Over 90% of crypto token valuations trend toward $0. These assets aren’t investment vehicles backed by companies like stocks are. Instead, token prices rely on demand generated by a degree of speculation and utility.
The key to profitability in the space is identifying a mismatch between a project’s utility, the potential to grow its community and tokenomics that favor price appreciation.
An ideal project for investment would minimally solve a problem, and its token would be essential to the solution. Additionally, the project’s token should not be in a speculative bubble. Project analysis aims to find projects satisfying this criterion (and more).
Risk Management Queries
Identifying factors that would contribute to a project’s token not appreciating is key to successfully picking web3 projects for investment. Crypto prices typically move in sync during bull markets, and projects exhibiting multiple risk factors tend to lag in performance on average.
In a macro bear market, projects with weak fundamentals often fail and get abandoned by their communities. A highly profitable strategy would be to pick up fundamentally strong projects during macro periods exhibiting weak market demand.
Below are ten starting queries to guide the digital asset analysis process.
Development
The development team is critical in determining a web3 project’s success. A competent team of builders will decrease the likelihood of fatal flaws in the project. Development is also vital for building a product that generates sustainable demand.
Following are four pertinent development-centric questions to consider when investing in a web3 project:
1. What is the URL of the official cryptocurrency project website? Are there any obvious UI/UX errors?
The official project website should be the starting point for web3 project investigations. Links to documentation, company updates, and team members should be available. A project missing an official website could be extremely early in development or not legitimate.
Egregious errors on the website are a red flag. Simple spelling and grammar mistakes, deadlinks, formatting issues, or lack of responsiveness could be oversight issues. These problems should raise quality concerns for the project.
2. What problem is the project trying to solve?
Value creation comes from solving issues for others. Unless the project’s focus is art or entertainment, having a solution looking for a problem is a surefire way to fail. Having a well-defined problem gives the project a clear objective to reach.
3. Is there a working product (MVP)?
A project with a minimum-viable product indicates time and energy spent bringing the project’s goals to fruition. The MVP is a testament to the team’s ability to deliver value, whether the individual team members are known or not.
4. Is there a known development team for the project?
Investing in web3 projects requires a significant degree of confidence in the team. Until the product can speak for itself, the most an investor can do is look at the track record of what the team has done in the past.
While a few anonymous teams can transform the entire web3 space, many are unknown. The people behind these projects could be scammers, novice developers, or cypherpunks. A transparent team means they are more comfortable being held responsible for the project’s outcome.
Furthermore, leaders with a strong reputation for quality and delivering on promises often have others follow them into new ventures. These leaders can give credibility to a project that may not be more than an idea on paper.
Tokenomics
The supply and demand properties of a web3 project asset greatly influence the asset’s price. Ideally, a token should be fairly distributed amongst many investors and freely traded. This distribution aids in preventing a minority of holders from manipulating prices and thus also thwarts price fixing, forced liquidations, pump and dumps, and other schemes.
In addition, tokens should have a clear use case that is pivotal to the project’s design. Many projects use their token to raise funds solely.
Following are three critical Tokenomics-centric questions for crypto investing:
5. What is/are the intended use(s) of the project coin within the project?
The token tied to a crypto project should be fundamental to how the project functions. Looking at Bitcoin, the protocol would not work without the ability to pay miners in bitcoin.
The token’s use case(s) should be clear and essential. Otherwise, there will be no long-term demand for it.
6. How do coins come into public circulation?
In the case of a token with 90% of its supply outstanding and 10% in the open market, investors should be confident that the other 90% won’t get dumped on them and crash prices.
In one scenario, the overhanging supply could be dripped to the market over hundreds of years through staking rewards. Conversely, one entity waiting to sell tomorrow could be holding the pool of tokens.
7. Are most of the coins in circulation (>50%)?
Price relies heavily on supply and demand. When there is more demand and less supply, the cost of an asset goes up. The opposite is also true.
Having the majority of tokens locked up creates the risk of supply flooding the market. Such an event would lead to price volatility to the downside and price suppression for years to come.
Community
Projects with dedicated communities enjoy more stable prices, as the token holders aren’t short-term price flippers. Instead, they are individuals looking to realize the project’s long-term vision.
A secondary benefit of a dedicated community is that the community will generate content around the project by themselves. Organic content can create a strong feedback loop that draws more attention to the project.
What follows are the remaining three questions for initiating a crypto project investigation.
8. What is the size of the official project’s social media pages (Reddit, Telegram, Twitter, YouTube)?
The best crypto projects have thriving communities. While a massive following across social media may mean not being early to the party, no followers mean no demand. Not having a market means the token’s price can’t appreciate organically.
9. Are the social media posts (and reactions related to the project) recent, and do they appear organic?
Bots are a growing concern across all social media platforms. While a project may have 100k followers on Twitter, a computer program may run most of those accounts.
Checking for recent organic engagement will help determine if the demand behind a token is sustainable or manufactured.
10. Are community members generating independent content to promote the project (YouTube, TikTok, etc.)?
There is fierce competition for attention on the internet. Staying at the forefront of users’ minds requires substantial marketing budgets—one way to combat this is having the project’s community market organically for the project. There is no better example of this than Bitcoin and the organic dissemination of the project’s purpose.
- Cryptography – A study of secure communications techniques in an adversarial environment
- Metadata – Data that describes some other data. Ex. the caption describing an image
- Whitepaper – Information document used to promote or highlight the features of a solution to a problem, product, or service
Next Steps
View additional articles in this series:
If you feel prepared, take our Introduction to Bitcoin and Blockchain quiz:
- Bitcoin / block / 0. Blockchair. (n.d.). Retrieved March 21, 2022, from https://blockchair.com/bitcoin/block/0
- Böhme, R., Christin, N., Edelman, B., & Moore, T. (2015). Bitcoin: Economics, Technology, and Governance. Journal of Economic Perspectives.
- Hernandez, J. (2021, September 7). El Salvador just became the first country to accept Bitcoin as legal tender. NPR. Retrieved March 21, 2022, from https://www.npr.org/2021/09/07/1034838909/bitcoin-el-salvador-legal-tender-official-currency-cryptocurrency
- Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. Bitcoin.org.
- Nakamoto, S. (2008, October 31). Bitcoin P2P e-cash paper. Metzdowd. Retrieved March 21, 2022, from https://www.metzdowd.com/pipermail/cryptography/2008-October/014810.html
- Ross Ulbricht, aka Dread Pirate Roberts, sentenced to life in federal prison for creating, operating ‘Silk road’ website. ICE. (2015, May 29). Retrieved March 21, 2022, from https://www.ice.gov/news/releases/ross-ulbricht-aka-dread-pirate-roberts-sentenced-life-federal-prison-creating
- Singh, M. (2022, February 8). The 2007-2008 financial crisis in Review. Investopedia. Retrieved March 21, 2022, from https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp
