The Iconist is introducing a nine-part series dedicated to fundamental analysis of ICON, exploring how ICON is a fundamentally strong project and how it can be improved.
Fundamental analysis of a blockchain project such as ICON provides a lot of information in terms of strength, how it compares to competitors, the value of ICX and its potential in terms of future growth. This analysis can prove useful to all ICON stakeholders, including the development team, investors, partners and traders.
A well-researched fundamental analysis of ICON will further attract stakeholders.
Each article in this series will focus on a different element of fundamental analysis, including ICON use cases, team record, ICON’s decentralized governance, technological prowess, market entry and opportunities, progress, competitors and financial stability.
What is fundamental analysis?
Fundamental analysis looks beyond chart patterns and history to determine whether a project has long term potential. This requires researching every aspect of the project’s ecosystem, including technology, competitors and business development.
Business metrics and indicators are used to determine the real value of a project or asset, and to compare the investments to other competitors in the market. Fundamental analysis traces a project’s value to its source, allowing you to spot overvalued or undervalued assets.
Who uses fundamental analysis?
Potential partners, investors and traders can use fundamental analysis to determine whether a project or business is a good choice to work with or invest in, and how much value it has. Current team members and partners can also use fundamental analysis to work out what can be improved and set realistic long-term goals for their project.
Tools of fundamental analysis
Fundamental analysis tools show useful data in an efficient way, making analyses between different competitors easier. Here are some examples below.
- Crypto Fees: This site displays each network’s fees over the past 24 hours or seven days, a useful metric in determining a blockchain network’s traffic or usage.
- Glassnode Studio: This dashboard displays a range of blockchain metrics, data and insights.
- Baserank: This research platform for crypto assets gathers information and reviews from analysts and investors, giving an overall score from 0 to 100.
Why is fundamental analysis important?
Fundamental analysis is crucial in determining whether a project has long-term potential or investment potential, weeding out “pump and dump” schemes and scams.
The aim of fundamental analysis is to generate an expected price and compare it with the current price by examining external factors and broader conditions that may affect the network, providing a deeper understanding of a project.
Why is fundamental analysis especially important for cryptocurrencies?
Being the medium of decentralized networks, cryptocurrencies exhibit volatility, show short-term results and can quickly shift. Their market value and performance may not always reflect their real value.
Therefore, conducting a fundamental analysis is especially important for cryptocurrencies as the market is unregulated — you’ll find no standardized reports as with publicly listed companies — which makes them potentially risky investments. Furthermore, being decentralized, no single entity runs a project, making them unpredictable.
Fundamental analysis offers trustworthy information that can determine the true value of a cryptocurrency and the potential of a blockchain project.
There’s no single measure to assess a network fully. To tackle this, a combination of metrics can provide a foundation for the creation of indicators that can be used in FA.
What are some aspects that are unique to a blockchain project?
As each blockchain project uses different consensus algorithms with their own mechanisms, it is crucial to use personalized fundamental analysis for each project. Financial metrics come from several sources, including websites, public data and project reports.
- Whitepaper – these documents provide an overview of a project, including technological descriptions, potential use cases, roadmaps and schematics for coin economics.
- Team record – a project is often only as good as the people behind it. Indeed, VCs often invest in teams rather than projects. Fundamental analysis looks at a network’s developers and members, including their previous experience and industrial success. Less savory incidents such as scandals are also noted.
- Competitors – who are the other players in the space, and how are they doing?
- Tokenomics – how are the coins used? What is the network’s fiscal policy?
- Initial distribution – This examines how coins were originally distributed. In cases such as ICON, this means an ICO.
- Transaction count – measure of activity taking place in a network.
- Transaction value – how much value has been transacted within a given period.
- Active addresses – blockchain addresses that are active in a given period.
- Fees paid – the demand for block space as users compete with each other to confirm transactions and receive awards.
- Hash rate – measure of network health i.e. the speed and efficiency at which hardware must operate in order to mine.
- Amount staked – number of users who stake their own holdings to participate in block validation.
- Market capitalization – essentially, circulation x current coin price. This is how much it would cost to buy up every single coin in the network.
- Liquidity – measure of how easily an asset can be bought or sold.
- Volume – helps determine liquidity.
- Supply mechanisms – How many coins can the public buy, determined by maximum supply, circulating supply and inflation rate.
Project metrics refer to the overall quality of the project, blockchain metrics provide information about how on-chain technology works and financial metrics give insight into the project’s asset.
Indicators combine multiple metrics using statistical formulas to create values that are easy to read and draw comparisons from.
Useful indicators include Network Value to Transactions Ratio, Market Value to Realized Value Ratio and Stock-to-flow model.
All these metrics and indicators combined allow fundamental analysis to provide valuable insights into analysing blockchain projects and understanding the financial health of assets. When combined with technical analysis, it can attach a true value to a project, as well as determine its credibility and potential.
Advantages of fundamental analysis
Fundamental analysis lets investors and network partners collect and analyze external information regarding a project. It also provides a comprehensive understanding of the true value of a particular asset, which enables investors to better predict the asset’s future value.
Members and developers also have a clearer vision of where the project is headed and what they can do to improve.
Disadvantages of fundamental analysis
Some metrics do not fit into any categories stated above, such as sociopolitical factors like uncertainty over politics and social movements, government regulations and media coverage.
External events also partly determine a currency’s value, but are practically impossible to predict. Cryptocurrencies are notoriously quick to respond to external events, though good fundamental analysis can help investors predict how well a project might handle external stresses.
Fundamental analysis requires seasoned analysts who know what they are talking about, particularly in accounting, business and blockchain technology.
Fundamental analysis is a time consuming process, requiring much study, research and analysis. That means investors may have to wait.
Accurately determining certain key metrics requires a bit of art in addition to science.