How to Analyze Cryptocurrency Before Investing

Top 100 Crypto
Analyzing cryptocurrency market data
Editorial Staff
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Understanding Crypto Analytics

Although it is widely assumed that anyone can start investing in crypto, trading assets as volatile as cryptocurrencies requires analytical skills and research competencies, among others. Developing this abilities can help investors evaluate any cryptocurrency’s potential, reduce the risks, increase the reward factor and make smarter and safer decisions, generating meaningful returns.

There are three primary methods to analyze digital currency and digital assets: fundamental analysis, technical analysis and on-chain analysis. These fundamentals highlight asset’s value, earnings, viability and potential for growth so that investors, by analyzing the qualitative & technical factors that affect market value, can have a fundamental understanding about assets they want to invest in.

To get the best out of all these techniques, traders and investors usually make a combination of fundamental, technical and on-chain analysis to get a complete overview.

Crypto Fundamental Analysis

Fundamental analysis is very helpful before making a buy or sell decision. Unlike technical analysis, which focuses on analyzing the price movement of a market and uses charts and indicators to predict future trends and determine when a stock should be bought or sold, fundamental analysis focuses on how external economic and financial factors affect the value of an asset/security. Its main goal is to identify opportunities with the best potential or establish whether an asset is undervalued or overvalued.

Fundamental analysis primarily relies on public data, such as crypto whitepapers, to figure out if the market's valuation of an asset is fair or recognize the future potential of a project. It also involves knowing of all new projects in the crypto ecosystem. It is essential to know which are those who can generate great impact and acceptance in the community, which updates can lead certain cryptocurrencies to reach better quotations and take into consideration the events that are carried out to encourage the purchase of ICOs or Tokens (Airdrops, Staking or Rewards).


Principles of Fundamental Analysis

Fundamental analysis comprises of:

  • Economic analysis;
  • Industry analysis;
  • Project analysis.

It is focused on several factors:

  • the state of the cryptocurrency sector & the market as a whole;
  • the domestic and global economic environment;
  • supply and demand;
  • the competitive landscape.


Key indicators, metrics & ratios in Fundamental Analysis

The most common fundamental analysis metrics, indicators & ratios to look are:

  • Market Capitalisation – It refers to the total value of a cryptocurrency calculated by multiplying the price of a coin or token by its circulating supply. A high market cap suggests that the project have more investors and more influence on the market.
  • Liquidity & Volume - Liquidity refers to the ability to trade an asset quickly and easily without a large impact on its price, while trading volume is simply a measure of the value of executed trades within a period of time. The higher the liquidity, the higher the trading volume.
  • Tokenomics – It refers to the supply and demand, utility and scarcity characteristics of a crypto project. The higher a token's market cap and lower its circulating supply, the more valuable it could be in the future.
  • Total Value Locked (TVL) - This metric measures the total value of all assets locked into a decentralized finance (DeFi) protocols and used to measure the growth of the industry.

Fundamental Analysis also involve project metrics such as:

  • Whitepaper & Roadmap;
  • Team credibility & experience;
  • Community size & engagement;
  • Regulation;
  • Competition;
  • Use cases;
  • Rate of network growth & Rate of adoption;
  • Target market;
  • Price history, major investors and age of the project.

Cryptocurrency Technical Analysis

Cryptocurrency technical analysis is essentially the study of supply and demand. It looks at charting patterns and statistical indicators to highlight opportunities for speculation and anticipate trends. The focus of technical analysis is on identifying patterns and trends that will repeat so that the trader can capitalize on them. Therefore, it is mainly dedicated to profitable short-term trading.


Principles of Technical Analysis

Technical analysis poses on a series of principles:

  • Supply and demand determine the final market price;
  • Rational factors collectively influence supply and demand, consequently affecting prices;
  • Prices change to reflect periodic trends exhibited in the past and in the market as a whole;
  • Patterns and trends are repetitive: it’s possible to predict future price movements based on past data;
  • Emotions play a significant role in influencing price movements.


Key indicators, metrics & ratios in Technical Analysis

Some of the most common indicators, metrics & ratios in technical analysis are:

  • Support & Resistance (SR) – Key price barriers that prevent overly dramatic declines/surges in the price of an asset, allowing traders to time their entry and exit into the market.
  • Average Directional Index (ADX) – A technical analysis indicator that helps determine the strength of a trend, leading traders to reduce risk and increase profit potential. It is based on a moving average where the price range expansion is shown for a certain period.
  • Bollinger Bands (BB) – A technical indicator made up of three lines plotted over the asset prices that helps the recognition of systemic pattern recognition in prices, measure volatility and look for entry and exit points.
  • Relative Strength Index (RSI) – A momentum indicator used to quantify the magnitude of pricing volatility, indicating price fluctuations of an asset or cryptocurrency.
  • On Balance Volume indicator (OBV) – It is a cumulative indicator that measure buying and selling pressure and is primarily used to confirm or identify overall price trends or to anticipate price movements after divergences.
  • Standard deviation and average deviation – It is a a momentum indicator that measure price volatility by relating a price range to its moving average. When the standard deviation is high indicates that the actual price is further from the average price, a sign of higher price volatility.

These indicators can help investors and traders in their quest to exact profits from trends. Other statistical tools that investors may turn to when leaning on technical analysis include moving averages/RSI/MACD, Fibonacci ratios, volume weighted average price (VWAP) and time-weighted average price (TWAP).

Crypto On-Chain Analysis

The vast majority of cryptocurrencies available on the market today use public blockchains to verify and record data. Blockchain transaction data is completely publicly available “on-chain” for everyone to see and because of this, all cryptocurrency trading and investment activity can be extracted from the public ledger and analyzed.

On-chain analysis monitor the transaction activity of a blockchain network and wallet data to gain valuable insights into the overall sentiment and behavior in the network through a variety of metrics and trading indicators in order to predict future price movements.

On-chain analysis kicked off back in 2011 with the creation of the Coin Days Destroyed indicator. It was the first metric to use the age of Bitcoin addresses.   


Principles of On-Chain Analysis

On-chain analysis involves gaining insights from the following types of blockchain data:

  • Transaction details such as volumes, the sending and receiving addresses and how much was sent;
  • Block details such as miner rewards, timestamps, and fees;
  • Smart contract info e.g. the underlying code that controls the issuance and transfer of tokens;
  • Price correlations;
  • Exchange inflows and outflows or the amount of coin deposited/ withdrawal from an exchange wallets.

To make the most of on-chain analysis, it’s important to have the most up-to-date indicators and meaningful metrics from reliable on-chain analysis providers.


Key indicators, metrics & ratios in On-Chain Analysis

The following metrics give investors and traders an overview of the network, including how secure it is, how much it is being used, and how its monetary policy is functioning:

  • Active Addresses – It shows the number of unique addresses successfully participating in a transaction on the network, giving an indication of blockchain activity. Historically, active addresses have correlated with price movement, zooming in that during periods where the price drops. 
  • Transaction Volume – It measures the aggregate volume of transactions recorded on-chain, indicating both trading and non-speculative activity. Can be used to spot reversals and break-outs.
  • Miner revenue per transaction – It’s the sum of block rewards and transaction fees paid to miners. High revenues reflect a healthy network where miners are incentivised to protect the long-term interests of the network, while bull markets have usually been preceded by long periods of reduced miner revenue per transaction.
  • Hash rate – It measures the amount of processing power that miners generate to process transactions in a blockchain. The higher the hash rate, the more efficient and secure the network is, indicating more profitability. 
  • Exchange Net Position Change – This indicator measures the net amount of Bitcoin that's entering or exiting wallets of all kinds of exchanges, determining if investors are spending or withdrawing their Bitcoins. When this net position change is positive, exchanges have more inflows than outflows. When the change is negative, it's the opposite.
  • Miners to Exchange Flow – A metric that indicates the volume of coins transferred from the mining pool to exchange wallets. Usually indicates a bearish sign as it is correlated to sell action or preparation for possible sell naturally connected to price drop.
  • HODL Wave – A graphic visualization that shows the amount of Bitcoin in circulation grouped according to different time periods – from less than one month to more than seven years – giving a macro view of the coin supply distribution and changes among different age bands.
  • Network Value to Transaction (NVT) – This ratio compares the market cap to the transaction volume in a specific window. It’s similar to the Price to Earnings ratio used in traditional finance markets and measures whether the blockchain network is overvalued or not, indicating bearish sentiment or bullish sentiment. If the value is too high, it means the network is overvalued compared to the low ability to transact coins in terms of volume, implying the possible removal of the price bubble coming.

Best Crypto Analysis Tools

There are many data analysis tools available on the market, different by sourcing, integrating and visualizing diverse datasets. Here are some of the best crypto analytics tools available:


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