Crypto Investing: How to DYOR
You don’t need a PhD in physics to find and research quality investment opportunities
An investment said to have an 80% chance of success sounds far more attractive than one with a 20% chance of failure. The mind can’t easily recognize that they are the same — Daniel Kahneman
A simple, sensible approach to crypto research
Do your own research (DYOR). The mantra of the many YouTube personalities that litter the crypto space. But what does it mean? What exactly should you be researching?
My first thought was to go through a mock asset selection using my research method. Then it occurred to me it might be more helpful to simply walk through the process I used for a crypto asset I already own. So, full disclosure, I am a holder of the asset we’ll be discussing in this article. However, the goal is to educate about the process of selecting crypto projects to invest in with a real world example.
Let me say at the outset, I am not recommending you buy into this project. What I do recommend is you view this information as a starting point to research projects you like. None of what follows is the ‘be all, end all’ of asset appraisal. There are literally thousands of metrics you can use to evaluate an investment. For me, this method has proven to be a fairly reliable way to find new projects with strong growth potential.
There are literally thousands of metrics you can use to evaluate a project
No guarantees (obviously), but I do think this method helps cut down on clutter and streamlines the research process. As I have written before, I view crypto investing like it is venture capital for the masses. A large number of decentralized exchange (DEX) listings are in the early seed, and startup phases of development. In general, these are some of the riskiest assets one can invest in. There is a reason financial regulations limit these types of investments to accredited investors in the United States.
Research is great, but you still need luck
If you have ever started a business you know there are a million things that can get in the way of success. Some things you can control or mitigate. Some things you just have to figure out, or work through. And some things just come out of nowhere. If you’re lucky, you will avoid the catastrophic stuff. If you’re not so lucky, the venture might suffer, be set back, or even fail outright.
Point being, if you want to invest in crypto, know every venture you put money into has, or will run into something (or many somethings) that threaten the business. No one on Earth can tell you for certain if a business is going to succeed or fail until it happens. So when you hear the warnings that an investment might lose all of its value, take it seriously! You can — and very well may — lose your money investing in a crypto project. It’s risky, so invest accordingly.
No one on Earth can tell you for certain if a business is going to succeed
With that in mind, crypto projects can also have some of the highest potential rewards. If you invest in Apple or Microsoft today, the likelihood of that stock appreciating 2000% in the next year is pretty close to zero. But those kind of returns are very possible in the crypto space. Likewise, if you invest in Apple or Microsoft today, the likelihood you will lose your entire investment is also pretty close to zero. That’s the risk-reward calculation in a nut-shell.
Filtering out the FUD, the crud, and the duds
Before we get into the actual asset evaluation, let’s first take a look at how one can find a project to begin with. I will try to keep this as simple as possible. This method isn’t foolproof, but I think it strikes a good balance between time spent and risk taken. When looking for a new project, I generally use Coinmarketcap.com (CMC) as a starting point. Nothing special about CMC, it just happens to be the site I use.
I try to limit my searching to the top 1000–1200 by market cap. To be sure, there are some great deals below that threshold. The trouble is, it already takes a lot of time to filter through the top 1000. Digging down another few thousand by market cap takes more time than I want to spend. Plus, I consider having a top 1000 market cap to be a good initial indicator of a quality project. Rough idea being, if they’re struggling to find investment in the early stages, I rarely see that organically improve with time.
What’s in a name?
As of this writing, there are 8555 crypto projects listed on CMC. Limiting our search to the top 1000 eliminates a lot of noise with very little friction. Once there, I use a ‘rule-of-thumb’ measure based on the name of the project. It’s not scientific, nor driven by data, nor research. It’s just filtering based on my personal taste/sensibilities. Basically, if I think the name is stupid, I pass right by.
…If they’re struggling to find investment in the early stages, I rarely see that organically improve with time
For instance, ranked at 1062 (as of this writing) is a token called ‘Dogs of Elon’. I don’t know anything about the project and I probably never will. I see a name like that and I almost can’t help but ignore it. It might be the biggest crypto project ever made, but that’s a boat I’m just going to miss. The name alone makes me think it’s not worth looking at.
Likewise, ranked at 805 is a token called ‘SENSO’. Nothing wrong with the name. I just don’t like it. That’s it. No rocket science, no deep dive into market cap, or the whitepaper, or anything. Does this mean I might miss out on a great return from a great project? Of course. Does that bother me? Not in the least.
It does help eliminate a decent number of tokens with low friction. So, after I find a name I like, I simply read the description on CMC. Oftentimes, within reading the first sentence or two, I already know I’m not interested, and I move on. But if the description catches my attention, I will go look at the website. If that isn’t a complete trash-bag mess, I’ll dig deeper. My goal is to understand, and test the claims they make on the website. A little creative Googling goes a long way here.
Some questions I’m trying to answer are: what problem(s) are they trying to solve? Has anyone else tried? Does the team seem capable? Do I understand what they’re doing? Does their solution make intuitive sense? Does their solution make technical sense? Would it be a big deal if they did solve the problem? Who are the competitors? Will the proposed solution be substantially better than what’s out there now? What’s stopping someone from just copying it, or doing it cheaper?
When asking these questions, you really want to find reasons not to invest. Confirmation bias is a real thing. Don’t get stuck in an information bubble. If you are only seeing things that encourage you to invest, you are not looking hard enough. What you are looking for are enough positive answers that outweigh the negative ones, while staying within your risk tolerance.
If the project is still looking good after you Googled it to death, you’re ready to move into some deeper research. You could apply the next steps I’m going to outline to every project listed on CMC. It will just take a lot of time and effort to do. If you are investing full-time, well then research is your job, and I’d recommend you take the time to do it. But if you’re like me, and just doing this on the side, it can quickly become more of a burden than it is worth.
Today’s token is…
The asset we’re going to evaluate today is called Sonar Ping (PING). Funny thing is, I didn’t find this project. A friend told me about it. My friend has done very well in the crypto space, so if he makes a recommendation, I pay attention. In fact, before I even knew one thing beyond what he told me, I went and put money in. It was a modest investment, but it was made almost sight unseen.
That should tell you what I’m preaching here are not rules. This is educational guidance, and your mileage may vary. Nevertheless, before I started investing substantially in PING, I still followed my usual routine, which I will outline now.
It all starts with the charts
Before I invest in an interesting project, the first thing I look at is the chart. I zoom all the way out to the longest time frame available. What I’m trying to see is the general flow of funds into and out of the project. Ideally, there is evidence of a high volume moves, both up and down. A chart with a lot of small, jagged spikes indicates to me the moonbois and the hodlers are working hard to keep each other honest. That’s relevant to me, because it shows the price is continually, and rapidly being tested.
An alternative example would be when I see a chart with flat-line lows punctuated with short, relatively smooth spikes. To me, it just looks like an externalized pump and dump. As in, someone outside the company hypes and promotes until the project gets a big spike in buyers. The hypsters sell off, and then the project goes into nuclear winter until the next YouTube/Reddit rush comes along.
The chart for Loopring (LRC) is a good example:
Not to say LRC is necessarily a bad project, but the two-year flatline is something to look into and should give you pause. Now, sometimes big price moves may correlate with positive news or project developments. In the case of LRC, the huge move on the right coincided with a lot of hype on Reddit and YouTube. Only time will tell if it was just hype, or if LRC is actually going up. Me personally, I’m sitting with the bears on LRC.
Of course, LRC is a three year old project, while PING is only six-months old. So, let’s zoom LRC to the first six-months and compare that to PING:
Sonar PING today (six-months):
LRC at six-months in:
You can clearly see the investor behavior is markedly different between the two projects. Of course, these are very different projects and there is no good comparison between them. I’m just using LRC as a chart illustration here.
Nevertheless, the thing that strikes me about PING’s price moves is the lack of hype around the project. Even without it, there appears to be a lot of turnover, as evidenced by the rough chart line. When I see a lot of churn and turnover, it tells me there is high price uncertainty. In turn, I think price uncertainty increases herding and anchoring behavior, which tends to draw in more people. As the number of participants increases, information starts cascading. When that happens, I think that creates an increased potential for large price moves.
On to the socials
Nevertheless, on my next stop, I roughly correlate the price moves to the project’s social media feeds. In the case of PING, I focused mainly on Telegram, because that is where the bulk of the communication occurs. What I’m looking for are sentimental indicators from the social media feed that seem to relate to price moves. This isn’t rocket science, as I’m not looking for actionable information. Rather, I’m looking to get a sense of founder and investor enthusiasm/support for the project.
And, that’s where the social feed comes in. Are the investors primarily ‘moonbois’? Or, are the investors primarily long term holders? Does the channel blow up with negative comments at every dip? Or, do investors remain optimistic during downturns? I like to see conflict between the moonbois, the fudders, and the hodlers. Those little arguments increase the information flow, which can lead to information cascades. As those cascades become larger and more widespread, they can precipitate price movement.
Socials also give you an opportunity to gauge the reliability and sincerity of the founders. How do the founders interact with the community? Are they present? Are they defensive, dismissive, or blowhards? Do they work to explain issues? Do they make huge, or unrealistic promises? Are they focused on short-term price moves? Or, are they resilient and focused on long-term goals?
Socials also give you an opportunity to gauge the reliability and sincerity of the founders
I encourage you to check out the PING Telegram feed. You may get a very different sense than I do about what this project is all about. What I see are throngs of moonbois in the crowd, but also consistent voices that show unwavering support for the project. I see the founders are engaged with the community, and seem responsive. They also appear to handle adversity well.
I see a project that has hit some stumbling blocks and recovered. I see founders that make a fair number of hyperbolic statements like, ‘we’re building a billion dollar company’, or ‘we’re going to revolutionize crypto trading’, or ‘we’ve got amazing features we can’t talk about yet’. I also see the founders have generally delivered roadmap milestones on schedule. Basically, I see what I’d expect from a functioning start-up.
Someone else looking at the Telegram feed might see something completely different. Neither one of us would be ‘right’. Think of this like a social media ‘gut-check’. Where I see a blow-hard, you might see a believer. Where I see opportunity, you might see a flop. Point is, focus on the process, not my answers. You want to learn how to identify projects that are right for you, not me, nor anyone else.
Think of this like a social media ‘gut-check’
Can the PING team deliver a ‘game-changing’ crypto analytics tracking platform along with other ‘soon to be revealed’ game-changing features? Maybe. It’s a tall order to be sure. It seems they genuinely believe they can pull it off. Of course, they could be wrong, or misleading everybody, but it doesn’t seem like it to me. Could I be wrong? Absolutely.
What about the whitepaper?
Before we press on, let’s recap. So far we have:
- Found a project with a nice name
- Read more about it
- Worked to understand what they’re doing
- Roughly compared the chart to the socials
- Spent time understanding the tone and mood of the discourse
I think many would suggest one start with the whitepaper. I think that is an error. In the crypto space, a ‘whitepaper’ can be anything from technical documentation to research papers to sales brochures. Many of them mix all three. I find them to be great sources of bias if you start your research there.
Whitepapers tend to be aspirational in nature. They are laying out their proposed solution to a problem, and they are making a case for why their particular idea is the one we should use. By reading the whitepaper first, you give them an opportunity to sway you, which can lead to confirmation bias. In contrast, I want understand the problem, and their solution without the project’s input first. I need to be able to evaluate the whitepaper, rather than rely on it.
This is also a good time to look at the tokenomics of a project. How many tokens are issued? How many tokens will be issued in the future? Are there revenue streams beyond hodling? What are the taxes? Are there regular burns? Is the token inflationary or deflationary? Is there sufficient liquidity? How concentrated are the wallets? Are the founder wallets multi-signature?
I want to understand the problem and their solution without the project’s input first
One commonly used tool for contract analysis is TokenSniffer. It serves as a kind of automated security audit for blockchain contracts. If you navigate there and look up the PING contract, it fails the ‘sniff test’ pretty badly. Why am I invested anyway? The areas of concern in the TokenSniffer analysis are plausibly addressed by the whitepaper and the founders.
The liquidity is a little low by some standards, but not ridiculously so. I also recognize the PING initial coin offering (ICO) was a funding round for the company, so the main purpose was to launch the venture. I can make allowances for them to pull a little more out to ensure sufficient funding for the project.
Likewise, the contract is not yet renounced. The founders address the issue and have credible arguments for why that is desirable. In fact, during a recent event, the team was able to recover a pretty significant amount of tokens a bad actor tried to steal. Their ability to modify the contract was a big factor in the recovery. It’s also a risk for me as an investor, and I could very well lose my bag because of it. I’m okay with that based on the rest of my research.
Point is, these are acceptable compromises to me, and fall within my risk tolerance. That doesn’t make them right, or okay for your risk tolerance. These can be huge red flags to you and that is perfectly fine! On the other end, many people don’t even realize they should be looking at these things and invest money in all kinds of silly stuff. But I’ve never been rug-pulled (knock wood), while literally millions of others have.
Many people don’t even realize they should be looking at these things
Point is, if things are stressing you out about the project, trust that feeling. If you don’t think the issues you see with a project’s contract or tokenomics are adequately explained, you should not commit money until they are. If they can’t be reconciled within your tolerance, just stay away. It doesn’t matter what I, or anyone else thinks. If you don’t understand it, or believe in it, why would you invest in it?
What did my evaluation tell me about PING?
To this day, I still don’t know what the Sonar Platform is going to be. I know there is a wallet and an asset tracking system, but I haven’t seen it yet. The beta version is due to roll-out on the 28th of December, so that will be interesting, but it might just be a turd. So, why did I invest? I think Sonar is CEX-y.
Meaning, my analysis leads me to believe this company is well positioned to get listed on major centralized exchanges (CEX). In turn, there is research that indicates CEX listings often lead to significant token price increases. To break it down in terms of this article, the thought process is something like this: good name, interesting project, socials support confidence, founders are dotting i’s and crossing t’s, trade volume and liquidity are good, contract is sound, tokenomics are deflationary, and holder positive, project might actually work, will probably get listed on Coinbase or Binance sooner or later, low entry point, and pseudo-competitors enjoy a much larger market share.
With all that in mind, I think this token might go up a lot, therefore I will buy. And, I could very well be wrong! But that’s okay with me, I understand the risk. I also used to lease a brand-new BMW every year. That was a colossal waste of money. If nothing else, Sonar PING is likely a better deal than that! Nowadays, I’d rather invest my extra money and stick to my used Prius.
The DYOR filter
That sums up my basic asset evaluation strategy for newly established tokens I find on the DEX. What I hope you can see is that it functions much like a series of filters. Here’s a visual:
That last box labeled ‘KO/WP’ stands for contract/whitepaper. I hope this presents as a logical approach. Like I said at the outset, this is not the ‘be all, end all’ of evaluation methods. It is accessible, and relatively straightforward to implement. The method relies on a lot of subjective interpretation. But I would argue even the most ardent technical, or fundamental analysis is still highly subjective. Regardless of the method you’re using, the essential goal is to predict the future, and no one has figured that one out yet.
Hopefully this method gives you confidence that you are investing in something that you are genuinely interested in, knowledgeable about, and believe in. The thing is, you might be wrong, and you have to be okay with that. Look at it another way. There are 8555 tokens listed on CMC. Chances are only around 800 of them will be viable, long-term projects. The reasons startups fail are numerous: lack of money; no need for the product; cost issues; lack of investors; team conflict; lack of enthusiasm, etc. Just based on the numbers alone, you’re going to miss more than you hit.
The essential goal is to predict the future, and no one has figured that one out yet
Regardless of whether you use my method, a fundamental method, a technical one, or something else, you will pick turkeys more often than not. But you will probably find a few winners along the way. The more quality projects you identify that you’re comfortable putting money in, the more likely one your investments will reward you with a solid gain. Or, you can be lazy, and just chase the crowd. To be fair, that has worked for a lot of people. You might also get Squid Gamed that way too.
At the end of the day, you should take this the same as anything else in the crypto space — with caution. I am a beneficial holder of PING. I am not paid by them, or associated with them in any other way. Based on my analysis, I feel confident this is a project worth my investment. I’m not recommending it to you, or anyone else. I’m presenting the method I use personally to evaluate projects, full stop. It’s not foolproof; it can lead to bad investment decisions; and following it might cost you money. Use this information accordingly.
Nevertheless, I find this research method useful, and I hope you will too. At the very least, I hope it will give you a starting point to research from, especially if you’re new to crypto investing. It’s a pretty wild world, with a lot of risk and opportunity. I wish you luck in your endeavors, and I truly hope you land on that life-changing token. Until then, please be safe, be smart, and be sure to tie the camel.
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