With a constant influx of newcomers entering the cryptocurrency space, the environment is rife for scammers to line their pockets with the new money coming in.
The issue is that investing in cryptocurrency has such a low barrier to entry, therefore many new cryptocurrency investors are not savvy in economics or business appraisal and evaluation.
We have put together a structured formula that can help you to truely understand the important aspects of a project, as well as highlight any potential red flags.
Cryptocurrency has enticed the greatest minds in all fields to venture into the space, implementing the next era of tech into their respective industry. This has sparked a fierce race between moguls, meaning that former employees at top-tier companies with top-tier ranks are plastered over most of the renowned cryptocurrencies on the markets today.
Although there are definitely exceptions to the rule, as there are many talented young programmers making DeFi products from the comfort of their house, having a team with vast experience from working at firms providing significant value and a history of success can give an advantage in this marathon towards building real DeFi products or integrating with real world applications.
One thing to note is the importance of checking the credibility and linking the team back to the institutions they worked or the success they have apparently achieved.
There is a lot of a bad actors in the space who put fake experience and accomplishments on their pages for scam projects, so make sure to do your due diligence online, just to backcheck that the information is accurate.
What you want to see is active contributors and contributions on their github too, a key metric to indicate whether a team is active and providing substance.
Sometimes, its not so much about what you know, but who you know.
Collaborations and networking makes the world go round, as well as opens doors to exposure and utility that were not previously accessible. Certain partnerships to look out for are real world integrations, not just blockchain-to-blockchain small scale collaborations between projects, although this can open up features for participants also.
The dynamic of the partnership is important too. Is there a direct benefit in the utility of the token, or is the cryptocurrency project just helping the legacy company with research, for when they release their own proprietary blockchain?
Strategic acquisitions and mergers are also important. If a cryptocurrency project acquires other companies, what impact does that have? These are all important factors to analyse when they arise.
Although we are early on in our efforts to building a decentralized ecosystem, any potential problem that can be solved seems to be saturated with droves of developers and visionaries working on the solutions in their respective niches.
First movers advantage is an important theory to keep in mind during your analysis. Projects like Ethereum have built up network effects, which is the growing momentum of developers, usage and groups that orbit around a particular ecosystem, leading to more infrastructure growth and more usage.
This can be hard to compete with, unless there are significant user experience benefits or superior technological advancement with the competing project.
As we are still early though, with a lot of issues needing to be ironed out in the short term, there is still a stretch to go before we can see who the key players are in DeFi and cryptocurrency in general.
Cryptocurrencies are financial ecosystems within themselves, therefore the token economics are an important-yet-overlooked subject of analysis when conducting an evaluation or appraisal of a project.
A few key areas of analysis:
- What is the percentage of token allocation for founders, partnerships, token sales etc.
- What is the token release schedule like? Is it a slow release over a number of years or is there any key dates when the market will be flooded with tokens.
- How much is the financial ecosystem set to deflate, inflate or even hyper-inflate over the short, medium and long term.
- The circulating supply is important to look at, in comparison to the total supply. It is important to analyse how fast tokens will enter circulation, and why.
With Proof of Stake, people may be enticed to hold tokens to ‘stake’ them, giving power to the ecosystem in return for a fixed annual percentage of the token back as a reward.
Although this is more advantageous than Proof of Work, which is utilizing computing power to ‘mine’ transactions, the token gain from staking has to come from somewhere. More supply is added to the ecosystem, so in most cases, you are just hedging against inflation by staking.
Therefore, people who are holding PoS tokens without staking them are in theory losing the same percentage in value due to dilution (e.g. if stakers are receiving 8% APY, the non-staker will be in theory losing 8% to inflation, if demand was to stay the same).
Analysing the utility of a token, and whether it is viable as a business model compared to the inflation (taking into consideration how many tokens are ‘burned’ or used up per interaction) is an important component of determining whether it could be worth holding as an investor.
With the ICO-mania we saw in 2017, the floodgates burst open with a mass of cryptocurrencies that were truely useless, meme-worthy ideas.
Although more subtle today, the space is still filled with many empty projects that are a solution trying to find a problem.
There is a distinction between a project that found a need and is providing a solution, to one that found a solution and is trying to find a need for.
Ensure that the vision of the project is consistent with their goals, whitepaper and roadmap. Also, ask the question: Does this project need to be decentralized? If business can occur with no added benefit from it being on the blockchain, then it most likely is only hype and novelty; two traits that can quickly wear off when there is no substance.
The whitepaper is a business plan, before investing in any project, it is highly recommend to look through it. The content should be clear, concise and the right amount of technical detail conveyed in a simplistic way.
The roadmap is an important way to check where their vision is is taking them, with the speed and ambition to which it does so. It should highlight key milestones and indicate to you whether they are being too ambitious, too slow or just right, taking into consideration the quality and quantity of their team members.
Always check to see their past performance meeting deadlines. There can be a bit of leniency regarding delays on groundbreaking innovations, however it can be a red flag to take into consideration.
Liquidity / Exchanges
A highly liquid environment is sought after as it can help to decrease volatility, as well as the impact of manipulation in a market. The higher the liquidity, the harder it is to move a market. It can also decrease the space between the bid-ask spread (the price difference between the buy and the sell orders).
Whether it be decentralized or centralized exchanges, one would check to see where the project is listed and the liquidity and reputability behind that exchange.
Being listed on a tier 1 exchange such as Binance can be a stamp of credibility, however sometimes it can just be a case of that project putting up the capital to fund the listing, so this can be a neutral indicator.
The advantage of discovering a great project before it has been listed on a reputable tier 1 exchange is the potential for more exposure in the future, when they do get listed.
This would historically have more of an impact than it does today, as there are an increasing number of reputable exchanges these days, with an increased amount of liquidity spread over different decentralized exchanges too.
There are a few key areas to be aware of within the social investigation for a project:
- How often to they post?
- What is the size of their community?
- Are they spread over different platforms?
- Do they have a specific marketing manager and campaign?
Although the size of the community does not matter if it is a newer venture, the quality of the contributions to the community can be an important guage to consider.
The ideal scenario is lots of fresh content and education on the project, with partnerships, events and community AMAs.