Contents

• Introduction
• What is fundamental analysis (FA)?
• Comparison between fundamental analysis and technical analysis
• Common indicators in fundamental analysis
  • Earnings per share (EPS)
  • Price-to-earnings ratio (P/E)
  • Price to Book Ratio (P/B)
  • P/E Growth Rate (PEG)
• Basic Surface analysis and cryptocurrency
  • Network value to number of transactions (NVT) ratio
  • Active addresses
  • Price to mining cost profit and loss ratio
  • White Paper, Team and Roadmap 
• Pros and Cons of Fundamental Analysis
• Summary

Introduction

Whether it is a century-old stock or an emerging cryptocurrency, there is no exact scientific theoretical support for trading. If anything, Wall Street's top financiers would have kept this theoretical formula a closely guarded secret.

What we have at our disposal are a vast array of tools and methods used by traders and investors. In most cases, these methods can be divided into two categories: Fundamental Analysis (FA) and Technical Analysis (TA).

In this article, we will dive into the basics of fundamental analysis.

What is fundamental analysis (FA)?

Fundamental analysis is a method used by investors and traders to determine the intrinsic value of an asset or business. To accurately assess value, they will delve into internal and external factors to determine whether the underlying asset or business is overvalued or undervalued. The research findings can provide investors and traders with recommendations to help them make decisions that are more likely to yield substantial returns.

For example, if you are interested in a company, you might first learn more about its financial health by researching things like its earnings, balance sheet, financial statements, and cash flow. Then, branch out and look at the markets or industries in which they operate. Who are the competitors? Who is this company's target audience? Is this company expanding its operations? You can expand the scope even further to take into account many economic factors, such as interest rates and inflation.

The above is the so-called "bottom-up" approach: start with a company of interest and gradually understand its position in the macroeconomic environment. Of course, a "top-down" approach can also be adopted. Look at the big picture first, then zoom out.

The ultimate goal of this type of analysis is to derive an expected stock price and compare it to the current price. If the estimate is higher than the current price, it's considered undervalued. On the contrary, if it is below the market price, you can assume that it is currently overvalued. Based on the data analyzed, informed decisions can be made to buy or sell shares of a particular company.

Fundamental Analysis vs. Technical Analysis

New traders who are new to cryptocurrency, foreign exchange or the stock market and investors are often confused about which approach to take. Fundamental analysis and technical analysis are in sharp contrast, analyzing different matters in completely different ways. However, both provide transaction-related data. Which method is better?

In fact, it may make more sense to focus comprehensively on the information provided by each method. Essentially, fundamental analysts believe that the stock price does not necessarily represent the stock's true value and use this as the philosophy behind their investment decisions.

In contrast, technical analysts believe that future price movements can be predicted based on historical price action and volume data. They don't care about external factors, but pay more attention to the market's price charts, prices and trends, hoping to determine the ideal points for buying and selling positions.

Supporters of the efficient market hypothesis (EMH) believe that technical analysis (TA) cannot help traders consistently beat the market. This theory holds that financial markets are already presented with all known information about an asset (so analysts are "rational") and have taken historical data into account. Among EMH supporters, moderates do not deny the role of fundamental analysis, but hard-liners believe that even if the research on fundamental analysis is very rigorous, it is impossible to gain a competitive advantage.

Obviously, there is no objective distinction between these two methods, as both can provide valuable insights into different fields. Some people may be better suited to certain trading styles. In practice, many traders will use the two together to conduct analysis and judgment from a more comprehensive perspective. This is true for short-term trading, and it is also true for long-term investing.

Common indicators in fundamental analysis

When we discuss fundamental analysis, we will not go Instead of talking about K-line charts, MACD or RSI, we will introduce some specific indicators of fundamental analysis. In this section, we discuss several of the most popular indicators.

Earnings per share (EPS)

Earnings per share is a measure of a company's profitability An established indicator that shows the profit generated by each outstanding share. The calculation formula is as follows:

(Net income - preferred stock dividend) / number of shares

Suppose a company does not pay dividends and has a profit of 1 million Dollar. After issuing 200,000 shares, calculated according to this formula, the average earnings per share will be $5. The calculation process is relatively simple, but it can give us an idea of the potential investment. Companies with higher EPS (or consistent growth) are generally more attractive to investors.

Diluted earnings per share Also favored by some, this metric takes into account factors that could increase the total number of shares held. For example, with stock options, employees can purchase company stock. This typically provides more shares to distribute net income over, so the value of diluted earnings per share is expected to be lower than simple average earnings per share.

Like all metrics, EPS should not be used alone when used to evaluate the value of a potential investment. That said, it works even better when combined with other analysis tools.

Price-to-earnings ratio (P/E)

Price-to-earnings ratio (referred to as The "P/E ratio") evaluates the value of a business by comparing its stock price to average earnings per share. The calculation formula is as follows:

Share price / average earnings per share

Using the same company as above again as an example: its average earnings per share for $5. Assuming a trading price of $10 per share, the calculated price-to-earnings ratio is 2. What does this mean? In practice, its significance will depend largely on the results of other studies.

Many people use the profit-to-earnings ratio to determine whether a stock is overvalued (higher ratio) or undervalued (lower ratio). It's a good idea to compare this number to the P/E ratios of similar businesses. Likewise, this rule does not apply in all situations and is recommended in conjunction with other quantitative and qualitative analysis methods.

Price-to-book ratio (P/B)

Price-to-book ratio (referred to as "P/B ratio") can tell us how investors evaluate the company's book value. Book value is the value of a business as defined in financial reports (usually assets minus liabilities). It's calculated as follows:

Price per share / Book value per share

Once again, let's use the same company as the example above. Assume it has a book value of $500,000. Each share is trading at $10, with a total of 200,000 shares. Book value per share is $500,000 divided by $200,000, which equals $2.50.

Plug the value into the formula and divide $10 by $2.50 to get a price-to-book ratio of 4. On the face of it, the results are not ideal. The data shows shares are currently trading at four times the company's actual book value. This may indicate that the market may be anticipating a surge in the company's value, leading to an overvaluation. If the resulting ratio is less than 1, it indicates that the company is worth more than the market currently recognizes.

The limitation of the price-to-book ratio is that it is more suitable for evaluating "asset-heavy" companies. After all, this calculation doesn't adequately account for a company with few physical assets.

Price-earnings growth rate (PEG)

Price-earnings growth rate (PEG) is An extension of the profit-to-earnings ratio to take growth rates into account broadens the scope. The calculation formula is as follows:

P/E ratio/Earnings growth rate

Earnings growth rate is the company’s expected earnings growth within a specific time frame. Estimate. This metric is usually presented as a percentage. Suppose we estimate that the company in the example above will grow by an average of 10% over the next five years. We take the P/E ratio of 2 and divide it by 10, which gives us a ratio of 0.2.

The values suggest that this company is worth investing in, as it is significantly undervalued when future growth is taken into account. Generally speaking, any business with a ratio less than 1 is undervalued. On the contrary, a company with a value above 1 is overvalued.

The PEG ratio is preferred over the P/E ratio because the former takes into account an important variable that the P/E ratio ignores.

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Fundamental Analysis and Cryptocurrencies

The above indicators do not really apply to cryptocurrencies . Instead, you may need to rely on other considerations when evaluating a project's feasibility. The next section will look at some of the indicators used by cryptocurrency traders.

Network value to transaction number (NVT) ratio

NVT ratio Often viewed as the price-to-earnings ratio for cryptocurrency markets, it is quickly becoming an important metric for cryptocurrency fundamental analysis (FA). It is calculated as follows:

Network Value / Daily Transaction Volume

NVT attempts to explain the value of a specific network based on the value of the transactions processed. Suppose there are two projects: currency A and currency B. Both have a market capitalization of $1 million. Coin A has a daily trading volume worth $50,000, while Coin B has a value of $10,000.

The NVT ratio of currency A is 20, and the NVT ratio of currency B is 100. We generally identify assets with lower NVT ratios as undervalued, and assets with higher NVT ratios as overvalued. This data shows that Coin A is undervalued compared to Coin B.

Active addresses

Some people measure usage by the number of active addresses on the network. While unreliable as a single metric (and can be manipulated), it can still reveal information about network activity. You can take this metric into consideration when truly evaluating a digital asset.

Price to mining cost breakeven ratio

The price to mining cost breakeven ratio is An indicator of the value of proof-of-work tokens, which are mined by network participants. This metric takes into account mining costs, namely electricity and hardware consumption.

Token market price/mining cost of one coin

The price to mining cost breakeven ratio can indicate the blockchain network current status. The break-even point refers to the cost of mining a unit of tokens. For example, if the equilibrium point is $10,000, a miner will typically spend $10,000 to mine a new unit.

Assume that the trading price of currency A is US$5,000, the trading price of currency B is US$20,000, and the break-even points of both are US$10,000. Coin A has a break-even ratio of 0.5, while Coin B has a break-even ratio of 2. A ratio of Coin A is less than 1, indicating that miners are mining coins at a loss. Participating in the mining of currency B is obviously profitable. For every US$10,000 spent on mining costs, it is expected to earn US$20,000.

With incentives, this ratio is expected to trend towards 1 over time. For Coin A, unless the price rises, miners who mine at a loss may leave the network. Coin B can bring huge profits, so more miners are expected to join it until it is no longer profitable.

The validity of this indicator is controversial. Even so, it still gives you an idea of the economics of mining. You can incorporate this into your overall assessment of digital assets.

White paper, team and roadmap

Some traditional project research methods also determine encryption Popular methods of currency and token value. Read the white paper to understand the project's goals, use cases, and technology. Team members’ track records show their ability to build and scale products. Finally, the roadmap can be used to determine whether the project is progressing as planned. It can supplement other studies to determine the likelihood that a project will achieve its milestone goals.

Pros and cons of fundamental analysis

Advantages of fundamental analysis

Fundamentals Analysis is a very reliable way to evaluate a business in a way that beats technical analysis. For global investors, examining a range of qualitative and quantitative factors is an important starting point for trading.

Fundamental analysis can be performed by anyone and relies on proven techniques and readily available enterprise data. At least that's the case in traditional markets. In fact, if we focus on cryptocurrencies (still a niche field), we will find that sometimes no data is available, and the effectiveness of fundamental analysis can be greatly reduced due to the strong correlation between different assets. .

When used correctly, it can provide the basis for identifying stocks that are currently undervalued but will appreciate in value over time. Top investors like Warren Buffett and Benjamin Graham have demonstrated that rigorous study of businesses in this manner can yield tremendous results.

Disadvantages of fundamental analysis

Fundamental analysis is easy to do, but it is not easy to do it well. Determining a stock's "intrinsic value" is time-consuming and laborious, and involves much more than plugging numbers into a formula. Many factors need to be assessed, and the learning curve for acquiring effective assessment skills is quite steep. What's more, it's more suitable for long-term trading than short-term trading.

This type of analysis also ignores some powerful market forces and trends that technical analysis can identify. As the economist John Maynard Keynes said:

“The market may remain irrational longer than you can remain solvent.”

Stocks that appear to be undervalued (by all metrics) may not necessarily increase in value in the future.

Summary

Fundamental analysis is a proven practice relied upon by some highly successful traders. By refining their strategies, investors can not only learn to better estimate the true value of stocks, cryptocurrencies, and other assets, but also gain insights into entire businesses and industries.

Fundamental analysis combined with technical analysis can give traders and investors a comprehensive understanding of which assets and businesses can profit from them. Whether it is the traditional market or the cryptocurrency market, the combination of fundamental analysis and technical analysis is favored by many people.

However, the cryptocurrency market is still a nascent field, and we must realize that fundamental analysis may not necessarily achieve the desired results. Be sure to do your own research to ensure you implement a solid risk management strategy.

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