Introduction:
Cryptocurrencies have received explosive popularity in the past three months led by Bitcoin’s parabolic rise from $10,000 to $20,000 in December. CNBC, WSJ, Bloomberg, Yahoo Finance and dozens of other media outlets write articles and discuss cryptocurrency prices daily. Bitcoin and Ethereum were topics of discussions in households across the world over the winter holidays. Millennials like me were left explaining this completely new technology and concept to people who still have difficulty using their iPhones.
Buying your first fraction of a Bitcoin or your first Ether is an exciting day. It’s you joining what many believe is the biggest financial revolution in modern times. As you begin to read more you are shocked to find out that there are more cryptos than the four offered on Coinbase. In fact, there are over 1500 cryptocurrencies and that number is growing daily.
The problem with so many projects is that it is difficult to sift through the bullshit (pardon my french). You have probably read about the ponzi schemes, and exits scams that plague the cryptocurrency markets. Do not become another statistic. Researching what you invest into is one of the most important things you can do. This is guide provides you with a checklist of things to consider before investing into a cryptocurrency.
My Crypto Research Guide
Where to find alt coins:
The best place to find extensive lists of altcoins are at https://www.livecoinwatch.com/ and https://coinmarketcap.com/. These two websites provide you with very basic information on alt coins; their market caps, price per coin, circulating supply and daily trading volume.
Obviously being new to crypto, this can seem overwhelming. Ask your friends who are invested for some coins they are invested into and then research the coin by yourself. Never blindly invest your money into something just because your friends are doing it or because someone else has recommended it.
The Basics:
Before I get into the meat of the research it is important to research the absolute basics of the project.
- Market Cap: How large is the market cap? In theory the larger the market cap the less room there is to grow, but the less risk there is that the project fails.
- Number of Exchanges/liquidity: How many exchanges is it on? Are they on major exchanges? If they haven’t hit major exchanges yet it can indicate that the price will rise if the project gets higher and higher in demand (look at NANO as a good example).
- Circulating Supply: This is more personal preference but I tend to avoid tokens that have circulating supplies in the billions.
1. Read the Whitepaper (seriously though, read it):
A Whitepaper is created by the team to give investors details of what their token will be used for, the economic model of the token, the technical details and more. A good example of a great whitepaper is ICON’s (ICX) (found here). The team has laid out their visions for the project, the economic model, technical side, and more. As a retail investor, it is not always necessary to understand the technicals of the project. Some projects will even exclude the technicals from the whitepaper and give it its own paper.
Do they have a roadmap?
A roadmap gives you an idea of the timeline for the project and is usually (but not always) included in the whitepaper. The team doesn’t need to be super specific with dates that things will be finished, as stuff happens that may delay the project. However seeing a general outline by quarter or month will give you a good idea of when major milestones will occur.
If the project has a five year timeline it might indicate that the price won’t move as much in the short-term. If it appears like a lot of deadlines or milestones are occurring in the next couple of weeks, that will indicate it’s a good time to buy as milestones usually result in price action.
You should also look at whether or not the team has met their previous deadlines. I usually create a table on excel with deadlines in their roadmap and see if they completed what they set out to do on time.
2. Research the Team:
An idea can only go so far as the people working on it. It’s extremely important to take some time to research the team behind it. Usually the teams can be found on the projects website. When researching a team you want to look at a number of different variables:
- Education: What is their educational background? Have they attended elite universities or master programs? Do they have PhD’s/MBA’s? This isn’t always necessary but it gives you an insight to how knowledgeable a team is.
- Experience: Have they worked for large companies? Do they have experience in blockchain companies/ cryptocurrency sphere? A CEO who has worked for Fortune 500 companies knows how to run a business and his knowledge from previous experiences can go a long way in running a project.
- Size: Do they have enough members to achieve their goals?
- Background: If the project is focused on financial systems you want some of the team members to have experience in the finance sector (working for big banks etc.)
- Developers: How many paid developers are there? Do they do bounty programs? Do they work remote or in an office? How many programming languages do they know.
- Transparency: Can you find information on the team members? Usually a good sign of this is having their LinkedIn Profile on the website. Can they be contacted? Once again, this one isn’t always necessary, there are solid projects with anonymous developers. Personally I prefer to know who is working on the project I invest into.
3. Research the Advisors:
As the industry is still small and growing, teams may not always have the experience or money to attract big talents within the blockchain industry. Although it is important to have them on their team, having big industry names on your advisory board can be just as helpful. Having CEOs of big companies, industry leaders (for example the head of a supply chain company as an advisor for a supply chain blockchain project) will go a long way.
4. Research the Investors:
Find out who is backing the project. When I look at projects I try to find some big name backers or venture capital firms that have a good track record. Some that always come to mind are Ycombinator, #Hashed, Kenetic Capital, and Consensys. Some large companies might also be backing a project like Tencent.
5. Research the Partnerships:
This is one of the most important things for legitimizing a project. If a large company announces a partnership with a cryptocurrency that means it is on the way to becoming adopted in the real world. It moves the project from just an idea to a reality. Companies and organizations like Microsoft, IBM, VW, and Tencent have partnered with projects.
Even better is if the project has a government partnership. This shows not only real-world adoption but support from a sovereign state. These are far fewer in the crypto realm but there are projects who have partnered with the Australian, Thai, and Chinese governments.
When researching partnerships it is extremely important to find out the extent to the partnership. Many projects will claim to have a large partnership, however, after digging a little deeper you might find it’s in a much smaller capacity or a subsidiary of the larger company.
6. Marketing & Community Outreach:
This one isn’t as important as the other ones if the team continues to deliver on time. There is a fine line between being too active on social media and using social media proactively. Tron’s CEO and founder is a good example of being overly active on twitter, marketing themselves too much. Chainlink is the polar opposite of that spectrum, with almost no community outreach or updates but continuously working on their project.
Things I look for are how often a project gives updates to the community. Generally good projects will update their communities monthly or biweekly. They will be active on the communities sub-reddit or Telegram/Slack groups and answer questions that the community has. As much as I wish marketing wasn’t such an important role in the success of a project, it is.
7. Research the Token Economics
This one usually goes under the radar for a lot of people, but Token Economics is probably the most important thing to research before buying a token/coin. What will the token be used for? Where does the token derive its value.
You’d be surprised by the number of projects out there that don’t have an actual use for their token. A project might have a great idea that will revolutionize the world, but if they don’t have a use case for their token then it is essentially just a way for the team to receive investments.
When looking into Token Economics consider the following:
- Token distribution: This is usually released before the ICO and can be found in the Whitepaper. Are the majority of the tokens available to the public or do the Founders have the majority share? If the founders control 70% of the total supply that might be a red flag. Is it justified?
- Vesting Schedule/Token Release Schedule: If a large amount of the coins are locked up, how long will they be locked up? Will they release them all at once in x number of years or will they released a percentage of them over a certain time frame.
- How does the token obtain value? Will it be used for fees on the blockchain? Do companies need to buy it in order to use the product? Are you rewarded for staking them? Is there more than one way the token obtains its value (Fees, nodes, etc.)
- Is the token economic model deflationary or inflationary?
- Is the token mineable?
8. Who are their competitors? Do they have first-mover advantage?
It’s obvious by the exponential increase in cryptocurrencies that the market has become extremely competitive. It is important to understand the basic crypto asset classes and then find out who’s the competitor for a given project.
For example, the protocol/platform market is becoming extremely saturated. I can’t name them all but Ethereum, EOS, QTUM, NEO, Stellar, Cardano, DragonChain, Nebulas, Elastos, WAVES, LISK, ARK, ICON, AION are the ones that come to mind.
Ask yourselves what makes this project unique from their competitors? Odds are they do not have the first moving, so it is important that there is something unique that differentiates them a competitive advantage.
Bonus: In regards to Platforms/Protocols (How Scalable/Secure/Decentralized is it?)
These might seem like buzzwords but they are extremely important for the success of a project. How does the project ensure it’s decentralized? Some projects are more centralized than they might appear. Is it scalable? If this projects receives mass adoption will it be able to deal with the high traffic on its network? How secure is the project?
9. The Community
This one probably doesn’t carry as much weight as the rest of them but look at the community. See how active and knowledgeable the community of the projects are by looking at their Telegrams and sub-reddits. Many of the questions you might have on a project can be found in their communities. Active communities show that they believe in the project. It also makes it more enjoyable to be part of a strong community.
Bonus Things To Consider
I’ve just provided a ton of different topics to factor in before purchasing a coin and there are plenty of others to consider. Here is a quick list of other things to consider before deciding whether or not to invest:
- Github: Not all projects have Githubs, but if they do, see how active they are on it, see how many people are helping the project develop.
- News: Is there something that’s happened that might effect the project? Have members of their team quit/left?
Concluding Remarks:
I hope this guide helps you with your cryptocurrency investments. This guide might seem to be too in-depth to some of you, but remember that this is an extremely speculative market and you are investing your hard-earned cash. I find the more you research and get to know about a project, the more confidence you have in its success, the less anxiety you’ll have about price movements, and the better you’ll sleep at night. At the end of the day you want to be sure what you’ve done with your money is the best you could have done. There is no such thing as asking a stupid question, and there is no such thing as asking too many questions. Skepticism is the best trait to have when dealing with cryptocurrencies.
ETH Address: 0x3F5D725f7e99A17098c6BAaFa057Fc401c7a69F1