting the rise of cryptocurrencies such as ETH, LUNA, AVAX etc.
Under fundamentals consideration, we breakdown a cryptocurrency into a couple of aspects, including the business model, technology behind it, the startup team and the backing/initial investor.
1) Business Model
There are more than millions of cryptocurrencies out there in the market, what makes one standing out form the rest of them? While the business idea of a cryptocurrency is not the sole factor of its success, it does play an important part and ensures the crypto has competitive advantage over its competitors.
For example, Arweave (AR) business model is built around the idea to store data permanently, by matching users who have spare hard drive space with those in need of data storage. One of the scam recently occurred in the NFT market is MekaVerse. Since the metadata is not stored in IPFS or other decentralized storage solution like Arweave pemanently, but stored in the centralized address of MekaVerse, your NFT can be substituted or deleted by MekaVerse. You do not truly own the NFT.
Besides the uniqueness value acquisition, we should also take note on a cryptocurrency’s market demand, roadmap/future development, user experience and marketing capability to give would-be investors a more comprehensive picture of the potential crypto investment.
Key technological characteristics that investors should be searching for regarding to a cryptocurrency investment includes whether the token address current market issue, its uniqueness and disruptiveness.
We have briefly talked about how Arweave using technology to address the market needs. Another example is ZK (zero knowledge) rollups, which facilitates faster transactions under Ethereum blockchain with a lower cost (in terms of computational effort), allowing Ethereum to handle huge amounts of transaction data in a short period of time. Such technology advantages are important for a cryptocurrency to scale up in the foreseeable future.
3) Startup Team
The startup team could also play a crucial part in a cryptocurrency’s success. When evaluating a cryptocurrency, investors should be aware of the startup team’s quality. While whether the team has prior experience in startup project does not convert to success in development, it could still serve as an indicator, along with other factors such as the variety of members’ expertise, nationalities and the team’s business connection.
4) Backing/Initial Investor
The last aspect for examining a cryptocurrency is the angel /initial investor(s) behind the project. Well-known investor groups in the cryptocurrency group include a16z, Coinbase Venture, 3 Arrows, the Spartan Group etc. Such groups have demonstrated excellent cryptocurrency picking skills and have invested in high profile cryptos like Polkadot, NEAR Protocol and Arweave. Some venture groups not only provide capital to cryptocurrency projects, but also human capitals and technologies.
Screening for cryptocurrencies with an international investor with a proven track record could enhance would-be investors’ chance of success in picking a crypto with potential. Diversity in the investor group and also their capital sources could also provide signals for crypto selection.
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