What is Fundamental Analysis (FA)?
When we invest in shares or cryptocurrencies
, it is never really a guess. We always want to be able to substantiate our choices. For example, why do you invest in Ethereum
and not in NEO
? There are various methods with which we can calculate this. Two of those methods are called fundamental analysis (FA) and technical analysis (TA). Let's talk more about the former in this article. That is why we explain in this article what a fundamental analysis (FA) is.
What is Fundamental Analysis?
It is actually not difficult to understand what fundamental analysis is. In particular, when conducting fundamental analysis, you are looking at both internal and external factors to calculate whether an issue is overvalued or undervalued. This means that you check whether the price of a share or cryptocurrency is too low or too high based on the characteristics of the company and of the market.
But what do you look at in a fundamental analysis? You can start with the internal factors. In the case of a company, this would involve things like balance sheet, income, an overview of cash flow and employee satisfaction. You do this to get an idea of how financially healthy the company is.
Then you look at the external factors. These are the characteristics of the market. For example, who are the competitors and how are they doing it? What is happening in the market, and how does the company respond to this?
As in the example above, if you first look at the internal and then external factors, we call this a bottom-up approach. If you do it the other way around, so looking first at the external and then internal factors, we call it a top-down approach.
The purpose of a fundamental analysis
If you think the stock or cryptocurrency is too low, it could be a good time to get in. According to the analysis, it would mean that the share or cryptocurrency should be worth more. If the analysis shows that the stock or cryptocurrency should actually be worth less, you might decide not to buy it.
However, a correct or incorrect analysis is never possible. Everyone makes a fundamental analysis in their own way. So you will only know afterwards whether your fundamental analysis was actually on the right track or not.
The difference between fundamental analysis and technical analysis
If you know what fundamental analysis is, you may be able to estimate what it means from the name of the technical analysis. There is a fairly large difference between these two different analyzes. You will always have people who have more confidence in fundamental analysis, while other people make all their decisions based on the technical analysis.
Technical analysis mainly looks at the figures. And those are actually always figures from the past. For example, they make estimates about what will happen in the future based on previous events. Consider, for example, patterns, price charts and trends in the markets. Based on these numbers, they can find the ideal point at which to enter or exit the market.
Indicators in Fundamental Analysis
There are several indicators that can be used during a fundamental analysis. Normally, well-known indicators of fundamental analysis are the price-earnings-growth ratio (PEG), price-to-book (P/B) ratio, price-earnings ratio (P/E) and earnings per share (EPS).
However, the above indicators are used when it comes to equities. When we talk about cryptocurrencies, completely different indicators play an important role.
‣ Active addresses
The first indicator is not necessarily a stand-alone indicator. Yet it can reveal a lot about the activity that takes place within the network. By looking at the number of active addresses on a network, it is measurable how much the network is used.
‣ Price-to-mining-breakeven ratio
When a blockchain uses Proof of Work, the price-to-mine-breakeven ratio can be used. Here we calculate how many costs are associated with the mining process. Ultimately, these are the hardware and electricity expenditures required to mine a coin.
‣ Network value-to-transactions (NVT) ratio
This is actually the crypto version of the P/E ratio as we traditionally know it. The NVT ratio determines the value of a particular network based on the value of the transactions it processes.
The white paper has been officially released by the developers of a cryptocurrency. It contains a lot of interesting information about, for example, the objectives and way of working. Hence, it is a very important indicator for fundamental analysis. A roadmap can also often be found here, which says more about the future of a particular cryptocurrency. As you can guess, these are internal factors.