Working at a cryptocurrency exchange exposes me to a lot of new projects that are being developed in the blockchain industry. My colleagues often ask me "Hey Josiah, what do you think about X?". To be honest, much of the time that interaction is the first time I am exposed to said asset. I'll often ask my colleagues to give me some time to look into the asset more closely, and use the framework below to produce an answer.
Note that the perspective I like to look at is the 1-3 year timeframe, which is generally much longer than many of the other posters or traders might be looking at.
Paying attention to the price of a crypto is where its usefulness as an indicator of future performance stops. I'll say it again: once a coin has gotten your attention with its price moves, take price out of the picture.
Don't try doing any kind of TA or make any predictions about where it is going to go. The coin has gotten your attention, but before you throw your money at it you need to do something called due diligence. Due diligence is a multi-step process that involves you spending some time to learn and understand about the asset, and try to grasp its vision. This will become your compass that will guide your future trading decisions.
Ok, so a coin has gotten your attention with its price moves. You see posts on Reddit or 4chan of people talking about different aspects of the asset. If you stop here, you are making a big mistake. If you have ever played a game of telephone, you will know that information isn't always reliably passed from person to person.
In the generally unregulated markets of cryptocurrencies and digital assets, there are even strong incentives for people spreading misinformation about different projects to impact their prices. Don't trust these strangers to tell you which projects deserve your money.
Most projects have published a "whitepaper" that details the overall vision and goals for the project. Sometimes these whitepapers contain many technical aspects of the project, while others paint in broader strokes to outline the roadmap. Don't worry too much about what kind of whitepaper you see, there is huge variance between whitepapers.
Instead, have the following questions in your mind:
Most whitepapers also contain a section describing some kind of token. It's debatable whether many of the projects actually need a token to function. Almost all of them will call themselves "utility tokens" and argue that the token is essential for the platform. Most of the time this is patently false. I look forward to the day when some experienced developers start cloning many of these token projects and simply cut out the cumbersome to use token. But I digress. Have the following questions in mind when reading about the token model in the whitepaper:
There are merits to having application specific tokens, but if a token is used primarily as a means of payment or voting rights to an ill-described Decentralized Autonomous Organization (DAO), then you should ask yourself if it seems like a strong model. Vitalik Buterin (Creator of Ethereum) wrote an excellent piece on why "medium of exchange" tokens have a weak value proposition.
You might think that it is a chore to read an entire whitepaper and take notes on it. I won't lie, it sometimes is. But what you might realize is that after a little while you start to notice patterns among different projects. You get harder to impress, and can more quickly identify crucial flaws in projects long before they become a problem. You won't get this information while trading until after the price has crashed.
One way I like to write notes is to go one paragraph or subsection at a time. Once I finish the paragraph, I write a one sentence summary. Using this method, I've been able to understand relatively complicated projects, such as the Maker and Dai project, or the Enigma project. It doesn't really matter too much your level of technical background, just don't rush yourself and take it slow. I promise you the whitepaper ends eventually :) .
If you have made it this far, congratulations! You've can now officially screen about 80% of the projects in the market! If a project holds your interest through its whitepaper, next check for a blog of updates. Most people might say to look at the team next, but I think this is not quite as important as recent activity. A project with no updates in the last three months should probably be avoided until a new update is published. Look for the following activities:
Also take a look at their social media hubs, such as their Reddit, Facebook, or Twitter accounts to check for recent activity. A project with a lively and lasting community is far more likely to succeed.
I think for many projects the strength of the team is a bit overrated. Perhaps my standards are too high, but a project with a working and testable MVP is far more valuable than a whitepaper written by MIT and Stanford graduates. That said, it is worth looking at the team to get a sense of the following:
Strong teams play a crucial role in establishing good development practices. More important than background education or experience is cohesion and organization. Even good projects can be torpedoed by bad management, which is usually not too difficult to spot. If members of the project are contradicting themselves, or end up in legal battles with each other, the prognosis is not good.
If you've made it this far with a project, then its time to make a decision. Use the information from the previous steps to weight the risks and limitations of the project, its future prospects, and usefulness to yourself or others.
Once you have decided that you want to buy in, be sure to make an exit strategy prior to actually purchasing. An exit strategy goes something like "I will hold this asset for X months, and evaluate on an X week basis. I will only sell a significant portion of the asset on the following factors: X, X, etc".
Making a strategy hardens you against falling prey to strong emotions of greed and fear. The market can move a lot in a day, but rarely goes in the same direction for very long. A strategy makes your decisions more logical, as you are essentially making them with a clear mind.
Since I don't recommend trying to time the peaks and valleys in the volatile market, I don't suggest waiting too long for an entry point in general. It is not uncommon for these markets to grow very quickly. However, you should make your own risk profile and assessment of where you think the asset will go. If after all your research you think it could 10x, then whatever it is today won't matter. However, if you think it will increase by less than 100%, then pick an entry strategy. An entry strategy might be "I will buy after the price dips X% in X days, and evaluate on an X week basis" or "I will buy after the price goes under X price, and evaluate on an X week basis".
Again, strategies help counter the emotions of fear and greed that plague inexperienced and veteran traders alike.
While there are certainly other factors to consider, such as the competition a project is facing, the regulatory environment of the home country of the project, and larger macroeconomic analysis when assessing digital assets, hopefully this framework can serve as a useful starting point for your research.
If you have the opportunity, try to go to a meetup that features the team you are researching. Many projects are actively involved in the community, and may be able to answer questions you have about their whitepaper, token model, or development plan.
I hope you found this post helpful, and feel free to share any strategies or methods I didn't mention! I'd love to improve my own evaluating skills so let me know what you use.
