In this blog post, we will take an in-depth look at the main aspects of my qualitative and quantitative approach to analyzing cryptocurrencies and blockchain projects. I will present you with a framework which helped me a lot in evaluating investment opportunities. This framework is split up into two parts. As the title says, the first part is about qualitative data, in this part of my analysis, the primary goal is to understand certain aspects such as team background, overall vision, technology and mid to long-term potential of a project. This step is also significant to make sure you’re not investing in a scam project.
To get a clear overall picture and make your potential investments comparable to each other, I developed a second part to this analysis, which I call the quantitative approach. I’ll also give you access to the spreadsheet I’m using for this part of my Evaluation.
The whole approach is feasible for established projects in the crypto space but also for ICOs.
PART 1: Quantitative data
First of all, we have to acknowledge that subjective and also data-driven techniques for analyzing cryptocurrencies are never set in stone. As the industry changes and grows, the parameters for evaluating projects have to change as well, new experiences and knowledge have to be taken into consideration when looking at the market.
Very few Investors have substantial experience with anticipating the development of new assets classes, especially with crypto it is tough to find something to compare it to or to find data which would make predictions more valid. Even the very popular comparison to the early stages of the internet should be taken with a grain of salt in my opinion.
Because of the inability to rely on data we would take into consideration when evaluating tradition assets like stocks or bonds, new aspects take a dominant role in this new asset class of cryptocurrencies. It is essential to develop your own, personal schemes and approaches to evaluation and make sure you feel comfortable with them and they bring value to your decision-making process. Let’s get into it, let me give you an idea of the process I’ve developed.
Mainly there are six factors I’m looking at:
- Potential (Market)
- Adoption and Strategy
- Potential (Growth) and Roadmap
A lack of vision is clearly not the problem for most of the projects in the space. In most cases it’s quite the opposite: many projects promise a revolutionary new technology which will completely change the world or at least disrupt a whole industry. These promises may sound impressive first, but you should always think for yourself and even more importantly evaluate for yourself how feasible this vision is and how high the chances are that it will become a reality someday, from a technical standpoint and the perspective of potential users.
Use common sense and your own view on reality to determine if what the project is offering is possible and even more critical, if it is really needed regarding its potential to solve real problems.
Your focus should be on finding projects with a clear value proposition and a new approach to solving real-world problems. If you can’t see it in the project you are looking at, please save yourself some time and don’t look deeper into it. Value creation and the ability to solve problems it what makes a company worth your time and money and therefore make it a good investment.
Here are some questions you should ask yourself when looking at the Vision of a blockchain project:
- Is there a specific use case and is it aimed at solving a problem?
- Is the proposed, blockchain based method significantly better than the centralized, traditional approach?
- Is a token really needed for this?
- Are the advantages clear and measurable?
Because we can’t rely on “hard facts” during our analysis, we have to rely on the team, as one of the main factors for the future success of a project. Especially the background and history of team members but also the composition of different skills and know-how play a significant role.
You should also take a closer look at the advisors and partnerships a project has been able to bring on board. This is an excellent indicator of the status of a project within the industry. Advisors can also become a critical factor for success, especially for projects that are confronted by a growing number of competitors within their Niche, or when their success is dependent on networks and access to big players in a specific industry (e.g., supply chain projects). However, also the additional skills and know-how of an advisor can bring a project to a whole new level (e.g., plasma network, OmiseGo).
Here are some questions you should ask yourself when looking at the Team of a blockchain project:
- Which are the projects team members worked for in the past,
- How did these projects perform?
- Are there any reports about scams etc. involving team members?
- Are the managers (at least) sufficiently qualified for their job?
- How experienced are the advisors?
- What do the advisors bring to the project?
We’ve already answered the question about if and how a project provides value to a specific user base, now it’s time to find out, how big this potential user base is. Focus on big markets with dynamics that are easy to understand. If it’s a small niche market find out what potential it holds by looking at the size of traditional companies in the space. In short: for significant gains, you need a big market which can create substantial demand for a projects token or coin.
There are two ways to determine the market potential of a blockchain project or cryptocurrency:
Take an in-depth look at the structure, characteristics, and size of the target market/industry and create different adoption scenarios (pessimistic, realistic, optimistic).
If you are dealing with a customer focused (B2C) project, you should take a look into the social media channels of the project. Pay attention to the size of the user base, activity, overall tone, and transparency. If an ICO was sold out in a short amount of time and has an engaged and open community, it might show some real enthusiasm among a community which is beyond the usual hype.
Here are some questions you should ask yourself when looking at the market potential of a blockchain project:
- How many potential users are there?
- Will there be enough people to create demand for the token demand? (Compare to other projects that are more established)
- Is there potential to disrupt an existing market or industry?
- Is the target market growing or shrinking?
- How many competitors are there? (traditional and startups)
- How does this project differentiate from its competitors?
- What are the overall trends for this market?
- Will the problem the project is targeting increase over time?
- Is the value proposition of this project bound to this particular market or can it be transferred to different industries?
Tokenomics describes the design of a Token, as well as the framework and mathematics in which token functions within a projects ecosystem. On the first level (design) good tokenomics would be achieved if all possible stakeholders of the project (customers, user, investors, etc.) are creating demand for it. Look out for real usage of the currency either to maintain a networks stability or as means of payment for particular products or services within the network.
Good Token design should:
- Provide value to all stakeholders
- Have a real function
- Reward users and investors for being early adopters
- Reward users to bring in new users into the network
- provide long-term incentives to hold the token
On the other side you should look at the Tokenomics from an investor standpoint:
Price per Token
Total Circulating Supply (All coins that are currently traded) Take this into account when determining if a coin is “cheap” or are there just many of them in existence.
Market Cap (Price multiplied by total supply) Determines the growth potential of a currency (low Cap = high potential for growth)
Trading Volume — the amount of cryptocurrency that exchanged hands during a certain period, most often 24 hours. Different exchanges usually give their own volume for a particular time, but if you’re observing single currency and deciding if you should invest or not, make sure to look at total volume and not just one exchange.
Transaction Time — The time it takes to transfer a token or coin from wallet A to wallet B.
Here are some questions you should ask yourself when looking at the tokenomics of a blockchain project:
- Is the Token providing real value or is it just speculative?
- Does the token have a use case besides as a speculative asset?
- Are intermediaries eliminated or compensated through the token?
- What does the relationship between price, market cap, and supply look like?
- Are you investing in a coin with a high potential (low market cap)?
Adoption and Roadmap
A vision alone doesn’t mean much and certainly doesn’t make a good company. If this vision is never converted into reality, even the best idea is worthless. In other words: It’s not about the Idea, It’s about how the team can execute on this idea.
Adaption is the bridge between Vision and Reality. Most Blockchain startups are very open about how they will push the distribution of their tokens and lay out their plans in the project’s roadmap. The roadmap is another vital aspect in the process of evaluating a blockchain startup and its cryptocurrency. It gives Investors and users an overview of what is planned and where the project is heading. In the best case, the roadmap contains a detailed plan for the next 24 month. Never take for granted what is outlined in a projects roadmap, many teams miss their targets either concerning deadlines or regarding features. Constant development and ongoing communication with the community can make up for this if explanations for delays are reasonable.
Here are some questions you should ask yourself when looking at the Adoption and Roadmap of a blockchain project:
- Does the roadmap contain a clear strategy and is it realistic?
- How is the team set up concerning marketing? (team and strategy)
- How did the team deliver on their roadmap so far?
Many of these young projects are not able to provide a working product yet. They rely on test-nets, beta versions or MVPs. In the beginning, speculation and the money that comes with it is all that drives them and keeps them alive long enough to eventually deliver on their promises sometime in the future. You as an investor have to decide if you believe in the team, the vision and the promise of a working product, therefore identify the overall potential by looking at every single aspect we’ve talked about in this article in detail. Don’t be blinded by hype and false promises.
Here are some questions you should ask yourself when looking at the overall potential of a blockchain project:
- Based on the previous steps: Is the coin undervalued?
- How are the trading metrics? (Volume, market cap, etc.)
- What are the reasons for low trading volume as an example? (is the coin only traded on a few exchanges or is the overall interest in this project too low?)
- How did the price react to positive news in the past?
- Is there some kind of hype?
Always keep in mind that there is a lot of money to be made in the short term. Especially during a bull market, it doesn’t really matter in which project you invest. However, if you are aiming for long-term profits and exceptional returns on your investments while keeping risk at a minimum, you should take a closer look at the points I provided in this article and draw your own conclusion.
In the second part of this series, we are going to take a look at qualifiable Data in crypto project analysis, to grasp the whole picture of what it takes to identify great projects in this noisy environment.
“Risks come from not knowing what you are doing” — Warren Buffet
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How to analyze and evaluate Crypto and Blockchain Projects PART 1: Qualitative Factors was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.