In this part one I will show you what category of tokens you should never buy, what you should probably buy and what you should buy only after studying them. In the second part we will analyze a example token P/E.
This is not financial advice.
But first of all the basics of stocks investing:
Bringing Graham into DeFi — The Intelligent Investor
Benjamin Graham in the 40s wrote the reference book about investing in the stock and bond market: The Intelligent Investor, reprinted and updated forever, last editions with foreword by Warren Buffett himself.
That is the must read if you want to get serious about investing: it talks about stocks and bonds; but we can safely convert what he say to the DeFi.
His formula is simple and logic: companies have a certain value and their price fluctuates up and down around that value. You own a company if you own all the shares of that company; if we multiply all the existing shares times the price of a single share we have the price of the company.
This is called Market Cap.
He made a formula to standardize the price evaluation: he states that the price of a company should be 15 - 30 times the yearly income.
Full stop. That's it.
If a dividend from a share is $1.00 per year, the cheap price for that share is $15.00, the expensive one is $35.00 .
If you normalize the prices with this P/E formula all the stocks will go in that range.
It's more complicated than what it looks like because yearly earnings are not stable, so the P/E value can change even if the price does not.
To evaluate the price of a stock you need to know of forecast the real earnings of the company.
Another important topic is the benchmark sector of the company we are evaluating (this will very relevant later): a company that has +5% earnings in a sector growing 30% a year is not doing good.
The book goes deeper, but this suffices our needs for now.
From stocks to tokens
As I explained in another article there are few tokens that are comparable to stocks: they receive dividends, they let you vote in the governance of the company and there are token exchanges (DEX). Only there is no company, there are projects or protocols; and dividends are paid usually staking the tokens, not just by owning them.
The absolute first action to take is to evaluate if a token is a token of a project that has a business plan of some sort: the vast majority of tokens that your friend, uncle, Facebook, Twitter, Instagram will tell you about will be a meme coin of some sort, without earnings. Trash that shit.
They will tell you that they are deflationary, they burn, they have an innovative swap, they go to the moon, they have such a trendy smiley doggy face on the logo: bullshit.
You want to know how they are going to make money. You want cash flow. You want that business plan to be innovative, not a copy of something existing sold at you for something new while it's the thirtieth sad auto-referential copy of Sushiswap (yes: looking at you, Shiba).
Meme coins
Meme coins are those "coins" (usually tokens on Binance Smart Chain or Ethereum) that have a lot of marketing and posts about them on Twitter and Telegram, reaching spam levels. These are in the almost never buy category.
Usually they have a nice dog logo or something related to the space or Elon Musk, they rely on marketing and on the ignorance of those people making their first steps into crypto.
They don't have an income source to be distributed between the holders.
They do not mimic stocks, they are Ponzi schemes going on on a world scale.
Very few of those could be considered like baseball cards: collectibles that can retain some value in the future, but nothing to do with stocks.
Their price goes up because they pay for marketing or pay to be listed on CEX — with your money — to get more and more people to buy.
I know some of you will say:
"But they burn such and such to create deflation! The value will keep to grow because there will be scarcity!"
No, it will not: because no matter how scarce something is with no value, it will still have no value.
Your burning token will halve it's total circulating supply in seven years (this is the real timing if you make the math) not in a month.
But — if you believe that scarcity creates value and you want to prove me wrong — you can buy one of my Invisible NFTs: they are so scarce and unique!
"And how do you explain that such and such meme coins have a market cap in the billions?"
It's a Ponzi scheme bubble: it might go higher and higher but eventually the price will match the value. And the value is zero.
"I payed my Lambo with such and such meme coins"
My uncle won the lottery.
"My meme coin is building a Swap!!"
Your meme coin is just cloning for the 42th time an existing product, no one of the legit tokens will have liquidity there, there will be only self-referential fake tokens. DeFi is better than this, come on!
"I bought such and such meme coin at $0.0000000003 and Bitcoin is at $95.768: it is impossible for that price not to go higher and higher!"
You poor naive soul: what counts it's the market cap, not the single token price. Those shitty coins mint trillions and trillions tokens to make the price of each single one so low.
Imagine how low would be the price of the sand if you would buy it by the grain instead of by the weight!
Wait, actually I can tell you: taking for good this Quora answer there are 5.000.000 grains in a kg (2.20 lb) of sand; the price is $2.50 for 25 kg.
So it is $0.10 for a kg and (0.10 / 5000000) $0.000000008 for a grain: it is clearly time to invest in sand — the price IS SO LOW!!!
For these tokens the value analysis is easy: they are worth nothing, do not buy.
DeFi environment
Set aside meme coins, before talking about governance tokens we have to look at where we are in the DeFi environment: we are the beginning.
This is something that will stay with us, in different shapes, for generations. It's like being on the Internet in 1997. It is a market that at the time of writing is growing 80% each year, and it is expected to grow like that for the next two years at least.
As you can see in these charts we are the very beginning of DeFi.
As one would expect both technology adoption (number of users) and money deposited are growing more than linear.
Blockchain native coins
These are the probably should buy category.
If you just want to be in par with the benchmark of the DeFi market you should buy the benchmark directly: today that benchmark is $ETH, the currency of the Ethereum network; it will most probably grow at the same peace of the technology adoption. Today that is the “safe” bet.
There not only Ethereum: there are many other clones (more or less innovative) of the Ethereum network — some good like Fantom, Polygon, some not so good.
Those could be solid investments too, research market share, what they (really) do different from Ethereum, what is the security level, the decentralization, etc…
If you want to casually invest into DeFi just research what are the most used chains, by volumes, active users, number of transactions, decentralization, security, TVL — Total Value Locked, buy hold and stake those chain native token, and that's it.
On average those coins will grow following the market growth.
Governance tokens
The governance tokens are in the should only buy after studying them category.
They are usually used to vote and get dividends from a project
Here you can find some gems that makes ten times their price in few months, many, many useless clones of solid projects that are a little better than meme coins and well established project's tokens.
For every token you analyze you want to know the project emitting it: you need to search for their site and on the site you will see their documentation.
From here you look for the tokenomics: how the economics of the tokens will work to generate revenues, if these revenues are sustainable in time, if these revenues will create inflation of the token. You also want to check that the project is not just a clone of something already existing: go to https://defillama.com/ or https://defipulse.com/ to get an idea of the top projects and main categories of them.
If the project is not a clone of something else we want to study its tokenomics: look if they are sustainable or if the authors (sometimes genuinely) have been too optimists or missed some details.
Once in a while a new, innovative project pops out from the background noise: if you manage to find it early it could be life changing.
How do we know if they have been too much optimistic or if the tokenomics are solid?
We cannot know 100%, but we can make some educated guesses and apply some math to cut out a big chunk of tokens.
More on this on part II…
Hi, I’m -DvD-. I’m a mod in the Yel.finance Discord — this is why I invested on Yel.finance. Being on that Discord I realized which are the most misunderstood concepts of DeFi and here I try to simplify them.
I believe that knowledge should be free and accessible for all, but if you wish to offer me whatever beverage is good in your culture you can tip me at: 0xebDBbca4744C66E3aE39F997fD5fB7dE29874ce5, I’ll be super happy to know I helped someone! Cheers!
