Written by Nick Kitcharoen
The very discussion of fundamental analysis as it applies to cryptocurrencies might seem silly to those that don’t believe in the asset class as a whole, particularly with the cryptocurrency market currently at its lows for the year. However, I am personally a long-term believer in cryptocurrency and also believe that fundamental analysis can be applied to the asset class, although it should not be applied in the same exact way as it applies to stocks. Instead, the fundamental analysis should perhaps more closely resemble a fiat currency and its central bank, but simply on a microeconomic level. The organizations behind these cryptocurrencies should have to answer one fundamental question: what are they doing to increase the demand or number of transactions on their blockchain and increase transaction volume overall? To use the central bank analogy, what are these miniature central banks doing to increase the economic activity in their microeconomy, or blockchain?
The current market leaders in cryptocurrencies have achieved their positions through different strategic advantages. A brief fundamental analysis of some major cryptocurrencies is offered below.
Ethereum: Started in 2014 via an ICO, Ethereum has an innovation advantage compared to its blockchain competitors. This is due to the fact that it was the first cryptocurrency to offer smart contracts and achieve a high adoption rate. Smart contracts potentially allow for the elimination of intermediaries in many ways other than just financial transactions, and its potential is enormous in that respect. An Ethereum smart contract also allows one to create their own cryptocurrency relatively easily, and over 70% of ICOs in 2017 were on the Ethereum blockchain. They are creating long-term demand for transactions on their blockchain, and thus also creating long-term demand in its cryptocurrency. The future looks bright for the organization as long as they continue to innovate, and it is hard to imagine that they will not be around in 5 to 10 years. Many other blockchains are creating smart contract capability at the moment as well, but Ethereum is currently the perceived leader in the technology. In general, having an innovation advantage among peers in a given industry is the most effective and desired competitive advantage to have.
Bitcoin: Established in 2009, Bitcoin was the first cryptocurrency and thus has first mover advantage due to it being widely adopted and recognized by the public. In the mainstream press, Bitcoin still gets the vast majority of headlines. However, the popular blockchain has had its fair share of issues in the past year such as higher transaction costs and long confirmation times. There is not a very transparent or very public organization behind Bitcoin unlike other major cryptocurrencies today, which is a bit concerning in the long term. Due to its current name recognition and adoption, it is hard to imagine that Bitcoin will not be around in 5 to 10 years. However, because of recent scalability issues and not leading in terms of innovation to the degree that Ethereum has, they are on somewhat shaky ground from a long-term, forward valuing fundamental analysis perspective.
Ripple: There are some that are critical of Ripple due to the perception that it is not truly decentralized, with there being “oracle nodes” (from Ripple Labs and other financial institutions) to approve transactions instead of allowing transactions to be approved by everyone in the Ripple community. They also allow the transfer of other currencies on their blockchain, however, all transaction fees are paid in Ripple’s cryptocurrency. This would imply a lower demand for their cryptocurrency compared to others if competing blockchains that have roughly the same number of transactions and volume exclusively use their own cryptocurrency on it.
While controversial to some in the blockchain community, Ripple has been extremely effective in creating relationships with major international banks such as American Express, UBS, Banco Santander, and Standard Chartered Bank. As a result, Ripple has a strategic alliance advantage. Due to their continued emphasis on building alliances with banks and the number of transactions that those financial institutions will demand on their blockchain in the future, it is hard to imagine that Ripple will not be around in 5 to 10 years. However, because of their lack of true decentralization in how transactions are confirmed, they will continue to be criticized by many in the cryptocurrency community.
Litecoin: A fairly popular cryptocurrency that claims to be “silver to Bitcoin’s gold.” Litecoin is based on Bitcoin’s code and is more user-friendly in terms of lower transaction costs and confirmation times. However, a decent adoption rate and being more user-friendly is not enough in itself to be a sustainable competitive advantage in the industry since Ethereum could make the same claims. Additionally, there is some degree of doubt if they will be around in 5 to 10 years especially since its founder, a former Google executive, sold all of his Litecoin holdings in the middle of 2017. Earlier in the year, there was a lot of buzz surrounding LitePay and its potential in being able to use Litecoin in the “real world” at physical retail locations. Since then, the speculation surrounding LitePay seems to has since fizzled out with LitePay closing in late March, which is further reason why Litecoin is relatively weak on a fundamental basis compared to Ethereum, Bitcoin, or Ripple.
Questions Needed For Good Fundamental Analysis: Below are a list of questions that should be applied to any major cryptocurrency in assessing ita long-term viability and value.
- What competitive advantage does this cryptocurrency and its underlying technology (blockchain or decentralized application) have compared to its competitors and is it sustainable in the future?
- Will this cryptocurrency be around in 5 to 10 years and why?
- What real achievement has this cryptocurrency and its underlying technology made? Potential and promise are nice, but core components of the fund should be able to display real achievements, not just potential ones.
- Has the organization behind the cryptocurrency been innovative and are others in the industry trying to copy them?
- To what degree has the organization behind the cryptocurrency been able to form important strategic alliances?
- What has the organization behind the cryptocurrency been doing in order to increase demand for transactions on its blockchain or decentralized application?
- How transparent is the organization behind the cryptocurrency and how well do they communicate with community. Is long-term credibility a concern in this respect?
- What challenges has the organization behind the cryptocurrency been facing? Can the organization reasonably overcome them and does it already have a plan in place?
- Have there been technological issues or constraints in the cryptocurrency’s underlying technology such as long transaction confirmation times, higher transaction costs, and hard forks?
For those of you that are relatively new to cryptocurrencies, I hope that you found this article useful as an initial start. For those of you that aren’t new to crypto, I would like to hear from you. In my new cryptocurrency fund project, Bitdollar Fund*, I am starting with an initial allocation state of 40% Ethereum, 20% Bitcoin, 20% Ripple, and 20% asset-backed cryptocurrencies (backed by physical assets such as oil and gold to provide uncorrelated returns). While this is an initial state, the registered holders of Bitdollar will determine the cryptocurrency components of the fund and the percentage allocations to each through annual elections. Please check out BitdollarICO.com for more details and our white paper (pre-sale begins August 18th).
If you could vote, what percentage would you give Ethereum? What about Bitcoin? Ripple? The asset-backed cryptocurrencies? Is there a cryptocurrency that you would like to see introduced to the fund such as EOS or Litecoin? Let me know in the comments below!
*Cryptocurrency investing involves significant risk of loss and is not suitable for everyone. Please do your own research or consult your investment professional before investing. Citizens of the USA, Canada, Cayman Islands, Estonia, China, South Korea, Singapore, & New Zealand are not eligible to participate in Phase 1 of the Bitdollar ICO in 2018, however, we are working to accept citizens from these countries during future phases of our ICO in 2019 and beyond.
Nick Kitcharoen is Founder and CEO of Bitdollar Capital, which recently announced its ICO for Bitdollar Fund (bitdollarico.com), the world’s first collectively managed fund. Both planned collectively managed funds from Bitdollar Capital aim to provide clarity to the cryptocurrency community by guiding fundamental analysis and facilitating research, while also providing a relatively safe place for those that are new to cryptocurrencies to get started. Nick has a background in corporate finance and trading in financial markets and was most recently Founder and CEO of Acumen Algorithms LLC, a formerly registered Commodity Trading Advisor, where his sole focus was the development of trading algorithms based entirely on technical analysis.