02-Mar-2018

When trading cryptocurrencies, speculative factors are not the only ones that matter. Fundamentals play an important role, too. Or do they? What are fundamental factors in a market with no solid rules or established regulation?

When talking about stocks, professional investors often refer to fundamental factors (or fundamentals) as an indicator of their performance. The purpose of fundamental analysis is to find the asset’s intrinsic value, which can be quite different from the market price.

Overhyped hi-tech giants like Apple and Tesla are traded at a huge premium. For speculative traders, this is not a problem as long as the stock price is expected to go up. For a value investor, who is more conservative and cautious by nature, it can significantly decrease company’s attractiveness, as he is looking for long-term opportunities. Overpriced stocks will sooner or later begin to slip, not being able to provide expected results.

Value investing is thus critical and is about finding promising and at the same time undervalued companies with good enough fundamentals.

Now, how exactly do you do your math? In order to calculate the P/E ratio of any cryptocurrency, take its respective market cap and divide it by the daily trading volume. As of recently:

  • Bitcoin has a P/E ratio* of 25,
  • Ethereum — 42,
  • Ripple — 67,
  • Bitcoin Cash — 44,
  • Litecoin — 13.
    *Higher growth firms will have higher P/E ratios; Higher risk firms will have lower P/E ratios; Firms with lower reinvestment needs will have higher P/E ratios.

When making an investment-related decision, a value investor will compare the PE ratios of different cryptocurrencies and pick those with the lowest values. In this case, Litecoin and Bitcoin sound like the most promising choices. This formula can be applied to any cryptocurrency of your choice.

Of course, this ratio is not the only factor to be considered when committing to a certain asset. Past performance, analytical reports and legislation changes — all have to be taken into account.

Want to test the theory? Start a free demo account!

RISK WARNING: YOUR CAPITAL MIGHT BE AT RISK.

This is an excerpt from a well-written and in-depth IQOption blogread the full article here

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