For 2024 crypto I am afraid fundamentals don’t matter

For 2024 crypto I am afraid fundamentals don’t matter

This year is rather different. Instead of making a prediction over which tech is going to be superior in the crypto sector this year, I declare that such predictions have become increasingly irrelevant.

That’s why this year I’d rather do no tech predictions.

It is greatly understood that the longer you are in crypto the more ‘accepting’ you become. You are seeing good projects that deserve it, but it doesn’t get any traction. Meanwhile, projects that straight-up grift and scam reach billions of market cap instead.

This belief has been even more strengthened lately with how the market works in the past couple of months. That’s why Ethereum proponents are in disbelief over Solana, or a layer 1 called Sei, which only has $10 million in TVL and has over $1,7B valuation.

This disconnect has been so persistent that it has become a standard pattern, rather than an exception like many of us believed before. It is time to accept crypto the way it is. That there’s no correlation between fundamentals and the price of assets.

It's understandable that the cryptocurrency market can be volatile and influenced by a variety of factors, sometimes making it seem disconnected from traditional fundamental analysis. Cryptocurrency markets are often driven by sentiment, speculation, regulatory developments, technological advancements, and macroeconomic trends, among other factors.

While it's true that short-term price movements in the crypto space can be heavily influenced by market sentiment and speculation, it's important to note that fundamentals can still play a crucial role in the long-term success and value of a cryptocurrency. Here are some key fundamental factors that can impact cryptocurrencies :

Technology and Development:

• Blockchain Technology: The strength and efficiency of the underlying blockchain technology are crucial. Consider factors such as scalability, security mechanisms (e.g., consensus algorithms), and the ability to handle a high transaction volume.
• Development Team: Evaluate the experience, expertise, and commitment of the development team. Regular updates, bug fixes, and improvements demonstrate ongoing development efforts.

Use Case and Adoption:

• Clear Use Case: Understand the specific problem or need the cryptocurrency aims to address. Cryptocurrencies with a well-defined use case, solving real-world problems, are more likely to gain adoption.
• Adoption and Partnerships: Monitor the level of adoption by businesses, institutions, and individuals. Partnerships with reputable entities can enhance credibility.

Security and Network Strength:

• Consensus Mechanism: The consensus algorithm used in the blockchain determines how transactions are validated. Common mechanisms include Proof of Work (PoW) and Proof of Stake (PoS).
• Decentralization: A decentralized network is generally considered more secure and resistant to censorship. Evaluate the distribution of nodes and governance mechanisms.

Regulatory Environment:

• Compliance: Cryptocurrencies that comply with regulatory requirements are more likely to gain acceptance. Regulatory clarity can reduce uncertainty and encourage investment.
• Legal Standing: Stay informed about legal developments globally and how they might impact the cryptocurrency. Regulatory hurdles can significantly affect a project.

Community and Ecosystem:

• Community Engagement: A passionate and engaged community can contribute to the success of a cryptocurrency. Active forums, social media presence, and community-driven initiatives are positive indicators.
• Ecosystem Growth: An expanding ecosystem with various projects, applications, and partnerships suggests a healthy and sustainable environment.

Tokenomics:

• Supply and Distribution: Analyze the total token supply, distribution model, and any mechanisms in place to control inflation or deflation.
• Utility: Understand the utility of the cryptocurrency within its ecosystem. Tokens with clear use cases and benefits are likely to attract more interest.

Fundamental analysis in crypto is flawed, to begin with

It's true that applying traditional fundamental analysis methods, as commonly used in the stock market, can be challenging in the cryptocurrency space. Cryptocurrencies, being a relatively new and unique asset class, often exhibit characteristics that can make traditional analysis methods less effective. Here are some reasons why fundamental analysis in crypto can be considered flawed or challenging :

Limited Historical Data: Many cryptocurrencies have limited historical data compared to traditional assets. This makes it difficult to assess long-term performance and trends accurately.

Lack of Cash Flow and Earnings Metrics: Unlike traditional stocks, cryptocurrencies often lack traditional financial metrics like earnings and cash flow. Traditional valuation models may not be directly applicable.

High Volatility: The cryptocurrency market is known for its extreme volatility, which can be driven by speculative trading, sentiment shifts, and external factors. This volatility can lead to rapid and unpredictable price changes.

Reliance on Sentiment and Hype: The crypto market is heavily influenced by sentiment, social media trends, and hype. News and social media sentiment can have an immediate and sometimes irrational impact on prices.

Rapid Technological Changes: Cryptocurrencies operate within a rapidly evolving technological landscape. New projects and innovations can quickly change the competitive landscape, making it challenging to predict winners and losers.

Market Manipulation: The relative lack of regulation in the cryptocurrency market can make it susceptible to market manipulation, pump-and-dump schemes, and other fraudulent activities that may not be present or are more regulated in traditional markets.

Diverse Use Cases: Cryptocurrencies serve a wide range of use cases, from digital cash to smart contracts and decentralized finance (DeFi). Each use case has its unique set of fundamentals, making it difficult to apply a one-size-fits-all approach.

Despite these challenges, many investors and analysts in the cryptocurrency space continue to use a combination of technical analysis, sentiment analysis, and a modified form of fundamental analysis to make informed decisions. While traditional methods may need adaptation, considering factors such as the technology behind a project, adoption rates, partnerships, and regulatory developments can still be valuable for evaluating the long-term potential of a cryptocurrency. However, it's essential to approach cryptocurrency investments with caution and a recognition of the unique challenges and risks involved.

Fundamental analysis in crypto doesn’t tell the whole story. For example, people like to focus too much on Total Value Locked (TVL) but the discrepancy between it and valuation resulted in a common saying that ‘TVL is a meme.’

Other things people like to talk about are our revenue, product-market fit, and earning-to-ratio.

Recently, a TradFi VC mocked Solana on Twitter for not having revenue or product market fit. People are quick to point out that a smart contract chain or a decentralized network, doesn’t need to behave like a startup. I don't think I emphasize this enough. Layer 1 = startup equation simply doesn’t make sense. Revenue, for example, doesn’t go to company coffers, it is distributed among stakers and even holders with mechanisms like burning.