Fundamental Analysis for Cryptocurrency Trading

Hi everyone, in these videos we will look at fundamental analysis techniques to determine the value of a cryptocurrency. I spent 8 years studying Actuarial Science which includes various asset valuation methods and I’ve been playing with crypto since 2014, I’ve actually just had my 1 year work anniversary at Polygon, an Ethereum Scaling solution. So hopefully I have enough education and experience to speak on this topic but as always — big disclaimer, this isn’t financial advice, always consult a Qualified Financial Planner before you make any investment decisions. A good planner will analyse your liabilities and look at how to match them. Thus what is a good investment for me might not necessarily be a good investment for you. Also I’ll be using the ByBit crypto exchange and recommend you create an account there as in the later videos when we are using derivative strategies it will be easiest to follow along if you are also on Bybit — so before you continue set up your account. Even if you are already registered on another exchange, it is a good idea to sign up to many and fragment your holdings incase one of your accounts gets hacked. Also by having a separate ByBit account you can follow these fundamental strategies with the funds you deposit here and then compare its performance to your other strategies. So whether you are new to crypto or already have an account, let’s head to ByBit and set yourself up. There are also a lot of welcome bonuses that you can earn.

• Click the link to the sign up page (https://partner.bybit.com/b/mjfellowactuary)

• Enter an email and a new password and click Create Account.

• Drag the puzzle piece to the empty space to verify that you are human.

• Enter the verification code that was sent to your email address.

• Verify yourself to Level 1 — Recommended

• Enable Google Authentication — Withdraw later

• Deposit Fiat or Crypto to earn those welcome bonuses.

• This can be done with One Click Buy, P2P or Fiat Wallets

• Let me know if you need further help with this and I can assist

Bybit offers both Spot and Futures trading. Spot trading is when you buy the actual asset. So you can buy cryptocurrencies on Bybit with spot trading and then withdraw those cryptocurrencies. Leverage trading is when you use derivatives such as options and futures to gain more exposure to the price movement of an asset. After we go through the theory of Fundamental Analysis we will look at the practical side of how to go about making Spot and Leveraged trades.

If you join Bybit and complete your first deposit, let me know as we have social groups on Telegram and Discord for us to chat with each other about fundamental factors and what tokens to analyse. There will also be some NFT giveaways and a strong community. So email me that you’ve joined: mj@mjactuary.com — use the same email as the one you used to create the account for me to verify and then I’ll add you to the groups.

In the next video we will compare Fundamental and Technical Analysis and make a case why Fundamental is the better method. See you there.

Sign up link for ByBit — https://partner.bybit.com/b/mjfellowactuary

Every asset that is listed has a price, the price however could be different from its value. If price is greater than value then one should consider selling it. If price is less than value then one should consider buying it. So the big question to ask is how to determine value? There are two main techniques — Technical Analysis and Fundamental Analysis. Technical Analysis uses the price history of an asset to determine the value, it is backward looking and it focuses on the past. Fundamental Analysis considers the current factors surrounding an asset and how they will progress to determine value, it is forward looking and focuses on the future.

The nice thing about Technical Analysis is that all the data is in one place, most exchanges have a token’s entire price history along with various analytical tools for Technical Analysis. That is all you need to get started and is therefore very popular amongst traders. Some technical analysts will also look at volume traded but in crypto volume is very easy to manipulate by setting up two accounts and moving large amounts back and forth.

Very few people are 100% Technical Analysts, there are too many listed assets now for a single person to analyse all of them and therefore many analysts filter out listed assets and only focus on a few. Unknowingly they may use a Fundamental Filter and choose to focus on one token because of its network size, another because of its hashrate, another because of the amount of decentralised applications built on it, etc. These factors are fundamental factors. The fact that you’ve chosen to trade Crypto and not Forex is a fundamental decision and not a technical one.

Fundamental factors are the foundational factors that drive an assets value. In the next few videos we will go through these factors as well as various models that use them to determine value. Once we have value we can compare with price and make a decision on whether to buy or sell.

We will be making our trades on Bybit and if you join using this link and complete your first deposit, let me know as we have social groups on Telegram and Discord for us to chat with each other about fundamental factors and what tokens to analyse. There will also be some NFT giveaways and a strong community. So email me that you’ve joined: mj@mjactuary.com — use the same email as the one you used to create the account for me to verify and then I’ll add you to the groups. Check out the last video on how to set up your account.

Sign up link for ByBit — https://partner.bybit.com/b/mjfellowactuary

The formula for the present value of an asset is the discounted sum of all future cashflows. Mathematically the formula is quite simple and reduces to just a few parameters but estimating the value of the parameters is extremely complicated and the market struggles to come to consensus on what they should be, hence why prices go up and down constantly.

If we look at the formula we will see three key parameters: C which is the cashflow generated by the asset. G which is the growth rate, how future cashflow is expected to change. And I which is the discount rate that captures Risk and the Time Value of Money. The price will be high when G is high and I is low. The price will be low when G is low and I is high.

If for example I was offered to purchased an asset for a price of $450 that was going to generate $100 at the end of the first year and $150 at the end of the second year and $300 at the end of the third year. Should I buy it?

Well if the interest rate was 10% then the present value would be:

PV = 100/(1.1) + 150/(1.1)² + 300/(1.1)³

PV = 90.91 + 123.97 + 225.39

PV = 440.27

Since value of 440.27 is less than price of 450, I would not purchase this asset.

But if the interest rate was 5% then the present value would be:

PV = 100/(1.05) + 150/(1.05)² + 300/(1.05)³

PV = 95.24 + 136.05 + 259.15

PV = 490.44

The value is 490.44 and that is greater than the price of 450, so now I would purchase this asset.

It is interesting to note how a different interest rate changes my decision. This is why when central banks increase interest rates, assets such as equities that generate future cashflows in the form of dividends and properties that generate future cashflows in the form of rent see their prices drop as their value has been decreased by an increase in interest rates. We will have a video dedicated to understanding interest rates in more detail.

I want to show how we get to the formula of C/(i-g)

In our last example the asset only generated three years of cashflows whereas many assets generate cashflows indefinitely. To try simplify what all those future cashflows are going to be, we relate them to the first cashflow via a constant growth rate. We can now write out all future cashflows as follows:

Let V = 1/(1+i)

PV = CV + CV²(1+g) + CV³(1+g)² + …

PV(1+i) = C + CV(1+g) + CV²(1+g)² + …

Let G = (1+g)/(1+i)

PV(1+i) = C + CG + CG² + CG³ + …

PV(1+i)G = CG + CG² + CG³ + …

PV(1+i)-PV(1+i)G = C

PV(1+i) ( 1-G) = C

Since G = (1+g)/(1+i)

PV(1+i) ( 1 -(1+g)/(1+i)) = C

PV(1+i)( (1+i -1-g)/(1+i))= C

PV(i-g) = C

PV = C/(i-g)

In the next video we will look at how i is determined and then in the following videos we will consider what the C is for cryptocurrencies and what fundamental factors determine g.

We will be making our trades on Bybit and if you join using this link and complete your first deposit, let me know as we have social groups on Telegram and Discord for us to chat with each other about fundamental factors and what tokens to analyse. There will also be some NFT giveaways and a strong community. So email me that you’ve joined: mj@mjactuary.com — use the same email as the one you used to create the account for me to verify and then I’ll add you to the groups. Check out the last video on how to set up your account.

Sign up link for ByBit — https://partner.bybit.com/b/mjfellowactuary

In the last video we looked at the Discounted Cashflow Model and saw that the value of an asset can be determined by the formula: C/(i-g). Where C is the most recent cashflow, g is the growth rate of future cashflows and i is the interest rate.

Interest rates are a combination of many factors but the three main ones are:

• Time Value of Money

• Opportunity Cost

• Risk

The Time Value of Money is based on the idea that when asked if people will prefer $100 today or $100 in one years time, almost everyone will choose to have the $100 today. If people are indifferent between receiving $100 today or $105 in one years time, then we could say that the Time Value of Money is 5%. Now the Time Value of Money is personal. You might be indifferent to $100 now and $104 in one years time and thus your TVM is 4%. I might however only be indifferent to $100 now and $106 in one years time and thus my TVM is 6%. If the interest rate is set at 5%, and you have surplus cash, you will deposit your money into the bank as 5% is more than 4%. Because my TVM is 6% and the interest rate is lower at 5%, I will borrow money if I have a need for it. The Time Value of Money can be thought of as the cost of money, the higher the interest rate, the more expensive money is, thats why if my personal TVM is 6%, money at 5% is cheap and I’ll “buy” (go long) money by borrowing it. If your TVM is 4% then money at 5% is expensive and you’ll “sell” (go short) money by depositing it. Thus when a central bank sets the interest rate high, more people will think that money is expensive and will choose to deposit rather than borrow, when this happens money leaves the system and the economic activity slows down. But when a central bank sets the interest rate low, more people will think that money is cheap and will choose to borrow rather deposit, when this happens money enters the system and the economic activity speeds up. Most of crypto is quoted in US Dollars and therefore the Time Value of Money at any given moment can be determined by what rate the Federal Reserve sets. The Fed sets interest rates in accordance to inflation rates. If inflation is high, the Fed will increase interest rates to reduce money supply and put downward pressure on inflation. If inflation is controlled, the Fed will lower interest rates to increase the money supply and promote economic activity. Thus if you know inflation, you will know what interest rates the Fed will set. To determine inflation you need to consider the supply and demand of goods and services. When supply exceeds demands, there is downwards pressure on prices of goods and services, when supply cannot meet demand, there is upwards pressure on prices of goods and services, aka inflation. Both covid and the war in Ukraine have disrupted supply and so supply cannot meet demand and inflation is rising. This leads the Fed to increase interest rates which in turn decreases the value of assets according to the Discounted Cashflow Model.

Another factor to consider when determining the interest rate in the Discounted Cashflow Model is the Opportunity Cost. Since I have limited money, I cannot invest in everything and so by investing in one asset, I’m forgoing the opportunity of investing elsewhere. It is challenging to quantify Opportunity Cost and again it will be different for different people. A highly regulated Pension Fund has limited investment options and so Opportunity Costs are low. Someone who can choose between equities, property, bonds, forex, commodities, startups, hedge funds, crypto, etc, will have a higher Opportunity Cost.

Another major factor to consider is Risk. The more risky an asset, the more the interest rate needs to be increased to accomodate it. For example if two people approach you for a loan. The one person has a steady job and needs the money for liquidity reasons as he doesn’t want to sell his stock portfolio and is getting his salary in two weeks time. The other person has nothing to their name and wants the money to go to the casino and try get rich quick. Which person do you offer the loan to? You might lend the first person an amount at a very low interest rate because you are quite certain they will repay you. The other person you might only want to lend them an amount at a very high interest rate because there is a high chance you won’t be repaid. Thus the more risky something is, the higher the interest rate needs to be to compensate for the chance that a loss is made. Crypto is generally perceived to be higher risk as it isn’t regulated and many tokens have become worthless and so the investors apply higher interest rates to their valuation models.

So we can begin to see how our simple formula of C/(i-g) is starting to get complicated as:

i = Fed Rate + Opportunity Cost + Risk

Where the Fed Rate depends on Inflation and inflation depends on supply and demand of various economic goods and services.

Opportunity Cost is subjective to each investor.

Risk depends on each token and so we will take a deeper dive at a later video.

We will be making our trades on Bybit and if you join using this link and complete your first deposit, let me know as we have social groups on Telegram and Discord for us to chat with each other about fundamental factors and what tokens to analyse. There will also be some NFT giveaways and a strong community. So email me that you’ve joined: mj@mjactuary.com — use the same email as the one you used to create the account for me to verify and then I’ll add you to the groups. Check out the last video on how to set up your account.

Sign up link for ByBit — https://partner.bybit.com/b/mjfellowactuary

One of the fundamental questions you want to ask is: What cashflows does this project generate and how are they expected to change in the future.

In our Discounted Cashflow Model, the cashflow relates to the C and the expected change relates to g. In the last video we considered i and how i depends on Fed Rate, Opportunity Cost and Risk. Risk will be specific to each crypto project although it’s good to be aware of systemic risks that impact them all, for instance when a powerful nation puts out a blanket ban on crypto, all projects will suffer due to that.

With traditional equities there are two broad groups of stocks: Growth Stocks and Income Stocks. Income Stocks have cash flows that are relatively high compare to their price but very low growth rates. Growth Stocks have cash flows that are relatively low compare to their price but very high growth rates. An example of an Income Stock would be a chocolate factory in a developed nation, every month we can expect the same amount of sales and so the cashflows are constant but don’t expect to increase that much. An example of a Growth Stock would be a tech company that might not even be making a profit now but is expected to drastically increase the number of users in the future and so the growth rate is expected to be large. Crypto projects are similar to Growth Stocks.

The price of Income Stocks don’t tend to change as much as Growth Stocks. Income Stocks are judged on their current cash flows and this is a value that is easy to estimate as it is recorded in the financial statements. Thus the market can reach a consensus on what the price of Income Stocks should be and so the volatility is low. Growth Stocks are judged on their growth rate and this is a value that is extremely difficult to estimate as it depends on a multitude of factors. The market struggles to reach a consensus on what the price of Growth Stocks should be and so the volatility is high as different investors put different levels of significance on the various factors.

With Growth Stocks it is more important to accurately determine the growth rate than it is to quantify the cash flow. The same can be said about Crypto Projects, growth rate estimation is more important than quantifying current cashflows. Cashflows are still important, you want to pick a project that is at least generating some sort of cashflow, otherwise what is the point of having tremendous growth if it isn’t going to manifest itself one day into revenue. But for short term trading, estimating growth rate is more important than estimating cash flows.

So for cashflows we just want to make sure they are there, does the project charge a fee for using it? If not how is revenue generated, as long as there is some way to potentially make a revenue we can consider the crypto project.

More importantly is the growth rate, how many transactions are occurring on its network or through its smart contract? Be mindful that these numbers can be misleading as bots can be set up to run fake transactions. So instead of focusing only on past transaction data, think about how changes in current factors will impact these numbers in the future.

For example if a country like China bans crypto projects, we can expect that to have a negative impact on growth as a large amount of current and potential users have been removed. If a big company like Starbucks launches a loyalty program on a network, we can expect more users and transactions on that network and so this will have a positive impact on growth. As a trader you will want to quickly sell on the news of China and buy on the news of Starbucks. But when should you close out your position to make the most potential profit? We will discuss that in the next video.

We will be making our trades on Bybit and if you join using this link and complete your first deposit, let me know as we have social groups on Telegram and Discord for us to chat with each other about fundamental factors and what tokens to analyse. There will also be some NFT giveaways and a strong community. So email me that you’ve joined: mj@mjactuary.com — use the same email as the one you used to create the account for me to verify and then I’ll add you to the groups. Check out the last video on how to set up your account.

Sign up link for ByBit — https://partner.bybit.com/b/mjfellowactuary

In the past few videos we have considered the Discounted Cashflow Model and showed that the value of a crypto project is influenced by two main factors: Interest Rates and Growth Rates.

We can use the ocean as a metaphor. Water moves according to tides and waves. Changes to Interest Rates are like the tides, they cause big movements but occur over longer time periods. Changes to Growth Rates are like the waves, they cause small movements but occur over shorter time periods. To extend the metaphor, just like how the ocean comes in and then back out, so prices move one way and then another. There is oscillation and cycles. This is due to the observation that markets tend to overact. If the change in a factor is negative, the market overacts due to fear and prices go down by more than they should, after some time the market comes back to its senses and the price rebounds a bit. Likewise if the change in a factor is positive, the market overacts due to exuberance and prices go up by more than they should, after some time the exuberance wears off and the prices come back down.

If you time the market correctly, you can surf these waves and make a healthy profit, but if you mistime them, you can crash and drown. It is important that as a trader you understand the risks you are taking on and that it isn’t a perfect science when it comes to timing the market and correctly estimating the magnitude of a change.

Also it is important to realise that changes don’t come one at a time. You might have positive news that a blockchain has released a new feature combined with the negative news that stricter regulations are being imposed on cryptocurrencies in general combined with some geopolitical news that is ambiguous about whether it will be good for crypto or not. Sometimes when things get too complicated, it is can be a good strategy to stay out of the market and wait for things to calm down.

It is up to you to determine how much risk you are comfortable taking on and I’m going to tell you about how you can use leverage to further increase your risk so that you can chase even higher rewards.

For example: Let’s say a token is trading at $100 and the crypto project is going to make an announcement. You believe the announcement will be good news and increase the price of the token and so you buy $1000 worth of the token. The announcement is good news, you were right, but the price only increases by $10 to $110. Thus you only made $100 on this trade. If you use a leverage token on Bybit you can magnify your result. There are 2x and 3x tokens and you can choose between long and short. A long 2x will pay you double if the token goes up. A short 3x will pay you three times if the token goes down. However by magnifying your wins you also expose yourself to magnifying your loses, so use with caution.

Leverage means you can use less capital and small movements aren’t reduced as much by fees, however they are a bit more complicated and prone to human error so be careful.

We will be making our trades on Bybit and if you join using this link and complete your first deposit, let me know as we have social groups on Telegram and Discord for us to chat with each other about fundamental factors and what tokens to analyse. There will also be some NFT giveaways and a strong community. So email me that you’ve joined: mj@mjactuary.com — use the same email as the one you used to create the account for me to verify and then I’ll add you to the groups. Check out the last video on how to set up your account.

Sign up link for ByBit — https://partner.bybit.com/b/mjfellowactuary