Before investing in crypto projects, you should always do your research. These key components can help your understanding if there is the real value behind a specific blockchain or token.
1. Qualitative Data
A vision is essential, but in most cases, it remains the same, especially when it comes to new technologies such as blockchain and cryptocurrencies. Entrepreneurs are coming out of nowhere, promoting hundreds of new ideas on how to improve people's lives, and every project is a potential project of the century. It is not that easy. Many people just come forward with the intention to get rich, and the technology as well as the vision becomes less and less important.
The focus should always be on the value which a project can bring to the people. Value is created when issues can be reduced, or if real problems can be solved. If that is not going to be the case, just leave it alone, and don’t waste time. One common question to assess a project is if it makes sense to solve such a problem in a decentralized blockchain-based way or if it’s just overcomplicating things.
To get a better understanding of the current state of a network or coin, we need to review some basic components. First of all, there is the whitepaper that should provide a realistic, and clear abstract of the main goal of a project. Sometimes, it is a very technical document, and other times its only marketing. At least it should answer the questions of what does the project do, how does it work, and would someone needs this project on the blockchain. What’s more important is the road map, a complete overview where a network's development is going to be in the next months, and where it is at the moment. For a product, it is best to have a USP (unique selling proposition), and low competition. If there are already many other solutions for a specific problem, it’s unlikely that it will reach the required awareness and usage.
Figure 19 - There are over 6,000 cryptocurrencies from where to choose from. If the token is being traded in a reputable exchange, that is a good indication yet it’s not definitive-Do Your Own Research (DYOR)
Team, Partnerships, and Community
A third key component for analyzing any crypto project is the team and their partnerships.
A quick background check might be useful to reduce the risk of fraud and look at the different skills the team members can offer and if they have accomplished any other successful projects in the past. Partnerships can be the key to success because they provide infrastructure, potential users, and stakeholders.
While there are community-driven projects with organic growth people actually working on them and there are others where a core team is doing all the work. Neither of them may be wrong but if there are only a few people holding a big amount of all the existing coins you can ask yourself if that provides equal governance in a so-called decentralized economy.
The crypto community is mainly on Twitter, Telegram, and Reddit. A healthy community should consist of a solid web presence, which means answering all project-related questions.
Today there are hundreds of projects pretending to be the next Amazon or Google. As we know there are a lot of different use cases within the blockchain industry, therefore it can be useful to review the potential of a whole industrial sector. For substantial growth, it requires big markets with many potential users. It makes sense to consider if there are any real competitors and what’s the difference to their approach.
Tokenomics describes the design of a token in its network, which can convince users and investors to adopt it. It includes the purpose of the token, the distribution, network stability, and governance. As mentioned in Chapter 1.4: Types of Cryptocurrencies, there are different kinds of tokens with their utility and function. Make sure there is a real purpose behind it and not just marketing machinery promoting their Ponzi scheme.
Let’s have a look at the distribution. The first and probably most important property of a token or a coin is the ability to be distributed to potential users. This can be achieved in several ways. Either through rewarding miners for their computing power by using an algorithm called proof of work or rewarding people in the network by using an algorithm called proof of stake. That means the validators get a reward in proportion to their stake. Tokens can also get sold through ICO’s (token sales) or distributed with airdrops (free giveaways). Why does this matter?
Today there are many projects which focus more on fundraising instead of real use cases. It happens that investors & creators hold more coins than the network's users and so it’s easy for them to manipulate the price but also to make the rules for the network by themselves. Therefore one should always watch out for coins that have been pre-mined and held by only a few people.
The purpose of a token can be diverse. It can be used as currency, provide its user access to services, incentivize actions within a network, act like securities, or represent ownership. Today there are security tokens, governance tokens, transactional tokens, utility tokens, and platform tokens. The ability to execute smart contracts when certain circumstances meet is what all of them have in common.
Their functionality goes hand in hand with the network's infrastructure.
Can they interact with other tokens, and Is the access limited or free? Are they unique or fungible?
The ERC-20 token was created to standardize rules and functions of smart contracts to ensure that different types of tokens will perform in any place within the Ethereum blockchain. For example, the ERC-20 includes a few basic functions e.g. total supply, transfers, and approvals.
If there are no long-term incentives to hold and use the token it’s not gonna last long. Good tokenomics should provide real purpose(what), functionality(how), utility, and distribution.
Adoption and Strategy
When it comes to the adoption of crypto projects there are some factors slowing down the process compared to today's economy. First of all, people still need to educate themselves a lot about blockchain and cryptocurrencies, which will remain an ongoing process for several years. Some people don’t even know what cryptocurrencies are or don’t see any benefits in using them, so they don’t care much for blockchain. Furthermore, cryptocurrencies are still very volatile and risky and no one likes to lose their money. This is where regulation comes in, with the aim to reduce risk, money laundering, and develop know-your-client (KYC) measures. There are also some governments that slow down cryptocurrency adoption with restrictions on the use of cryptocurrency for businesses or financial institutes. Projects that strive for success need to meet a lot of requirements and make sure that they get closer to the industry standards.
Even the best idea is worthless when a vision can not be converted into reality.
By providing a strategy or a roadmap the investor can see if the project accomplished any valuable milestones yet or if it’s more believing in promises for the future. Many of them are not able to provide a working product so it's mostly speculation. Therefore it’s useful to make your decision not only based on one or two qualitative factors but also consider some quantitative numbers and factors we’re going to look at now.
2. Quantitative Data
When it comes to investing in a specific coin or token it's always necessary to know where the market goes. The key figures here are:
It shows the amount of money that is currently in the market. It is calculated by multiplying the current market price of a particular coin or token with the total number of coins in circulation.
Shows the total number of units that changed hands in a market during a given time. It can be used as an indicator to gain a better understanding of the market-strength. Higher trade volumes mean higher liquidity and a higher chance to connect a buyer and a seller of an asset.
The number of cryptocurrency coins that are publicly traded in the market within a time period.
In the case of Bitcoin the total supply and the circulating supply are equal. If one took a look at other coins such as ripple it's not even half of it, which means a few people are controlling supply.
The number of coins that currently exists of a cryptocurrency.
Refers to the number of coins or tokens that will be ever created for a cryptocurrency.
Cryptocurrencies can be limited to a certain amount of coins e.g. Bitcoin with a max supply of 21 million coins.
Highs and Lows:
The highest or lowest price of a cryptocurrency for a specific time period gives you an indicator about whether the current price is high or low compared to a specific time frame.
Top 100 Cryptocurrencies by Market CapitalizationFigure 20 - Tools like CoinMarketCap allow you to see the price, market cap, volume, and more for all tokens
To evaluate if the current state of a token is healthy you can have a look at the network activity. First it’s always useful if the product is live and the code is open source because then you can review the network's performance otherwise we have nothing but expectations. Let’s have a look at some indicators of blockchain performance.
The average transaction time in a network depends on the number of transactions taking place because then there are more transactions to validate. It also varies from blockchain to blockchain.
The block size of blockchains is limited by their code. While Bitcoin’s block size is limited to 1MB there are blockchains with a higher limit. The bigger the block size the more transactions can be packed into one block. If Bitcoin blocks are too small, not many transactions can be processed by the network. If blocks are too big the cost to store the blockchain on a node or to validate the transactions could increase as the blockchain would grow faster.
The hash rate is a measure of how much computing power is flowing into a network. Miners are calculating “the hash” until the resulting hash matches a specific target predefined by code. An increase in hashrate represents higher security because there are more participants validating the transactions.
Active and new users:
Here we are talking about the number of unique addresses that appeared for the first time in a transaction of the native coin in the network.
Exchange flow shows how many coins are transferred from wallets to exchanges which indicates that they will be sold at some point. There are many other indicators but these are the most popular ones. If you want to know more about blockchain data check out https://www.blockchain.com/explorer.
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Product, page 29
Highs and lows, page 32