Bitcoin Fundamental Analysis Featured

Beyond Candles: Bitcoin’s Fundamental Analysis

When it comes to trading with bitcoin and cryptocurrencies most traders just concentrate on technical analysis and charts. As digital assets are an emerging brand new class on the financial markets, the traditional fundamental analysis that you would apply on stocks, forex or commodities does not necessarily work on cryptos. But this does not mean this new sector would not have its own indicators and ratios which helps to understand the fundamental value of a coin.

Fundamental vs Technical Analysis

There are two major schools in trading which are followed by traders to determine the right value of assets: technical analysis and fundamental analysis. They are completely opposite of each other in terms of theory, both have supporters and opponents, but for the best result in profits it worth using both methods to research the historical prices and forecast future price patterns.

Bitcoin Fundamental Analysis VS

Technical Analysis

Technical analysis uses the tradable assets’ prices and volume information in inputs in the model. The underlying assumption of the technical analysis that every singe fundamental information is already stored in the current market price of the asset, so there it does not necessary really to analyze and factor in any fundamentum into the analysis. Instead of focusing on the fair market value of the assets, technical analysis is using charts and diagrams to identify patterns and trends in the historical price changes that have and indication to what the price will do in the future. The main assumption here is that if a price behaved a certain way in the past, it will follow the same path in the future, if and only if all of the prior circumstances happen exactly the same way. The most popular tools used in technical analysis are moving averages with different lengths, support, and resistant levels (for example using Fibonacci technique), trend lines and other momentum-based indicators like RSI.

Fundamental Analysis

Fundamental analysis’s main goal is to identify the intrinsic, fair value of an asset. Once identified this value, it can be easily determined if the current market value indicates the tradable asset is undervalued (the market value is below the intrinsic value) or overvalued (the market value is above the intrinsic value of the asset). Analysts using fundamentals are researching and analyzing all the information available on the market, including the overall economy, the industry in question and the specific asset specifics. Most of the time, fundamental analysis are used for stock trading and the most popular ratios and indicators are based on results available in the company’s financial statements, like earnings, expenses, assets, and liabilities. But fundamental analysis can be applied to other asset classes as well, even to cryptocurrencies if we think outside of the box and looking at the characteristics of the special digital assets market.

Bitcoin’s Fundamental Analysis’s Specifics

Before digging into the details, there are a couple of aspects of the bitcoin markets you need to understand to see the specifics of the traditional fundamental analysis application.

bitcoin is a decentralized project, so there is no central company whose performance can be easily analyzed through its financial statements.

On the other hand, compared to commodities, there is a scarce resource of bitcoin available in the market, with a limited amount fo 21 million coins. This would economically indicate an ever-rising price due to the fixed demand and the increasing supply.

Bitcoin Fundamental Analysis Specifics

But we all know, even bitcoin prices do not always and all the time increase continually.

bitcoin can be considered as an intangible asset and thus its value is depending on public policy decisions, funds available and the success of ongoing research and development projects and overall acceptance and adoption of the asset on the market, which justify its use case value.

Public Policy Decisions

Public decision-makers have a direct effect on the long term price of bitcoin. Although bitcoin itself is a decentralized project with no central government having any direct influence on its market in theory, in reality, countries can make or break crypto assets with their supporting or blocking regulation.

Quantifying public policy decisions can be made through the evaluation of the decision’s efficiency. If a government with leading economic power decides to ban cryptocurrencies completely, it will definitely have an effect on its long term value. In terms of bitcoin, during the prior years regulations have been moving into the direction to channel crypto assets into a fairly regulated environment with all the AML and KYC procedure, but once that is realized, countries seemed to be embracing the new technology.

Bitcoin Fundamental Analysis Map

According to Wikipedia, currently, the legal status of bitcoin is permissive (green – legal to use bitcoin), contentious (yellow and purple, with some legal restrictions on usage of bitcoin)   in most of the countries as opposed to being hostile (red, where full or partial prohibition is applied).

Research and development

Research and development are very important for intangible assets as this distinguishes one from other competitors on the market and provide them a competitive advantage. Quantifying R&D is however a difficult exercise.

While everyone feels there is a lot of development going in the background for bitcoin, software engineers are continually working on improving the code of the bitcoin network, quantifying this is a different story, but certainly not impossible.

Since bitcoin is a completely open-source project its R&D can be followed closely in open repositories. Notice the logarithmic scale on the Y-axis which implies a steady growth rate in bitcoin project over the past years.

Bitcoin Repositories

Research can be also quantified through looking at the number of scholarly articles written about bitcoin. Here you can see the sharply increasing number of scientific articles written on the topic of bitcoin since 2016.

Bitcoin Scholarly Articles

Based on the above, it looks like there is a constant investment in terms of time, energy and money to constantly develop the code of bitcoin which also describes a bullish long term picture for bitcoin.

Network Adoption

The network effect is described in economics with Metcalfe’s Law, saying that each additional user added to the network has a positive effect on the value of the network. The more users are using the better the network will be.

There are a couple of ways to measure the adoption of the bitcoin network.

The network value to transaction value (NVT) ratio shows the amount of value which is sent over the bitcoin network during a certain period of time relative to the total market capitalization. Usually, the 24 hours volume is compared to the total market cap, which are both easy to obtain measures from Coin Market Cap for example or using more sophisticated tools, like BTC360. The NVT ratio then can be plotted on a graph against time and can be followed accordingly. Constantly low NVT ratio can show a solid user base with a decent amount of transactions flowing through the network. Increase or decrease in the ratio can be further analyzes if it is driven by market cap or transaction volume changes. Furthermore, NVT can be fairly useful to analyze altcoin networks when compared to bitcoin as a benchmark.

Bitcoin NVT Signal

Social media presence is also a good indication of what is the overall market sentiment. The more people are talking about something the easier it widespread to new users. Bitssanalytics, for example, provides useful data about social media posts about cryptocurrencies each day. You can look at the number of tweets, Reddit posts, and news articles which have specific keywords in it to show the current sentiment on the market.

Bitcoin Fundamental Analysis Chart


bitcoin relies on several complex technical systems which include mathematics, cryptography, computer science, economics and game theory. If you want to run a full fundamental analysis on bitcoin, you would need to channel in all these sciences into your model.

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