Crypto OG: How to conduct fundamental analysis on the project?

Original Author: Alpha Please

Original compilation: TechFlow intern

We've all bought tokens at stupid valuations, and no one should be surprised. This is the tuition fee you have to pay in the field of cryptocurrency, so I have indulged in this research for many years, and it has made me a better crypto investor. I hope that in this article, I can help you avoid some losses and avoid some detours. The following is my method of fundamental analysis.

Fundamental analysis seeks to determine an asset's intrinsic value, which is an objective measure of its value. This is how you should find long-term belief in an asset. A good FA can help you withstand the volatility of cryptocurrencies in the long run. I'll take you through my own investing process and how I did it. This helped me build early belief in projects like ETH, AVAX, LUNA, LINK and more recently POKT, MAGIC and GMX.

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1. Project Analysis

This is where I usually start. The white paper is the most important part of a project, and I will read it first. I'm amazed how many people put huge sums of money into crypto projects without reading the white paper.

The white paper should outline the following:

• problem being solved

• explain their technical solutions

• Token Economics

• Token Economics

• Background information on the team

This white paper alone should give you a solid foundation for continuing your analysis.

A good white paper makes you want to learn more about the project. Dig into the team and really dig in, check the team's academic references, check out their LinkedIn for their experience so far.

You have to decide if the team is going for the long term, or building an MVP (sometimes they don't even get that far) and using you as exit liquidity. These are the people who are responsible for delivering the project, and they need to be passionate enough.

For anonymous teams, you can still gain insight into their online presence.What did they write about on social media or elsewhere?

If they're a developer, check out their GitHub contributions. DM them and see if they'd like to answer any questions. Double check the roadmap. Take a look at the timeline to assess whether it is the right time to deploy your funds. If a project has not delivered its major product within two years, there may not be a rush to invest. Use the roadmap to assess whether the team delivered on time or achieved their milestones. Transparency in this area is also important.

Then, start to do competitor analysis.

Who are the pioneers in this industry and how does the market value compare? What are the advantages of this protocol compared to competitors? Are they successfully attracting users? Why would users use this project instead of a competitor's solution?

Then there's social media analysis.

How is the project communicated on social media? Is their marketing in place? Have they cultivated a strong community willing to help with marketing? Is there a lot of social activity associated with the project? Join Discord and Telegram to get a feel for the project community. Are they discussing the intricacies of the project in depth? Or is it just saying that FOMO is being produced for no reason? Does the community make great memes? Memes indicate a passionate and strong community and help spread the narrative of a project.

CT is one of the best and worst places to do project analysis. A compiled tweet is always worth reading to see if you missed any key details from your own research.

What does the UI/UX look like? It's like a subjective category of analysis. But you have to decide if it's a good experience for the user, if the interface is intuitive and easy to use without someone having to go to Google"first level title"。

Yearn in 2020 VS Yearn in 2022

2. Analysis of Financial Situation

The second layer, let's focus on the financial indicators. I think it goes without saying that when trying to assess whether something is fairly valued, you should look at the market cap and fully diluted value of the item. This is where most people start. However, there are still many retail investors who do not do this.

In 2021, we have many retail investors buying Shiba near new highs, shouting "the price will reach $1!" because they don't understand the market value. For reference, Shiba currently has a circulating market cap of $16 billion and a price of $0.00003025.

Everyone loves to say that FDV is the meme of the bull market, and sometimes it is, but sometimes it really isn't. Take a look at the Solana dApps, they provide valuable experience on FDV. If the FDV of a token is seriously out of sync with the current situation, don't go in and buy it again, imitating the Solana dApp in the crazy FDV is not going well.

Market cap can provide misleading valuations if you don't take liquidity into account. Liquidity is a measure of how easy it is to buy and sell an asset.

Which exchanges are the assets listed on, or how liquid is the Dex?

Assets that are very illiquid can be very dangerous because the price can change dramatically if large holders decide to cash out.

For example Squid:

Tokenomics, Tokenomics, Tokenomics! Say important things three times. Token Economics isToken supply and demandeconomics.

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

Does the product need tokens to operate? What is it for? More real-world use cases means more users and more demands. Reading the white paper might give you some answers about the coin.

In some cases, projects may have changed from the original white paper. Check out blogs and do a Twitter search to see if anyone has written about token economics. Sometimes, it is difficult to find out the token release time, distribution and release rate. This is usually not a good sign. Not knowing a team's potential supply sale could cause you to incur some serious losses in the short and medium term. You need to know the annual inflation rate for a project every year. New tokens entering the circulating supply need to be absorbed by the market.

If stakers are earning a lot of tokens, then there can be a lot of sell pressure. $MIR and $ANC have ~200% inflation in the first year as developers look to bootstrap dApps and attract liquidity. So the price is always on a downward trend in the short term.

This doesn't apply to projects without a product, but to live Layer 1, dApps, and infrastructure.

You can use Tokenterminal to get:

• – Revenue from the agreement

• – P/E and P/S for protocols and dApps

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

You can even use these numbers to help model discounted cash flows. This is a popular stock valuation model that discounts the current value of a business by the future cash flows that the company can generate. Because these two interest rates are key - the expected growth rate and the prevailing discount rate. Based on the pull of each factor, the cash flow is determined and a fair valuation is derived.

Here's an example of a discounted cash flow model trying to find what the minimum price for $1 of ETH is.

The model shows $10,200 per ETH, suggesting that Ethereum is significantly undervalued.

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3. Analysis of activities on the chain

Finally, I try to find out what happened on the chain.

Platforms like Glassnode, Nansen, and DuneAnalytics can tell you:

• Number of addresses and active addresses

• The number of addresses whose balance exceeds a certain amount

• Number of long-term versus short-term holders

• exchange supply

• Whale wallet address activity

......

What I'm trying to say is, try to find any reason why it might not be a good time to buy. For example, if most of the circulating supply has moved to an exchange recently, that could be a sign that people are planning to sell.

You now have a ton of information about projects and tokens that can help you decide if this is a good long-term investment. I compile all of this into a combination of documents and tables so that I can have all of this information in one place should I need to refer to any of them. Don't try to keep all this information in your head. Write it all down. You'll want to reassure yourself of your investment at various times, especially when prices are plummeting.

I would also like to say that I invest a lot of time researching projects only to decide not to invest.