Jonathan Hobbs

4 months ago5 mins

How To Size Up A Crypto Investment In Four Easy Steps

How To Size Up A Crypto Investment In Four Easy Steps

Jonathan Hobbs

4 months ago5 mins

How To Size Up A Crypto Investment In Four Easy Steps
  • Just like with picking stocks, a good analysis of crypto projects can go a long way toward improving your investment returns.

  • It’s smart to have a set process for analyzing a project. Start by finding a particular narrative that piques your interest, then research projects within that narrative to see which ones sound the most compelling.

  • Once you’ve got a watchlist together, you can start checking the data to see how each project’s user and developer activity stack up, and whether they’re in good financial health. Then do one last screen for red flags.

Just like with picking stocks, a good analysis of crypto projects can go a long way toward improving your investment returns.

It’s smart to have a set process for analyzing a project. Start by finding a particular narrative that piques your interest, then research projects within that narrative to see which ones sound the most compelling.

Once you’ve got a watchlist together, you can start checking the data to see how each project’s user and developer activity stack up, and whether they’re in good financial health. Then do one last screen for red flags.

The crypto market looks to be in better shape so far this year (knock on wood). And if you think it’s a sign of better days to come, you’re probably wondering which projects to invest in. So here’s a four-step framework to pick them, so you can separate the diamonds from the dust.

Step 1: Find a project that fits your crypto narrative.

Before you can analyze any project, you first need to find it. And this could be easier than you think. Start by scanning crypto data aggregator CoinMarketCap.com. It lists pretty much all the projects in existence, and your job is to filter through it to find a starting universe of, say, ten potential investments that fit a particular narrative that you think makes sense.

The bad news is that there are over 8,000 investments to choose from. But the good news is you can probably discard any that aren’t already in the top 200 by market size (unless you’ve really got a thing for risk-taking). You can also filter projects by different categories (green square), and start adding them to your initial “watchlist” (yellow square) by clicking the star next to each project.

Screenshot of CoinMarketCap.com data aggregator.
Screenshot of CoinMarketCap.com data aggregator.

So, let’s say you think the metaverse is going to get much more entwined with our reality. Well, in that case, you’d want to filter your list by “metaverse” projects in CoinMarketCap. Or if you think AI is the next big blockchain narrative, you could filter for “AI and big data” projects. Regardless of which narrative you’re looking into, you can click into each individual project on CoinMarketCap to read about what they’re trying to achieve. And if any of them pique your interest, you can add them to your “further analysis” watchlist.

Step 2: Check the data to see whether the project’s got any traction.

Once you’ve whittled down your watchlist to a handful of interesting prospects, your next step is to dig into the data to see which of them are actually gaining traction. While there are many different providers you can use to do this, I’ve found Token Terminal to be one of the simplest and most accurate (it’s free too). I recommend using it to focus on three key things.

First, you’ll want to know how many users (green square) the project is onboarding, as more users tend to lead to bigger network effects. Second, you’ll want to see if developers like building on the project (white square), because the more developer talent it attracts, the more likely it’ll be to improve its tech. And third, you’ll want to know if the project is generating fees and revenue (blue square) from its users.

Screenshot of Token Terminal options for analyzing a project’s data.
Screenshot of Token Terminal options for analyzing a project’s data.

But Token Terminal does have some limitations when it comes to blockchain gaming and metaverse projects, so for those, I’d use DappRadar, and I’d focus on the number of users and transactions as your key metrics. And while Token Terminal is a great data source for decentralized finance (DeF), some people prefer DeFiLlama, so that might be worth a look too.

If, for the life of you, you can’t find any data about your project between Token Terminal, DappRadar, and DeFiLlama, there probably isn’t any. In that case, the project likely has zero traction, so forget about it and move on to the next.

Step 3: Check the project’s tokenomics.

“Tokenomics” is the economics of a project’s token, and there are three things you need to check here.

First, check the token’s total supply on CoinMarketCap. You’ll want to compare the project’s “circulating supply” (orange square, the tokens that are already minted) with its “maximum supply” (blue square, the most that will ever be minted). Typically, the closer they are together, the better – as there’ll be fewer new tokens that could dilute their value in the future. See, there are two kinds of market values for a project on CoinMarketCap: there’s the “market cap” (red square), which is the circulating supply times the token’s price, and the “fully diluted market cap” (green square), which is the token’s price times the maximum supply. You’ll want to use the fully diluted market cap when comparing the values of different projects.

Sample screenshot from CoinMarketCap.
Sample screenshot from CoinMarketCap.

Second, look into the project’s token supply schedule. Some – like bitcoin – have a “disinflationary” one, where the number of new coins minted decreases over time. Others opt for a more inflationary approach to incentivize miners and stakers, by rewarding them with more new coins. And while that can help projects gain momentum in the early stages, be wary of schedules that could dilute the token’s value too fast.

Third, look at how the tokens were launched in the first place. A “fair launch” is usually a good thing: that’s when a project’s community owned all the tokens from the get-go, with no pre-allocated tokens for outside investors or founders. Other launches are more like share offerings, where projects raise startup capital from private investors with a pre-allocation of tokens for the founders and team. If that’s the case, make sure the early investors have a “vesting schedule” that stops them from cashing out too early and dumping the price.

For points two and three above, try Messari as your go-to data source. Failing that, you might be able to find the information on the project’s website. If the tokenomics stack up compared to similar competitors, you’re onto the final step.

Step 4: Do a last round of due diligence to spot any potential red flags.

Before putting any of your hard-earned money into a project, see if you can spot any potential red flags. At the very least, do a thorough background check on the project’s key personnel. You can gauge qualifications, career highlights, and reputations on LinkedIn, and then verify your findings with further online research. Reda’s got more about how to spot the crypto Ponzis here. But if your project comes up clean, you’re all set.

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