3 Features of Crypto That Traditional Finance Lacks

It might be challenging for investors used to traditional financial markets to analyze cryptocurrencies using their normal tools of financial analysis. To determine whether to invest, a traditional investor, for instance, could consider the fundamentals of a stock or security.

Understanding a security’s value in relation to current market prices can be done through the use of fundamental analysis. In order to make a decision, crypto investors will consider a number of variables, including price-to-earnings (PE), price-to-book (PB), earnings per share (EPS), and free cash flow (FCF), among many others.

However, since they don’t exist, you can’t listen to a quarterly earnings call for a token. The decentralized nature of Bitcoin is a crucial, founding component of the project; there is no firm revenue, profit, or expense to consider for, instance, bitcoin (BTC) — there is no Bitcoin “company” operating the show.
What criteria then may analysts and investors employ when making decisions? What else are they required to consider?

Tokenomics

A common and significant method of examining a cryptocurrency project is tokenomics. A cryptocurrency project is controlled by a system of incentives and math known as tokenomics. A project with weak tokenomics is bound to failure, but a token with a strong plan for why people will acquire and keep tokens over time has a good chance of success. Making the right choice requires being aware of a project’s tokenomics.

Understanding who possesses the tokens and how they were distributed is important for understanding token distribution, which is a key component of tokenomics. If the supply is finite or infinite, as well as how fresh tokens join the ecosystem, are other factors to think about.

For instance, the maximum supply of Bitcoin (BTC) is 21 million coins, and new coins are added to the ecosystem through proof-of-work, while the maximum supply of Cardano (ADA), a proof-of-stake blockchain, is 45 billion coins.

Investors can receive signs about a cryptocurrency’s long-term viability and anticipated growth by taking these factors into account. For instance, if a token has a high rate of inflation, that may indicate to an investor that the token’s future worth would be in doubt.

Understanding the whole tokenomics of a project involves a number of other elements. Analysts typically consult the project’s whitepaper to identify the tokenomics and other crucial data.

White papers

Reading the white paper is a crucial first step in order to fully comprehend a cryptocurrency.

White papers are records that are unique to a cryptographic endeavor. Before the start of the project, the currency or token’s creator(s) publishes the white paper. The white paper is a document that describes the goal of the project, its statistics, the formulas used in its coding, and its tokenomics.

Investors can gain a thorough grasp of the developers’ objectives by reading the white paper. They will comprehend the market the coin competes in and the project’s long-term goals. They can then start developing an investing thesis around the project using this information. After reading the white paper, it’s not a good sign if you still don’t comprehend the “why” or the project’s objectives. The problem that Bitcoin is attempting to tackle and how it plans to do so are both spelled out in detail in its white paper, which can be accessed here.

The white paper is a good spot to look for warning signs and research the founders’ history. Investors should be warned away from a business if the white paper has grammatical problems, sections that are plagiarized, returns that seem too good to be true, or founders who have a history of failing projects or pulling pranks.

Investors can start examining the token’s blockchain if they have a solid understanding of tokenomics and the project’s objectives.

On-Chain Analytics Crypto

The availability of blockchain data that is publicly available for all to dive into — transactions and wallet balances are there for all to see “on chain,” 24 hours a day, seven days a week — is one of the most exciting features about cryptocurrencies that you don’t find in traditional finance.

The method of analyzing data from a blockchain ledger to create an opinion on market sentiment is known as “on-chain analytics.” Wallet balances, transaction data, gas costs, transaction volume, active addresses, and other indicators that can be discovered on blockchain ledgers are examined by analysts in order to analyze market sentiment and determine whether a certain asset is a good investment or is sending sell signals.

You might infer a coin is popular if, for instance, a project has lots of active transactions and active addresses. The project may be losing users, struggling, or being outperformed by another coin if wallet balances are declining and transaction volume is falling, on the other hand. Investors have access to a variety of tools for on-chain analytics, like EtherScan and Glassnode.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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