Fundamental Analysis in Trading

(MECX Source)

Fundamental analysis is regarded as the core foundation of investing and can be applied to all types of assets. In traditional financial markets, this concept is associated with assessing the intrinsic value of an asset and analyzing the factors that may influence its future price. This approach often relies on macroeconomic data, microeconomic factors, financial reports, and industry trends. Essentially, fundamental analysis is carried out through two main approaches: top-down and bottom-up.

In the field of cryptocurrency, fundamental analysis has several differences compared to traditional finance and has not yet been fully developed. For crypto, analytical methods often revolve around three main areas

On-chain metrics
Project analysis
Token analysis

🔗 Learn more about On-chain Metrics

These three methods can be applied to both Spot trading and Futures trading.

On-Chain Metrics

Active Addresses

Tracking the number of active addresses on a blockchain provides valuable insights into user participation. If the number of active addresses gradually increases over time, it indicates a growing user base, which can be seen as a positive signal for holding the asset. Conversely, when the number of addresses declines, it may suggest a weakening user base, reducing investor confidence.

Active address analysis usually relies on data of unique addresses that send or receive tokens daily or weekly. It is important to consider the rate of change in the number of these addresses and compare it with other indicators such as trading volume. For detailed monitoring, investors can use blockchain explorers specific to each project, such as Etherscan for Ethereum.

Hashrate

The hashrate indicator applies only to blockchains operating under the Proof-of-Work (PoW) consensus mechanism, such as Bitcoin, Ethereum (before transitioning to PoS), Bitcoin Cash, and others. In a PoW system, miners play the role of validating transactions and securing the network by solving cryptographic puzzles using computational power.

Hashrate represents the total computational power the entire network dedicates to transaction processing. The more secure the network, the higher its hashrate. For instance, in the case of Bitcoin, hashrate has a strong correlation with mining difficulty and often fluctuates in line with market price movements.

Total Value Locked (TVL)

TVL (Total Value Locked) is a key metric used to measure the performance of DeFi projects. It refers to the total amount of crypto assets that users have staked or locked in a protocol.

A higher TVL indicates greater trust and popularity of the project, while a lower TVL reflects limited market attention. Investors often compare TVL across different protocols to assess growth speed. A reliable source for TVL data is DeFiLlama.

Project Analysis

Whitepaper

A whitepaper can be considered the “business plan” of a blockchain project. This document details the core idea, operating model, founding team, development roadmap, and other key factors. During the fundraising stage, the whitepaper serves as the central document, reflecting both the technical capability and the strategic vision of the project. Therefore, it is always a crucial basis for evaluating quality and growth potential.

Team Background

The team’s composition and experience play an especially important role. If the founding group has previously built successful products or has a strong professional background, investor confidence will be strengthened. Moreover, the participation of influential figures in the industry also increases a project’s value. For example, Ethereum has Vitalik Buterin, while Yearn Finance (YFI) has Andre Cronje.

Additionally, backing from reputable venture capital firms is another factor to consider. Names such as Andreessen Horowitz (a16z), Multicoin Capital, and Digital Currency Group (DCG) can provide financial resources, talent acquisition, and industry connections, giving the project a major advantage.

Competitors

To understand a project’s potential, it is necessary to identify the problem it aims to solve and its target market. If a project has no direct competitors, this may indicate innovation and the potential to become a future market leader. However, if there are competitors, investors should compare aspects such as team quality, degree of innovation, financial backing, and industry positioning to estimate the project’s potential market value.

News Analysis

News is always a powerful factor affecting token prices. A serious incident, such as a major security vulnerability in a DeFi project, can cause token prices to drop significantly. On the other hand, positive news—such as the SEC declaring XRP is not a security—can trigger a sharp price increase. In addition, global macroeconomic data can also indirectly influence the crypto market. Therefore, consistently staying updated with information is essential.

Token Analysis

Market Capitalization and Fully Diluted Valuation (FDV)

Market capitalization and FDV (Fully Diluted Valuation) are two commonly confused concepts. FDV refers to the total market value when all tokens are in circulation.

When the gap between current market cap and FDV is too large, it indicates that a significant number of tokens have not yet been released. Once these tokens enter circulation, they can create heavy selling pressure. New projects often face this situation because the initial circulating supply is usually very small.

For example, when Curve launched the CRV token, the initial trading price ranged from $15–$20, pushing FDV beyond $50 billion—surpassing Ethereum at that time. This was clearly an unrealistic valuation, which subsequently led to a sharp correction.

On the other hand, an undervalued project could serve as a catalyst for future price appreciation.

Earning and Burning Mechanism

A project’s whitepaper often specifies the mechanisms for earning and burning tokens. Users can receive additional tokens by staking or participating in the ecosystem’s activities.

The burning mechanism is designed to control total supply and prevent inflation. Common methods include token buybacks or burning transaction fees. Before investing, it is crucial for investors to understand the tokenomics to avoid risks such as unlimited token creation.

Conclusion

Fundamental analysis is an essential skill in the cryptocurrency market, helping to complement and overcome the limitations of technical analysis. When making investment decisions or holding a token, thoroughly understanding a project’s fundamentals is extremely important.

However, it should also be noted that even if a project has strong fundamentals, the token price may not immediately reflect its true value. Therefore, the most effective approach is to combine fundamental analysis with technical analysis to build a more comprehensive investment strategy.

Fundamental Analysis in Trading - Complete Guide