Since the inception of cryptocurrency the quest to find a framework for fundamental analysis and token valuation has been a never ending journey. Very few investors have experience in predicting and anticipating the economic growth of new asset classes. There are no existing industries whose historical data directly correlates to the growth of cryptocurrency. One of the closest correlations would be the stock market during the 1970s — 1980s however even that is not a comparable match.
The distinct lack of publicly available financial metrics or regulated information of any kind means that accurate judgements are hard to make. Therefore, you must design a Fundamental Analysis framework based on predictive logic and even though you don’t have all the answers, there is still a lot you can do to discern high quality projects from their vapourware neighbours.
- Vision
- Team
- Market potential
- Tokenomics
- Adoption strategy
- Room to grow
Vision
This area is usually not lacking. Most projects claim some sort of revolutionary blockchain system for changing the future of humanity. This is great, however you need to use your own view of reality and common sense to discern if what the team is trying to accomplish is actually possible or even necessary.
There needs to be a clear purpose for the coin and a functional intrinsic value. If there is no real reason for the user to buy it the price is held up purely on speculation, this makes for a very risk investment.
Here are some questions to ask when judging a coins utility potential.
- Is there a real-world purpose, is it solving a problem?
- Will the proposed solution dramatically improve the way things are done currently?
- Is the token fundamentally important and functional for the implementation of the solution?
- Are the benefits tangible and understandable?
- Does the company have any history of past successes?
Team
Since there is often a lack of publicly available financial data when performing fundamental analysis the team becomes one of the most critical components for assessing the future success of a project. Along with the core leadership team it is also important to look at the current investors and advisors.
Investors and advisors can give a solid insight into the level of belief in a particular project as well as increasing the chances of success by improving the overall knowledge-base of the team.
Here are some questions to ask when judging the team of a project.
- What past projects have the core leadership team been involved in?
- Were they a success?
- Have any of the team members been involved in ‘shady’ deals in the past?
- Do they have a list of highly qualified managers and leaders to command the software and marketing efforts?
- Do they have experienced advisors?
- Have those advisors been involved in majorly successful projects in the past?
- Are any of the private or pre-sale investors well known for selecting high performance investments?
Market Potential
A token may be useful, however if only one person needs or uses it, the demand will be low. There needs to be a significant market for the token or currency to create volume and demand.
You can usually get a fair idea of the market potential by looking through the various social channels for a particular token. If they sold out there ICO and have a lot of engaged supporters, it is likely that there will be sufficient market demand, at least in the near term.
Here are some questions to ask when judging a coins market potential.
- Are there enough users actively engaged with this token or coin?
- Is there enough users to fuel demand for the fundamental and practical application of this token or coin?
- Is the company well positioned in the industry?
- Is it a growing or declining industry?
- Does this company have any competitors that are trying to solve the same problem?
- Is this company well positioned and do they have a competitive advantage over their competition?
- Do you see a future in this industry and do you believe the pain point they are addressing will continue or increase into the future?
Tokenomics
Tokenomics refers to the design of a token and the set of rules of the economic ecosystem for it’s use. At a fundamental level a token with good “tokenomics” is a token that becomes desirable by all stakeholders of the ecosystem: clients, users, suppliers, sponsors and investors.
A token with good “tokenomics” should
- Provide significant advantages to users of the tokens
- Incentivises users to be early adopters of the token
- Incentivises players to bring new users to the ecosystem
- Is appealing to token buyers at the ICO in their “speculative” role, as something that will appreciate if the project gets traction
Here are some questions to ask when judging a coins tokenomics.
- Is the coin or token available for sale at a discount?
- Do you get exclusive member only access or rights to do/ use anything that would create future value?
- Is the future value of the network likely to increase and if so do the token holders share the benefits of the network?
- Is a middle man being removed from an old system that all token holders will be paid to replace by investing in this token?
- Do you get distinct advantages for holding the token such as the ability to waive otherwise large fees by using the tokens you hold on the internal payment system?
- Supply and demand; is there adequate demand for this token or is there so much demand that the limited supply will cause prices to rise?
Adoption Strategy
Just because there is an idea out there that can change the lives of 7 billion people isn’t important if it is never finished or the resulting product is never used. Adoption is the link between idea and revolution.
New projects are often very open and forward about their adoption strategy. The most common and often times heavily marketed aspect of this is their roadmap. It is crucial for the investor to look deeply into the roadmap and team to make an assessment about whether the project will be able to deliver on their promises. Don’t take their roadmap as gospel, many projects fail to deliver on time and when they do the results are sub-par.
Here are some questions to ask when judging a coins adoption potential.
- Is there a clear roadmap outlining a practical growth strategy?
- Does the company have an experienced marketing team?
- Does that team have a publicly available marketing strategy?
- Has the company delivered on their roadmap so far?
- Does the company and the team have a good track record of achieving their milestones
- Based on the experience of the team, do they demonstrate the ability to achieve the public roadmap they have set out to accomplish?
Room to Grow
While alot of new companies are so young that they are only just releasing test-nets and BETA products it is important to remember that the driving force in the short term is speculative financial investment. Investment is important because it helps the company achieve their goals as well as keeping investors involved for the length of the project, potentially decades.
It is important to remember, that even though alot of short term market moves are based on speculation, the odds of you achieving above average results from your investments requires a deep knowledge of all 6 steps.
Here are some questions to ask when judging a coins room to grow.
- Based on the above 5 steps, is the currency undervalued?
- Is the trading volume low? Is this because it is only trading on small exchanges or is it a symptom of the lack of public interest?
- Will the release of milestone achievements on the company roadmap create hype and increased demand?
- If the company were to solve it’s problem, what would a fair market cap for the project be?
- Is the token integral into the way the company solves the problem, is it sure to increase demand for the token?
Summary
Mid-long term investing in high quality cryptocurrency projects is the safest way to ensure your portfolio grows and you support the entire cryptocurrency eco-system.
Short-term trading and technical analysis can be extremely beneficial but mastering those skills takes time and dedication. Relying solely on TA alone also increases your vulnerability to investing in either low quality projects that will decrease in value over time or even full scale scams.
By performing thorough research on each of your investments, understanding the team and what they are working to achieve not only will you have greater odds of success but you will also have the confidence necessary to stick to positions, even when times get tough.
Unprepared investors that rush to buy cryptocurrencies in the moment are usually nervous and easily spooked due to their lack of knowledge and deeper understanding. They often lose money because they don’t understand why they are investing in the first place.
It is troubling how many people throw away money by buying into the hype or worse still get stuck investing in a scam or an objectively useless coin/ token and we aim to change that. Help spread the message and help everyday people understand how important it is to do thorough research before investing.
“Risks come from not knowing what you are doing”— Warren Buffet
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Written by the team at CoinLoop
The #1 Cryptocurrency Dashboard and information platform.
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