Fundamental analysis is an independent method for evaluating the value of financial assets (such as securities) and issuing companies. During fundamental analysis, the investor studies the financial and accounting statements of the company, taking into account both economic and financial factors, in order to determine whether the asset's value is fair.
Fundamental analysis can include an assessment of macroeconomic factors such as the state of the economy as a whole, industry conditions, or the business associated with the asset. The value of a company and its securities is influenced by many factors, for example, the political and economic situation in the country, the activities of competitors, the financial condition of the company. Such factors are often tracked using leading and lagging macroeconomic indicators.
After completing fundamental analysis, analysts seek to determine whether an asset is undervalued or overvalued. Investors can use this conclusion when making investment decisions.
If the investor concludes that the fair value is lower than the current market price, then it is not profitable to buy a financial asset. If the fair value of an asset is higher than the current price, then it is profitable to buy such an asset because it is undervalued in the market.
In the cryptocurrency market, fundamental analysis can also include an emerging field of data science that deals with publicly available blockchain data called on-chain metrics. These include network hash rate, main owners, number of addresses, transaction analysis, and more. Using the wealth of public blockchain data available, analysts can create sophisticated technical indicators that measure specific aspects of the overall health of the network.
Fundamental analysis is not very indicative for cryptocurrencies due to the novelty of this asset class. At the moment, there is still no standardized overarching framework for determining market valuation and the market is still heavily influenced by speculation and popular sentiment. Thus, fundamentals usually do not significantly affect the price of a cryptocurrency. However, more accurate ways of assessing the value of cryptoassets can be developed as the market matures.