When investing, many employ various complex strategies in order to manage risks and profit margins for the ultimate goal of securing a successful investment. One of the most commonly used strategies is Fundamental Analysis (FA), an investment analysis strategy concerning both quantitative and statistical data regarding businesses or institutions that can affect the movement of an asset’s price. This is all to find the intrinsic value of the asset at hand.
When the asset’s intrinsic value has been discovered, fundamental analysis investors would compare the value of the asset’s current price to observe whether or not its value is higher, lower or reasonable. Regardless of the calculation outcome, the general belief is that the asset’s value would revert back to its original intrinsic value.
Henceforth, the fundamental analysis method is suitable for acquiring benefits when the asset’s market value is lower than its intrinsic value and also commonly employed when aiming for profitable gains.
How to use the FA method
The FA method applies to almost any financial market as the focus of finding an asset’s intrinsic value is beneficial to any form of investment.
In length, the method covers many branches of thoughts and knowledge, including the areas of financial statement analysis, indicators, institutes, global economy and much more, all of which can be analyzed through the FA method.
Nonetheless, with varying markets come varying factors and indicators that need to be taken into account beforehand.
Equity investors may study a company’s financial statements, stock’s P/E ratio, etc. Those in the Forex market would have to look into differing variants, like information regarding the central bank, which would help study a country’s economic status.
FA in Crypto Markets
In correlation to the aforementioned information, the cryptocurrency market also attains its varying factors and indicators.
Network value-to-transaction (NVT) ratio
Network value-to-transaction (NVT) is the ratio brought into play to determine whether or not a blockchain network’s value is higher or lower than its actual value. The result can be found from the ratio comparing net worth of the blockchain network (equal to its market cap) with the number of daily on-chain transactions or how much the blockchain is used in a day.
This equation is as follows:
NVT = network value / Daily Transaction Volume
When calculating the NVT of two values, the higher ratio of the two illustrates that its blockchain’s value is higher than normality and the other is lower. This can be exemplified by a situation where two networks’ market capitalizations, of coin A and B, are both equal to 10,000 THB, but differ in the NVT ratio, wherein coin A is 60 and coin B is 150.
In general, assets with lower NVT are considered as undervalued assets. In contrast, assets with higher NVT are considered overvalued. Therefore, it can be concluded that coin A, with the lower NVT, is undervalued, while the network is overvalued.
Daily active addresses/ users (DAA)
Daily active addresses refer to the indication of active user accounts on a network within a day. Its usefulness lies within the fact that it is beneficial for indicators, such as NVT, as well as for determining the trend of a network.
The Price-to-mining-breakeven ratio is an equation used to determine whether the cost of mining a new coin in Proof of Work fashion is worth the value of that coin or not. It concerns the coin market price, mining capital, electricity fees and initial costs for hardware.
The equation is as follows:
Price-to-mining-breakeven = coin market price / initial costs when mining a coin
This ratio is also applicable towards the indication of an economic status as well. If the Price-to-mining-breakeven ratio is higher than 1, it means that there is a probability that investing in the asset would be profitable. Miners tend to use this method, further driving the network’s economy.
When investing in assets, though there are techniques and indicators that can be applied for price analysis, investors tend to stick to basic means to thoroughly better the understanding behind the project and the technology. Such methods concern the asset’s whitepaper, the information behind the developers and their drawn roadmap.
The FA technique is suitable for analysis that takes into consideration any highly detailed information that is easy to access, including economic data, a company’s turnover and much more.
This investing approach, moreover, could contribute to substantial gains in the long run, just like how bitcoin’s price has surged over 4,800,000% over 10 years. Hence, most of the well known figures like Warren Buffet and Peter Lynch, for example, utilize fundamental analysis for their investment decisions.
Therefore, if done right, fundamental analytic investors could benefit off of these pieces of information and improve their investment methods.
Though easily conducted, the FA technique can be difficult to assess as an asset’s intrinsic value is not easily indicated. Moreover, if an asset is undervalued, there are no guarantees that it will revert to its intrinsic value.