The crypto OG tells you how to conduct fundamental analysis on a project

Written by: Alpha Please

Compiled by: TechFlow Interns

We have all bought tokens at foolish valuations, and no one can be surprised. This is the tuition you must pay in the cryptocurrency space, and for many years I have been immersed in this study, which has made me a better crypto investor. I hope that in this article, I can help you avoid some losses and take fewer detours. Below is my method for conducting fundamental analysis.

Fundamental analysis aims to determine the intrinsic value of an asset, which is an objective measure of its worth. This is how you should find a long-term belief in an asset. Good FA can help you endure the volatility of cryptocurrencies in the long run. I will walk you through my own investment process and how I do it. This has helped me build early beliefs in projects like ETH, AVAX, LUNA, LINK, and more recently POKT, MAGIC, and GMX.

I categorize fundamental analysis into three types: 1. Project Analysis 2. Financial Overview Analysis 3. On-Chain Activity Analysis

1. Project Analysis

This is usually where I start. The white paper is the most important part of a project, and I read it first. I am surprised by how many people invest large sums into crypto projects without reading the white paper.

The white paper should outline the following:

• The problem being solved

• Explanation of their technical solution

• Use of the token

• Tokenomics

• Background information on the team

Just this white paper can lay a solid foundation for your continued analysis.

A good white paper makes you want to dive deeper into learning about the project. Delve into the team, really research, check the team's academic references, and look at their LinkedIn to understand their experience so far.

You must determine whether this team is in it for the long haul or just to build an MVP (sometimes they don’t even get that far) and use you as liquidity for their exit. These people are responsible for delivering the project, and they need to have enough passion.

For anonymous teams, you can still gain insights into their online presence. What have they written on social media or elsewhere?

If they are developers, check their GitHub contributions. DM them to see if they are willing to answer any questions. Carefully check the roadmap. Look at the timeline to assess whether it is the right time to deploy funds. If a project hasn’t delivered its main product in two years, it may not be wise to invest. Use the roadmap to evaluate whether the team is delivering on time or achieving their milestones. Transparency in this regard is also important.

Next, start doing competitor analysis.

Who are the pioneers in the industry, and how does their market cap compare? What advantages does this protocol have over its competitors? Have they successfully attracted users? Why would users choose this project over a competitor's solution?

Then comes social media analysis.

How does the project communicate on social media? Is their marketing on point? Have they cultivated a strong community willing to help with marketing? Are there many social activities related to the project? Join Discord and Telegram to get a feel for the project community's atmosphere. Are they having in-depth discussions about the complexities of the project? Or are they just generating FOMO for no reason? Is the community creating great memes? Memes indicate a passionate and strong community and help spread the project's narrative.

CT is one of the best and worst places for project analysis. Compiled tweets are always worth reading to see if you missed any key details in your research.

What is the UI/UX like? This is somewhat of a subjective analysis category. But you must determine whether it provides a good experience for users, whether the interface is intuitive and easy to use without someone having to Google "how to use _."

Yearn in 2020 VS Yearn in 2022

2. Financial Overview Analysis

On the second layer, let’s focus on financial metrics. I think it’s self-evident that when trying to assess whether something is fairly valued, you should look at the project’s market cap and fully diluted value. This is where most people start. However, many retail investors still do not do this.

In 2021, we had many retail investors buying Shiba near its all-time high, shouting, "The price will reach $1!" because they did not understand market cap. For reference, Shiba currently has a circulating market cap of $16 billion and a price of $0.00003025.

Everyone loves to say FDV is a meme in a bull market; sometimes it is, but sometimes it really isn’t. Look at Solana dApps; they provide valuable insights regarding FDV. If a token’s FDV is severely out of sync with the current situation, don’t go in and buy. Mimicking Solana dApps in a crazy FDV environment does not yield good results.

If you don’t consider liquidity, market cap can provide misleading valuations. Liquidity measures how easy it is to buy and sell an asset.

On which exchanges is the asset listed, or how is the Dex liquidity?

Assets with poor liquidity can be very dangerous because if large holders decide to cash out, the price can change dramatically.

For example, Squid:

Tokenomics, tokenomics, tokenomics! Important things are worth saying three times. Tokenomics is the economics of token supply and demand.

Supply and demand drive the value and price of cryptocurrencies. The higher the demand relative to supply, the higher the price.

Does the product require a token? What is its use? More real-world use cases mean more users and more demand. Reading the white paper may provide you with some answers about the token.

In some cases, the project may have changed from its initial white paper. Check blogs and use Twitter search to see if anyone has written about the tokenomics. Sometimes, it can be hard to find the token issuance schedule, allocation, and release rates. This is often not a good sign. Not knowing the team’s potential supply sales can lead to significant losses in the short and medium term. You need to understand the annual inflation rate of a project. New tokens entering circulation need to be absorbed by the market.

If stakers earn a large number of tokens, there may be significant selling pressure. $MIR and $ANC had an inflation rate of about 200% in the first year because developers wanted to guide the dApp and attract liquidity. So the price tends to decline in the short term.

This does not apply to projects without products but does apply to live Layer 1, dApps, and infrastructure.

You can use Tokenterminal to obtain:

• -- The protocol's revenue

• -- The P/E and P/S of the protocol and dApps

Then, you can apply more traditional stock analysis tools to help you objectively assess whether it is overvalued or undervalued based on current revenue. If a protocol clearly has massive profit potential, is showing significant growth, and has a very low P/S, then it may be a reliable long-term investment.

You can even use these numbers to help build discounted cash flow models. This is a popular stock valuation model that discounts the current value of a business based on the future cash flows it can generate. Because these two rates are key------the expected growth rate and the current discount rate. Determine cash flows based on the pull of each factor and derive a fair valuation.

Here is an example of a discounted cash flow model that tries to find out what the lowest price for $1 ETH is.

The model shows each ETH at $10,200, indicating that Ethereum is severely undervalued.

Clearly, this model does not account for future changes in Ethereum, how L2 affects demand, etc., but it is still another useful deployment tool when assessing an asset.

3. On-Chain Activity Analysis

Finally, I try to find out what is happening on-chain.

Platforms like Glassnode, Nansen, and Dune Analytics can tell you:

• The number of addresses and active addresses

• The number of addresses with balances above a certain amount

• The number of long-term holders vs. short-term holders

• Exchange supply

• Whale wallet address activity

……

What I mean is to look for any reasons that might indicate it’s not a good time to buy. For example, if a large portion of the circulating supply has recently moved to exchanges, this may indicate that people are planning to sell.

You now have a wealth of information about the project and the token, which can help you decide whether this is a good long-term investment. I compile all of this into a combination of documents and spreadsheets so that I can have all this information in one place if I need to refer to any of it. Don’t try to keep all this information in your head. Write it all down. You will want to reassure yourself about your investments at different times, especially when prices are crashing.

I also want to say that I spend a lot of time researching projects just to decide not to invest.