As you can’t really do with limited data available on the charts.
Your goal is to reach a conclusion on whether the asset is overvalued or undervalued. At that stage, you can use your insights to inform your trading positions. In other words, have we had a major hype & can a dump be expected?
Trading assets as volatile as cryptocurrencies requires some skill. You will need to define a strategy – otherwise, you are Gambling & not trading or investing.
As for , some expertise can be inherited from the legacy financial markets. Many new crypto traders use the same technical indicators seen in Forex, stocks, and trading.
You often see tools such as the , , and which seek to predict market behavior, the issue with this is the lack of data mentioned above. Yet, these tools are also extremely popular in the cryptocurrency space.
Slightly harder to read a moving average when the price is in a 90-degree move up.
With cryptocurrency , though the approach is similar to that used in legacy markets, you can’t really use tried-and-tested tools to assess crypto assets. To conduct a proper analysis, what we need is to understand where they (the company/Coin) derive value from.
For you newer traders…
“What is (FA)?”
(FA) is an approach used by investors and traders to establish the "intrinsic value" of an asset or business or in this case, crypto. By looking at a number of internal and external factors, their main goal is to determine whether said asset or business is overvalued or undervalued. They can then leverage that information to strategically enter or exit positions.
The goal of this article is not to dive into the methods of FA as a whole, rather just to highlight where you should begin.
However, there are problems with crypto (in the traditional sense)
Cryptocurrency networks can't really be assessed through the same lens as traditional businesses. If anything, the more decentralized offerings like Bitcoin ( BTC ) are closer to . But even with the more centralized cryptocurrencies (such as those issued by organizations), traditional FA indicators can't tell us much.
So now we are stuck between a rock and a hard place…
A quick step would be to identify strong metrics, these should not really take into account things like Twitter or Facebook followers. It’s so easy these days to buy several thousand followers for social media sites.
One method could be; the number of active addresses on a blockchain and see that it has been sharply increasing? For example…
Are we seeing Company actors transferring money back and forth to themselves with new addresses each time? This is the level of info you can go down to – we are on the Blockchain after all.
A little more TECHNICAL
If you want to get a bit more technical – you can look at “On-Chain” metrics in depth. On-chain metrics are those that can be observed by looking at data provided by the blockchain itself.
By running a node for the desired Crypto and examining the data, this can be time-consuming and expensive. Particularly if you are only considering the investment, and don't want to waste time or resources on this process.
A simple way to do this (in some instances) is to use API-based solutions, plug into exchanges, and see third-party tools such as Binance-research's project reports.
Look for info such as;
1) Active Addresses
2) Transaction value
3) Fees – this will give an idea of the demand…
Other areas as mentioned above
You are looking to ‘invest’ in a tech company, which is the longs and shorts of it. So go and read through the whitepaper. Assess use cases, do they make sense to you?
Review the team, do they have experience or have they already raised finance enough to keep the project going – you can now use the chain metrics – to see , you could go and look at the companies register, in the UK all companies are set up under “companies house” this will show shareholders, early account info, company directors.
How about competition in the space? What projects are offering similar solutions, are the other companies further along? Does the company you are looking at, have some kind of USP over their competitors?
Supply Mechanisms – Liquidity and – Market Cap.
These are all things to take into consideration.
And Finally - Initial distribution and Tokenomics as a whole
A lot of projects have created tokens as a solution looking for a problem. Doge on the other hand created a meme for the market, which is turning into a solution.
Understanding the use case, cannot be stressed enough. As such, it's important to determine whether the token has real utility. And, will it have decent adoption?
Consider how the funds were initially distributed. Was it via an ICO or IEO , or could users earn it by mining?
The whitepaper should outline how much is kept for the founders and team, and how much will be available to investors. If it was mined, you could look to evidence of the asset's creator pre-mining (mining on the network before it's announced).
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As I said, this is only to give you a starting point - especially for you newer traders. There are several other factors & methods but start here.