How to Analyze Cryptocurrency Projects for Investment
8 steps I use to examine potential assets
Disclaimer: None of what I say should be taken as financial advice. I’m not an accredited financial advisor. Please use what I write as only a portion of your due diligence in researching these new financial instruments.
If you’re looking for an objective guide to evaluate potential investments in this space, use this guide.
When I first heard about Bitcoin and read the whitepaper, I was hooked. This concept of a distributed ledger system with validation was such a simple idea yet so complex in implementation. I instantly knew it was a fantastic concept, but I was leery of investing because I didn’t know how what the future adoption might be.
Fast forward a couple of years and now I’m deeply entrenched in the crypto ecosystem, interested in every new asset that was released. The year is 2013 and Bitcoin rapidly rising in price along with a massive influx of new projects and potential investment. I bought into a few of those projects and was burned majorly by most. I lost a lot of money that year, but made some of the greatest investments of my life.
Below are a few lessons I’ve learned over the last 9 years of being in this space. I’ve learned the hard way how to look at potential crypto projects objectively and realize whether they have potential or whether they’re scams looking to make a few quick bucks off the Bitcoin bull cycle. I’ve seen it 3 times now. Each new cycle brings in new money, new excitement, and a slew of sleazy copy projects that have no purpose or meaning other than profit.
Here’s one last piece of information. Some of these factors are impossible to evaluate for new projects. This space is so new, and great projects are popping up everywhere. While being cautious investors, you also need to trust your gut instinct on whether a project has potential or not and sometimes just invest a little to begin with.
Had I done this and trusted my gut with Ethereum, perhaps put a couple of hundred dollars into the ICO when I had a chance, I’d be sitting on a beach somewhere without a worry in the world. So it should go without saying that you should be extremely cautious with your investments, but occasional small speculations could set you up for life.
#1 — Project History and Vision
Starting with the most obvious item, I evaluate how long the project has been around. Project longevity isn’t always the best indicator of a strong project. There are still copy coins that have been around for years, with no real innovation, changes, or contribution to the crypto space. However, you’ll still see them perform well during a bull cycle.
On the flip side of that, you can still use project longevity and activity to gauge a good project. Coupled with the project’s vision and active development around that vision, you can get a feel for whether this is just a copy and paste ERC20 token or whether it has real potential value and worth.
I usually take a long look at the project’s website, read through their blogs and articles, perhaps the white paper if I’m feeling really intrigued, and look at their code activity.
Most projects are open source and host their code on Github or some other code repository. You can look at these code repositories and see their activity and get a gauge for how active they are and the inception of the project.
If there hasn’t been new code added to their projects in months or years, well that’s a red flag. If they have posted none meaningful update or milestone in a long time, that’s another red flag. Conversely, if their code repo is active and they’re churning out articles, active in their community, and hitting milestones releasing new projects, then that’s a great sign.
#2 — Investors
How well is this project funded? The saying “Follow the money” has some merit here. If venture capital money is flowing into a project, those investors have done some form of validation and are eagerly awaiting a return on their money. If there is real VC money flowing into this project, that’s a good sign.
Projects are proud to get this funding as well, so it’s usually pretty easy to find if a project is funded because they like to brag about it on their homepage or website. Do some research and find out who is funding this project, if any.
I follow a lot of VC Funds and watch where their money goes. Coinbase Ventures shows you all the projects they’re funding. Most of these projects have ERC20 tokens you can purchase and invest in and most of them are great projects. This kind of funding is a good indicator of a project that will be around for a while and has enough funds to attract real talent.
#3 — Strategy and Purpose
What problem is this project solving and how are they going to solve it? Any good business solves a problem. Whether it’s Chipotle feeding you amazing food, solving your hunger issue, or a crypto project trying to make payments and smart contracts more accessible and cheaper, there is always a problem that should be solved.
You should be able to easily ascertain what problem this project is solved by reading their website and white paper. Sometimes, crypto projects that aren’t legitimate or serve no real purpose, like to bury you in verbiage that seems intellectual.
For example, one recently launched project says it’s a “fairly launched and community-driven token, seeking to help investors by automatically generating liquidity that goes into multiple pools and exchanges” This is fancy language but in reality, this is a copy and paste ERC20 token seeking to find quick gains and money, but has no real innovation and won’t be around in any real capacity in 2 years. It’s not innovating and not solving any problems. The sole purpose is to create a token, get listed on an exchange, gain speculation, and cash out leaving others holding bags and in debt.
You must do your research and learn to weed out these kinds of tokens and project from real ones. Learn to step through the community, watching videos from founders, and sense their passion. Follow the team on Twitter and see how they’re talking about their project and the problem it’s solving. Watch as they’re transparent in what they do and you’ll be able to learn quickly whether they’re just trying to pump up their price or actually advance a project with a real strategy and purpose.
Along these same lines, I recently listened to an amazing podcast about how we love familiarity and hate disruption. It refers to how people are most comfortable when things aren’t disruptive, and when things disrupt their normal environment, they’re often downplayed or dismissed.
When talking about technological innovation, we reinvent the familiar — to make things better. We invent electric cars, a better form of the typical automobile. We create faster computers, more storage, bigger and more vibrant screens. But when something truly innovative comes along, like the internet, it’s mocked and ridiculed and takes decades to see the full potential.
This is natural because true innovation has no frame of reference. The podcast recounts a great example of this.
If you asked a 16th-century farmer what invention would help him better till his field, he wouldn’t ask you for a steam-powered tractor; he’d ask you for a horse that was twice as powerful and only ate half as much.
This is because innovation, even perhaps good innovation, is still usually framed in the familiar.
The internet was truly a disruptive technology and people all over were mocking it for years. It’s a fad and will die out. Why would I send an electronic mail when I can just send a real letter? Why would I read the news on a screen when I can just read a newspaper? These are simple analogies, but if you lived through the coming-of-age of the internet, you saw this happen. People couldn’t imagine what this might become because it was truly innovative. We can’t perceive what has no precedence.
So what does this have to do with evaluating a crypto project? I’m glad you asked.
When I read about something truly innovative, something akin to what Bitcoin is doing to finances, or what Ethereum is doing to contracts, and I get the urge to dismiss it, that tells me I might want to dig deeper. If a project is truly innovative, solving a problem you might not even know you have, look closer. Perhaps it’s nothing and not worth your time. But perhaps it’s so innovative, it’s trying to solve a problem you didn’t even know existed. These are the true gems of the industry. These are where fortunes are made, real problems are solved with ingenuity, and you get to be a part of something amazing.
Remember, had you invested only $100 in Bitcoin in January 2013, it would be worth approximately $250,000 today. Had you invested that same amount in January 2012, well then you’d have around $605,000. And that same $100 invested in January 2011 (a mere 10 years ago) would be worth a whopping $10 million at the date of this writing.
Just like the early days of the internet, the early days of the automobile, and now the early days of crypto, it pays to be innovative, and see innovation, not blinded by familiarity.
Learn to take notice of true innovation in this space and be able to distinguish that from merely reinventing the familial.
#4 — Development Team
This item goes hand-in-hand with the project history and vision, but I usually like to take a deeper dive into the code of the project. Any crypto project worth its weight is open-source. You can research what that means, but in a nutshell, the code driving the project is open and visible. Anyone can see it, audit it, and contribute to it. Open-source projects are transparent and it’s harder to hide nefarious intent. It’s not impossible, but very difficult to hide code oddities inside open source projects.
If a project isn’t open-source, I don’t invest in it. There are a few crypto projects that aren’t open-source, and I stay away from them. Not that some of them aren’t legitimate projects. And I don’t use this same stipulation for other investments that I make either. For example, I invest in Microsoft. Hardly any of their projects are open-source, yet I still believe in them as a company because of other driving factors within the company.
Still, I place this requirement on any crypto investments so I can look at the analytics of their code and team. Is it being actively worked on? I can check the code. Are there good developers contributing to the project? I can check the code commits to follow up on who the developers are. Are there real problems being solved? I can check the code for myself. Being a developer, I can look at the code and sometimes understand what’s being done. I can get a feel for whether the project has good people working on hard problems or if it’s just a copy and paste project.
These things can be viewed by looking at source code analytics. Let’s look at the Bitcoin code repository for example.
I can see right off the bat via the Github Pulse page that code commits were being merged just hours ago. I can see there are code commits being added virtually every day. Development is active.
I can see there are dozens of contributors adding to the code via the Contributors tab. People are passionate about this project and it gets a ton of activity. I can see who those developers are, follow them on social media, and understand them.
These things help me validate that this project is active, alive, and has dozens of people invested and pushing it to succeed.
#5 — Tokenomics
I’m not sure who coined this term, but I have a love-hate relationship with it. It’s a cheesy play on the word economics, I think. It refers to the economics behind the project or token, specifically referring to things like market cap, coin/token supply, price, holders, and more. These things help someone evaluate the theoretical price and economics of a project.
To explain how this is important, you need to have a firm grasp of some basic economic principles. So I’ll lightly touch on market cap as an example. Market cap simply means the total value of an asset. The stock of a company has a total market cap of (# of shares) x (price per share). The same holds for a crypto asset. Also, the total market cap of all stocks or crypto can be referred to as the total market cap. As of writing this, the total market cap of the crypto space is a little under $1.5 Trillion.
This is important because there is a finite amount of money floating around the crypto investment class right now. The price, or price potential, of a coin, can only go so high, in reality.
So when you see people speculating that DOGE will go to $100 or some insane amount, understand how absurd that is. That would mean trillions of dollars of new money would enter the crypto space from outside, or, and perhaps more absurdly, the money in one asset would need to shift into DOGE for it to rise to that amount.
If you understand the economics of how money flows around, comes in, and goes out, you’ll understand that the price potential for an asset or coin can only go so high. Understanding the tokenomics of a particular asset or project also helps put in perspective how high the price for that asset might go.
It’s unlikely that a new project will eclipse the market cap of the king, Bitcoin. There might come a day with another asset dethrones Bitcoin, but it seems unlikely right now. Evaluating the price and tokenomics of an asset, what the supply is, what the supply cap is (if there is one), how liquid it is, and if it can be easily exchanged with other assets, are all factors that go into evaluating whether this project is a good potential investment or not.
#6 — Community
I’m passionate about this space, and I don’t want to see people hurt or harmed by scams. I try to provide valuable feedback and input that helps people make good decisions. That’s the type of community I want to be a part of and want to contribute to.
Without a doubt, the community is a great way to gauge a project’s validity and worth. If the project has an excited community, buzzing forums and socials, a great website with loads of information, and people willing to help and share, that goes a long way to validate this project.
When I look into a project, I always research their official website, forums, Reddit, socials, YouTube, and any other forms of media and communication they have. This gives me a good idea of whether they are outspoken and passionate about their projects. I also get a feeling for how people interact with them and the community at large.
I can tell if people are strictly talking about price and price action, or if they’re talking more about the technology, economics, and impact of the project. I don’t simply want to invest in a project that desires to make money and see gains. I want to see a project that is passionate about what they’re creating, surrounded by people that believe in their ideas and goals.
For example, Cardano is a fantastic blockchain project. One of the key partners and developers within the Cardano ecosystem is IOHK’s founder Charles Hoskinson. Charles is a great thought leader within the crypto community. He’s always active on social media, speaking a clear message to people about the future of this space. He’s a voice of reason when things get scary, and an outspoken leader within this field. He’s active on YouTube hosting all kinds of AMA’s, community sessions, and technical talks. He’s just one person in a very active community driving Cardano.
The Cardano community speaks volumes around what it means to be a vibrant and growing fellowship in this space. It’s a great example of what I like to see when I evaluate a project and look deeper into the community.
#7 — Trading
Trading and exchange is another factor that helps me decide on projects and whether they’re good long-term investments. Again, this factor might be a little skewed in favor of older projects and lend itself to be a little biased against newer ones, since it takes time for exposure and listing on exchanges. But great projects get recognized pretty quickly in this space and are listed on exchanges pretty easily.
To invest in these projects, you need to transact with them. You need to have a way to purchase the asset or can receive it. For most people, this means it needs to be listed on a trusted exchange, i.e. Coinbase, Gemini, Kraken, Crypto.com
The sign of a mature and thriving asset is liquidity. This means that the asset is liquid, easily tradable. Most people cannot jump through the 10 steps it takes to get on an exchange, get approved, purchase ETH, send it off to another exchange, purchase XYZcoin, transfer XYZcoin off to their XYZ wallet and store it safely. This just isn’t how most people will interact with crypto projects and assets.
The more easily an asset is traded, the more easily money can flow into it, creating more value, maturing the project, and helping it to succeed.
One of the factors that I use as a small measure of a project’s validity is how many, and the quality of exchanges, it is listed on. I think this has some value because the large and well-capitalized exchanges aren’t stupid. They have teams of people working behind the scenes to evaluate potential new projects that add value to their ecosystem. Sure some exchanges just list anything and everything so they can make money on the spreads, but then again, there are significant exchanges that have skin in the game to see this industry survive and thrive. It is in their best interest to validate and approve quality projects. So a meaningful, if perhaps minor aspect to validating a project would be to see what exchanges it’s listed on.
#8 — Network Support
Last, but certainly not least, would be how sturdy the project is from a network perspective. To understand this concept, you need to understand a little about how mining works. Mining is a pretty complex subject, best explained here, but I’ll do my best to simplify it for this article.
Mining is solving a complex math problem and adding transactions to the blockchain. The blockchain is a ledger or database of all transactions that have taken place since the inception of the digital asset or coin. Miners solve the math problem and choose what transactions are included in the next block, and as a reward, get a portion of the coin or asset. The network validates this and a consensus is formed around the current block. Then we go onto the next block, competing for who gets to solve the math problem and add more transactions.
While this is happening, people are submitting transactions to the network. They’re paying fees to get their transaction included in the next block. These transactions are debits and credits to accounts.
Think of it as if I’m sending you one dollar. One dollar would get debited from my account and credited to yours. And we don’t need any bank or third party to validate this. The network validates this because it knows, via the blockchain, whether I have that dollar to spend or not.
That’s a poor explanation of what a blockchain is, and I encourage you to do more research via the link above. But it gives you a simplistic view to start.
Let’s get back around to why network support and security are important. Validating that blockchain is the core of Bitcoin and other digital assets. If there are no miners or validators, then the whole system falls apart. There is no trust in the system and simply, the blockchain grinds to a halt as no transactions can be validated. It’s also the core behind being a distributed system. Taking down a single Bitcoin node, or even a dozen, does not affect the network because there are thousands of nodes around the world validating and mining transactions.
When I look at a project, I look deep into the distribution and network to make sure it has a vast spread of miners and validators around the world. This is a sign of a healthy ecosystem.
This might be hard to do at first if the project is new, or just getting started. But as it matures, there should be projects or websites that pop up and allow you to view the network and perhaps even visualize the distribution of the network.
For example, Bitnodes allow you to see where all the Bitcoin full nodes are around the world. Cardano’s Node Map is a map of all the Shelly nodes for Cardano around the world. Ethernodes give you a thorough analysis into all the Ethereum nodes around the world, what versions of software they’re running and how distributed that ecosystem is.
Having a robust network of miners, validators, or nodes, is a crucial part of having a vibrant and secure crypto ecosystem.
These are some of the primary criteria I use to judge a crypto project on whether it is a good long-term investment for me. This is not an exhaustive list, and as this ecosystem expands, there will undoubtedly be more things that I add to this list.
But this is a good start for verifying and judging new projects, as well as older projects, on how well they might perform in the future. Not only that, but I’m fascinated by where this space is taking us in terms of finances, technology, contracts, and how we interact with each other digitally.
I’m interested to hear what you all use as a litmus test for good crypto-related projects. Leave me a comment and let me know what you think.