A simple guide for researching and investing into a crypto project

sexypotato, April 2022

Article 2 in a 3 Article Series to help you Do Your Own Research (DYOR)

If you have been following IOTA for a while, you may feel the same excitement as I do. A big wave of projects is brewing and will soon be coming for our pockets like the white walkers on GOT. Among them, you can already anticipate there will be legitimate ones with hard-working teams and solid tokenomics, as well as shady money grabs, rug pulls, and Ponzi schemes. So we need to understand who they are, what they do, and how they work to safeguard our hard-earned money. Of course, we’re all here for the tech, but when it comes to money, we need to learn how to survive in the lake of crocodiles that we have in front of us. So please, guys and girls, instead of jumping in the water and losing your head, you better test the water with a finger tip first.

This article aims to educate retail investors on how to properly research and potentially invest in a crypto project by providing some basic principles and guidelines. By investing, I only refer here to buying tokens on a private sale, public sale, or on any exchange, leaving ‘seed’ investments and trading out for another time as they are different animals and require a different skill set. And by projects, I refer to those with a team behind and a token, leaving out simple NFT sales from a single artist. But keep in mind that investing is very personal. Each reader has different experiences, skills, time, and funds to allocate, so this all depends on each case.

Foundational principles.

Let’s start first with some cornerstone principles that I believe every investor should feel attached to.

1. Diversification is king in finance, but do it right or don’t do it at all: There’s a common tendency for people to diversify for the sake of it. The general belief is that if you split your money into different projects, you have higher chances of making more money and fewer chances of losing it all. Or, like this classic phrase better summarizes: never put all your eggs in the same basket. But quite frankly, I prefer to keep my eggs in just one strong basket rather than put some into leaky ones, so it’s very important to understand how strong those baskets are before allocating our eggs and not rely on pure luck or hype. Diversification only works when it is done smartly and efficiently, methodically and with strong discipline, and when it allows you to be chilled with your wife and sleep like a baby instead of going nuts by trying to follow them all.

2. Never make investment decisions based on other people’s advice; always DYOR: The DYOR term, aka ‘Do Your Own Research’, even though it is a cliché, couldn’t nail it better: To succeed ‘long term’ in crypto, there is no other way than to roll up your sleeves and work on your own research. Why? Because if you just follow someone else’s advice you will never have confidence in your positions, your hands will shake at any given drop (not to mention in a bear market) which may force you to do stupid things with your money. You will get mad with yourself and the market, you’ll force things to try to recover all your losses back, and you’ll probably end up losing it all. While by DYOR as I propose below, you can accept your losses and move on if something goes wrong, you can reduce your chances of getting into scams, and you will know how and when to exit from your investment as you understand everything about the project behind. Of course you can exchange opinions with your peers to see what they think about it, but always make the decision yourself.

3. Do not FOMO. Wait for it or let it go: Once your research is done, it’s very important to avoid falling into FOMO. If you missed it, wait for it or be smart and just let it go. I know it’s not easy to watch a rising rocket from a distance but trust me, that’s better than being crushed by it. Professionals never FOMO, they actually use this demand to exit their positions and if the price goes crazy, they even short it for a quick buck. Of course this depends on the stage of the token you’re looking to buy. FOMO mostly occurs in a secondary market, as the price for private or public sales are fixed, but in some cases a rushed decision to invest in these sales ends up with a similar result or even worse because your tokens are usually locked to vesting periods.

4. Do not over invest, always invest what you can afford to lose: Over investing is very dangerous as it increases your level of stress both ways. When the price goes up, you cannot sleep, your brain gets blurry and you start projecting in your mind all the things you’ll buy and all places you’ll visit with so much money. You cannot wait to send a resignation letter to your boss and finally get financial independence. When the price goes down, you cannot sleep either, you get nervous and imagine the worst, even working at McDonalds. But when you invest a prudent amount, you always feel in control of your position, you assume the worst scenario in advance, and you still chill like a kitty with a full belly.

5. Do not rest on glory, follow your positions like a hawk and take actions when things change: Crypto is highly dynamic, the most competitive sector I’ve ever seen. Innovation is crucial and those projects that cannot adapt surely die, and your money dies with them. So once invested, don’t rely on your initial research, follow them as much as you can and GTFO if you have to. Heck if we look at IOTA, what a bloody rollercoaster of emotions we’ve had. So you can start to imagine what it can be for a crypto project with a smaller team and community and a narrower budget.

Guidelines for proper Research.

Now that these principles have been addressed, we can expand our knowledge further into some basic guidelines for our research. There are many ways to perform such analysis, but the way I like to do it is to start with a checklist, and then build up my knowledge from there. A checklist provides me with an ordered methodology, it keeps me focused and it prevents me from missing key aspects of the project. It consists of a list of 100 multiple choice questions that I consider relevant, segregated by 5 areas of analysis, and where each of them has 4 different possible answers: (1) Yes. (2) More or less. (3) No. (4) Unknown. Questions are written in a way that every ‘yes’ and ‘M/L’ counts positively, and every ‘no’ and ’unknown’ doesn’t count, and will potentially help me to identify red flags and risks involved.

To get an answer to these questions, I refer to all public information I can find on official sites, official news and documents, social media and the IOTA discord. I also ask these questions on the project’s Discord server if they have one, and direct message one of the team members if they allow me to do so. I know sometimes it’s hard to get an answer to all of them, because that depends on the stage and size of the project you’re researching, and that’s why the ‘M/L’ and ‘unknown’ columns exist. Every case is different, but in any case, once you finish the checks you should have a better picture of the business insight. That being said, let’s move on to the questionnaire.

1. What are they building?

The first area of analysis that I like to focus on is their core business: the product or service these teams are looking to deliver. It gives me an answer to the “what” they are building. For this analysis, I have a list of questions listed below:

Personally, if I don’t have a positive answer to the first question I drop it completely and go to the next project. Understanding the core business is fundamental for me before anything else. Of course the other questions on the list are also important, otherwise I’d only have that one. So moving on, then it’s important to understand the use and purpose of the project, its sustainability and demand, the vision and goals, and so on. Most of this information can be obtained from the website and papers, so go read everything many times if you have to. If you don’t understand something, share your concerns with people to get their feedback and get a better understanding. Don’t be afraid of looking like a fool, if you don’t understand just say it, most things here are highly sophisticated to most of us. If possible, also check and test similar products on different ecosystems that are already running. There’s no better teacher than your own experiences!

Once I’m done with the reading, I do the checks and go to the next section.

2. How are they building it?

Here I try to understand “how” they build such a product or service, legally and technically. In regards to legal aspects, you should check if they have a legal framework supporting the project or if they are looking to set up one, either a regular company or a wrapped or regulated DAO. In some cases, there is the name of the entity publicly in their websites, so you can verify its legitimacy in any public domain of the registered country. When the name of the entity is not available, you can ask them directly via email, discord or twitter and do the same check. If you find the entity in a public record, you can check the type of entity, the purpose, and the name of the main authorities. If you don’t, you can ask them for a certificate of incorporation or anything that helps. If you don’t get any info, you can assume there is no entity behind. From my personal experience in crypto, I know that a project without such a legal framework has no future at all long term or at least not at a big scale. Therefore, I would only invest into those projects that do things right from that point of view. You might differ here and that’s fine for me, this is simply a guide and my personal opinion. But crypto is maturing fast and is highly probable that anytime soon regulators make a step forward in this direction and non-compliant projects suffer the consequences and their investors are financially affected.

Regarding technical aspects, you should check on the documentation if and how IOTA tech (including Shimmer and Assembly) is involved beyond having just a L1/L2 token. If they use the IOTA tangle, and/or services like smart contracts, streams, access or digital identity, and if that offers the product a competitive advantage over other similar tech. In addition, check if the code is open source, and if you can’t evaluate for yourself ask a friend to do it for you. It’s especially important to check if the code of smart contracts has been audited, and by whom. There are a lot of trusted auditing companies such as CertiK, SolidProof and Chainsulting, just to name a few.

3. Who is building it?

As important as the what and the how is the “who” that builds it. A solid team and leadership is crucial to deliver in time and to survive long term. By solid, I mean highly talented people in different areas of expertise, with clear roles and methodology, good relationships with each other (super important), and good reach to the IOTA Foundation and Community. Advisors are also important as long as they are more than a face in the website or a name in a list. If they really play an active role, they can provide expertise and rich advice to the team in specific areas of a business or tech. So try to figure out who they are and what they do for the project. To get all this info, besides public sources, you need to dig a bit deeper into social media, discord, etc. and get a general sense of these people. Passion and commitment to the cause is not written anywhere, you can only feel it if you see them working and interacting with you and others. It matters what they say and how they say it. It also matters if they are consistent over time, if they embrace positive feedback and use it for a better version of their product, if they show common sense and respect to other people, and if they face their problems and not lurk in the shadows. In the end, a company or a DAO is just a group of people, so before giving your money you should know them as much as you can and trust them and their skills to reach set goals and the ultimate vision.

4. How do they sell it?

At this point, you should already know a lot more about the project and the team. But even if you like everything about it and are satisfied with how it works, the real challenge for these guys is getting people to support them and use their product or service. So in most cases, it’s super important for a project to build up a big and active community that engages with the team and provides support and feedback that allows them to make a better product. And of course, this community will demand transparent communication toward them regarding updates, roadmap, changes and releases, which can be done with multiple social media tools such as twitter, telegram and discord.

In addition to this, it’s key to determine if there is a concrete plan or ongoing program for marketing that fits the size of the project. Marketing is what brings new people to the table, new supporters and eventually new users. Check if they have this plan and, if possible, the funds to pay for those bills.

5. How do I make money with it?

Last but not least, everything can be extremely cool and promising, but if there’s no token involved there’s no point in researching a project from our pockets’ point of view. Sure you can still do it for fun, but let’s be honest: we’re here to make money. And the token economy or the ‘tokenomics’ will determine if you, as an investor, will ever make money with it.

So assuming there is a token, there are many things to check in regards to it, starting from the most important one: if the token is compliant with current regulations of the jurisdiction where the backing entity has been or will be incorporated. WTF does this mean? In general (but this depends completely on each jurisdiction) tokens can either be considered a utility token, a cryptocurrency, or a security token. You can check for yourself the differences between them, but in an ELI5 summary, the first two are the cool guys, but the third one is a ‘wanted bandit’. Public offering and trading of securities is highly regulated all over the planet. And most tokens fall into this category, so you can check how the public sale was or will be performed, if KYC/AML/CFT were or will be applied and so on. This seems irrelevant nowadays for most people in crypto, but IMO there will be a time when these unregulated tokens face troubles and get delisted from CEXs, making trading and liquidity a big headache for holders.

But leaving those legal aspects to the interpretation of each one of you, there are other fundamental aspects attached to the nature of a token that must be reviewed, like utility, sustainability, potential revenues and rights involved. A token without a real utility is doomed to fail. It needs to have a purpose, otherwise it’s just a funding vehicle with no future. It also needs to be sustainable over time, something impossible to accomplish if for example the supply is highly inflationary or concentrated in a few hands. And in regards to revenues and rights involved, it’s important to determine if the token grants the holder any kind of governance rights when there’s a DAO involved, and potential revenues either from staking, liquidity mining, or inherent revenues from the product or service incomes. This may eventually increase the ROI of your investment, so be aware of it.

Besides, you need to understand how the token was or will be launched. A fair launch means the token is distributed fairly to interested parties, where there’s no pre-mining, pre-allocation or sale at all. But selling a token is not a bad thing as long as that sale is compliant and fair. So if that’s the case, you should check the portion of tokens kept by the team and advisors, the selling price at each stage, the different vesting schedules, and finally see if you judge them fair enough. An unequal distribution of tokens may represent a threat to small token holders as they can get dumped on or suffer from price manipulation.

Finally, a token needs a place to be traded. Listing on exchanges and good liquidity will provide you an exit when you need it. So check everything in this regard, and if there’s only trading on a DEX, be sure the liquidity on the liquidity pool is locked, or you could be rug pulled.

Measuring the results and investing into a project.

Once you have all your checks, you can measure the result by applying a defined method if you want to be more disciplined and consistent. There are many ways to do this. What I like to do is to count 1 point for every ‘yes’ and 1/2 point for every ‘M/L’ obtained. The sum of these points provides me with a final score that I use to compare with the maximum possible outcome, which is 100 points as there are 100 questions. I know getting the max score is impossible as there are some questions that can only be answered in some cases or if the result of the previous one is negative, but what matters to me here are ranges and not the final score per se. If you don’t like this approach, you can give more points to specific questions that you consider more important than others, so they weigh more in the final score. Use your imagination until you feel comfortable with your method. Here’s the way I do it:

In regards to these ranges, there’s also room to play around with their names, quantity and size but I like to use the followings:

Like I said before, if I don’t understand the core business of the project I’m researching, I just drop it and move to the next one. I do the same when I see no clear plans from the team to legally frame the project and the token. So basically these few cases are angry bears for me and I just GTFO of it.

When I get less than 25 points, it doesn’t feel good. There’s so many uncovered and improvised things that I simply prefer to avoid it at least for the moment and possibly revisit in the future if things get better.

The next one is a stage where most projects usually go public. Still less than half of the total points, but promising to me. These ones go to an ongoing research mode where I follow from the sideline and wait for updates like a Tibetan monk.

Things start getting interesting when I get more than 50 points, and go full watching mode. Here I follow them closely like a hawk to a rabbit, and talk to people from the team or the community in more detail. I might invest if the chance is presented right away, but in a small proportion to have my skin in the game.

Finally, when I get 75 or more points I’m really excited. Of course, the higher the better, but still nice in all cases. Here’s where I invest a decent amount (after getting the approval from the chief of da house, my wife) or prepare the funds to do so as soon as I can. Keep in mind there’s no magic rule here, these ranges are not arbitrary but mere frames to me. All depends on the context. So follow your gut and do what you judge better.

One last note before we close the door. As you study a project and fill the checklist, you might find some red flags that you want to write down and give them a follow up. Some can be minor things easily solvable, but some others can grow and potentially spoil the food on your plate. Think of a fight among key members of the team, a bad behavior from the founders to their community, or a poor reception of positive criticism and feedback. Judge as you will, but keep them in mind when investing. And if you do invest in a project, keep also in mind the principles that I’ve mentioned earlier in regards to FOMO and amount. Do not chase the price and protect your pocket!

All right, let’s leave it here for now. In the next article I will write about some of the risks involved in any investment. I hope you’ve enjoyed this one. If you did, please share it!

A special thanks to Rob (DigitalSoul.x), Holger (Phylo), and Philipp (Zaired) for their tremendous feedback.

Sköll!

Link to checklist:

https://docs.google.com/spreadsheets/d/1g86mc-ZOKNm5cXU_KKHz-6V1RzdYutoaj6h-o5WcaK0/edit?usp=sharing