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People keep saying “do your own research”. But where to even begin with, and how to navigate through the overinformation! DYOR is definitely easier said than done.
I do have to say though, putting your hard earned money into a crypto project because it feels like the right opportunity, or because someone recommended it, is like gambling at a casino. You might win occassionally, but at the end of the day, you are bound to lose.
And we’ve all made this mistake. Be it greed, be it FOMO, or be it laziness. Regardless if you got burnt or not, given the choice I don’t think anyone would like to be in that spot.
Even though we all understand that DYOR is a no-brainer, it is definitely easier said than done.
So to make life easier for you, here is a list of relevant points that make up what we call “crypto fundamentals”, which is essentially a checklist that you should follow when you are looking into a project.
Now, before we start, some quick call outs:
For easier understanding, I’m categorizing all key areas into 4 types, and each of them contains 2 to 4 areas:
- General Metrics
- Tokenomics
- Onchain Metrics
- Due Diligence
This list is shared in a top-down approach, so we are going from general to specific, from lower effort to higher effort, in order to ensure you optimize your time and energy as you grow in confidence in the specific project you are researching.
Last point is a quick disclaimer: there is no one set list of fundamentals, this is just my recommended list, so feel free to add/change according to your own preference.
On another note - I’m using coin/token here interchangeably without considering the difference between both. If you are curious to learn about what sets them apart, here is an article you can go through!
Now, without further ado, let’s get started!
1. General Metrics
Under this category, we have 3 general metrics to look into.
1.1. Market Cap
It’s short for market capitalization, and it’s calculated by multiplying the coin’s price to its circulating supply.
It can give you an overall sense of adoption.
1.2. Volume
This typically refers to trading volume over a certain period of time, providing an understanding of how active the trading of the coin is.
It is a great way to spot artificial or abnormal activity. If a coin/token’s daily trading volume gets to a high % in relation to its total market cap, then it might give you some hint of speculation.
1.3. Exchange Listings
Seeing where the coin is listed is a good idea. You want to know how easy it is for people to access this particular coin, as well as to liquidate it.
The size and credibility of these exchanges can give you some sense of security, compared to seeing a coin listed on a dodgy one you’ve never heard of.
2. Tokenomics
Tokenomics really just refers to the token’s economics. By understanding the design and circulation of the particular coin, you can get valuable information.
In this category, there are 2 main points to consider:
2.1. Inflationary vs Deflationary
The first one is to understand whether the coin you are looking into is inflationary or deflationary.
If it’s inflationary, likely the coin will continue to be created/printed, and it will usually decrease in price as time goes by and if nobody else continues buying. This is not just the case for cryptocurrency, but also what actually happens with our FIAT currency like the USD: as the Fed continues to print money, we continue to see a raising inflation rate.
For a coin to be deflationary, there has to be some kind of supply cap or burning mechanism in place, which would usually lead to increase in price (assuming demand stays constant) because as time moves on there are less supply in the market.
Now the inflation/deflation of a coin will not happen over night, we are obviously talking about longer time horizons.
2.2. Initial Launch Mechanism
The second point to pay attention to is how the token initially gest out to the market, which will have an effect on the overall tokenomics given that it plays a role in its centralization level.
For example, if the majority of the coin’s supply is in the hands of only some investors, then it’s safe to assume that any action they do (such as selling their holdings) will significantly impact the price.
There are different types of launch mechanisms, such as ICO (initial coin offering), presale to private investors, airdropping to early users, or pre-mine by a close set of miners.
3. Onchain Metrics
The third set in our checklist is the Network Metrics.
There are really a lot of different metrics, and what they do in a nutshell is to show you how often a coin is getting used, whether it is overall quite active or just a nice concept.
Let me call out the most common/relevant ones:
% of active addresses vs total addresses: % of addresses with a balance that had transactions during a given period of time. This will essentially tell you how much activity that particular network has, to determine if the users are just hodling the coin or if there is actual usage.
Average time between transactions: this will again tell you how active this blockchain is.
Distribution of tokens on the network: this is similar to what I called out earlier in terms of how a coin initially gets out to the market. The reasoning behind this metric is the same… you want to see how distributed the token is to determine how centralized it is, as we dont want few people controlling the market.
Development Activity: at the end of the day, it all comes down to the quality of the product and tech. Make sure there is active discussion in their group. commits, code frequency and contributors.
For Development Activity, Coingecko is a good source for high level information.
Using Polkadot as an example, here is what you can see:
For those of you really interested in these Onchain Metrics, you can check out intotheblock.
It is not a free tool, but there is a free trial you can use to check out if its worth using.
4. Due Diligence on the Project itself
This is the last category already, so bear with me a bit longer!
If you’ve done all the previuos steps, you have a broad understanding of a specific cryptocurrency, and if you are happy so far with what you are seeing, it is about time you do a more detailed research.
There are mostly 3 main things that matter here:
4.1. Team Quality
The people behind a project are very important.
It is highly recommended that they have relevant background in the crypto space, and that their information should be publicly available and verifiable.
It is good to look at their skills as well: typically a developer-heavy team makes sense as it all comes down to building a quality product, and it would also be relevant to have someone from a business/marketing background that can help drive awareness and adoption. But if the overall team is mostly Marketing, then you should wonder besides running great campaigns, how they would be able to deliver on their actual product.
How about the use of pseudonyms like Satoshi Nakamoto (the mysterious author of Bitcoin’s whitepaper), you ask? Well, pseudonyms are certainly cool. But what we need to establish here is that Satoshi is an exception, not the norm.
I think we are all on the same page when we say that crypto space has a lot of noise right now, so at this point it’s definitely worth knowing who is behind a project.
4.2. Project Uniqueness
There are few things to understand about a particular project.
To begin with, the key question is, what problem are they solving? this refers to their use case, as it will clearly determine the potential adoption it can get.
If there is a legit problem they are trying to solve, then the next question is, what does the roadmap look like? because one thing is the theory, another is how they plan to execute and with what kind of timeline.
Following this, you should be looking at the overall design of the technology and infrastructure. This covers important points like consensus method (how secure and scalable the network is), the technology stack (the architecture of their tech), potential interoperability (how can the network interact with the broader crypto ecosystem), and scalability (can the network support growth sustainably without running into bottlenecks).
Where can you get this information? Normally all projects would have their relevant whitepaper, which is where developers explain the technology and the purpose of the project they are working on.
Projects will keep releasing updated publications, as well as detail information in their website as well as socials.
4.3. Community
Lastly, it is about Community.
A big, strong, and active community will be committed and will go above and beyond to spread awareness and drive adoption. It’s like free marketing.
You can join their main social groups to get a sense of the amount of followers and the kind of convesations happening.
Additionally, Coingecko is an easy and convenient way to find the followers and social stats.
Following the example of Polkadot:
On the right hand side you can find the link to their relevant community groups and other good stuff.
On the “Social” details, you can also get an overview of overall followers across different socials.
As we get closer to the Ethereum Merge - here is a concise article with everything you should know about it. Don’t miss out!
That’s it for today!
This is my first article following the new biweekly frequency. It is also the first topic I picked up after refocusing again on key concepts and fundamentals, as well as some less mainstream quality projects.
I’m hoping that by providing a clear framework for you when trying to assess a project, you can build up stronger fundamentals!
If you have any suggestions, don’t shy away and let me know!
In the meantime, here is a list of topics in my idea bank, in no particular order:
What is technical analysis
Project Deepdive:
Helium
Filecoin
The Graph
Gala
An overview of “The Network State” by Balaji Srinivasan.
Social Tokens
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