When market conditions are right there are abundant opportunities in seeking out high quality and early stage crypto projects. In this post I’ll walk-through my crypto research process from screening and researching crypto projects to due diligence and tokenomics.
- Introduction Video
- Where To Find New Crypto Projects
- How To Screen Existing Cryptocurrencies
- Crypto Due Diligence
- What Are Tokenomics
- Crypto Valuation
- Long Term Fundamentals
An Introduction To Crypto Research
Where To Find New Crypto Projects
Being early to an investment normally amplifies both the risk and reward. The truth is most projects in the blockchain sector never find product market fit and wont gain traction. So how early is too early?
At this stage you are either investing in an idea or a person. It’s likely that there wont be a token yet so some experience with angel investing, convertible notes and pre-sale contracts would be a big help.
The best place to find teams and ideas are industry hackathons. There have been many great projects that started out through public hackathons such as Thorchain.
You can find the latest industry hackathons here:
Token Launch Stage
This is the easiest stage to get in at as an early investor. Token launches go from few and far between during bear markets to daily during bull markets. In 2017 there was the ICO boom and bust which has now reinvented itself as a IEO (initial exchange offering) or IDO (initial dex offering).
There are a lot of scams and beware of anything that sounds too good to be true or offers guaranteed returns.
Most centralised and decentralised exchanges will notify users of upcoming launches. There are also launchpad type sites that manage 3rd party launches for particular blockchains like Polkastarter and Solstarter.
Look at previous launches on a platform to see how token price was affected in early trading. Often there’s a big spike upwards initially to set an upper target, then a big drop followed by a balancing out stage. During the balancing out stage the token will normally decline if there is supply from VC’s who got large allocations in a pre-sale or go up if it’s a fair launch type of project with little existing supply.
Early Traction Stage
This is the stage that I mainly focus on where a recently launched project has a product, a less volatile token and it’s started gaining momentum. I look for real world usage in the form of adding value, fee generation or revenues for token holders.
FTX‘s FTT token is a good example where they publish trading volumes transparently and a percentage of trading fees go to buy back the token. You could literally watch them building and growing the exchange to decide when is the right time to invest.
DeFi protocols can be valued based on a percentage of the total value locked, TVL. This is always transparent and relatively easy to find. Here are some sites that I use to monitor fee generation and TVL.
- https://cryptofees.info – I have exposure to all the top 6 fee generating digital assets in my crypto portfolio.
- https://defipulse.com – I like watching where money is moving in terms of TVL however this can often be influenced by short term liquidity incentives.
- https://etherscan.io/tokens – A real time list of ERC20 tokens includes DEX volumes and number of holders
How To Screen Existing Cryptocurrencies
There are a number of free and freemium websites that you can use to screen cryptocurrencies. The most widely used is CoinMarketCap which has some basic filters and sorting tools.
They also have a list of gainers and losers which you can filter to just the top 500 coins and check 1h, 1d, 7d & 30d price movements.
There are a few others that have more advanced settings and options:
Some simple ideas for screens to set up and check when doing crypto research:
Market Momentum Screen
Filters: 1d price movement > 10%, Market, Market Cap > $100m
Look for increasing trading volumes and social chatter
Filters: 30d price movement < (BTC -20%), Market Cap > $1b
Look for high quality projects that are struggling and find out why
Newly Listed Screen
Filters: 1d price movement > 20%, Listed < 7d
Look for something that’s not a ponzi scam
Crypto Due Diligence
Once you’ve found a project that you want to research or have a shortlist of interesting projects it’s time to dive into crypto due diligence.
Investing in anonymous teams and daos (decentralised autonomous organisations) is higher risk than investing in a project that has their teams Linkedin and Twitter profiles listed on their website.
One of the factors that needs to be taken into consideration with micro-cap projects is the chance of a rug pull. This is when the developers simply liquidate their holdings and disappear with any funds in the vault or liquidity pool sending the token price to zero.
For developers there is a benefit to remaining anonymous as it avoids the barrage of “when moon sir?” and “why token go down sir?” messages. For investors there is a benefit to having a transparent team.
LinkedIn is the obvious place to see a team members past work history. You can also you Twitter to get a feel for how the person interacts with the community and what they have been thinking about.
The more developed a project the more likely it is they’ll have prestigious partners that add value and funding. Beware of claims to be partners with “Amazon AWS” or “Google Cloud Network” as this likely means that they are just using those services for hosting.
VC Partnerships can add a lot of value but can also cause negative price impact on the token as VC’s will usually get discounted terms. Check vesting periods which are lock ups where the VC or funds can’t sell tokens for a specific period of time.
Some big names to look out for are Alameda Research, Binance, Paradigm, Digital Currency Group, Consensys, 3 Arrows Capital, A16z Crypto, FBG, Pantera, Polychain & Coinbase Ventures.
If you gain one bit of alpha from this article this is it. Go to the Github code repository for a project and click insights, then from the menu on the left click contributors.
This shows how much code has been committed and by who over the lifetime of a project. In the example above for Litecoin we can see that there hasn’t been much development since 2019. You can also then go on to each developers profile and see what code they are working on, previous projects and profile information.
S**t happens to every startup and blockchain project. How the team reacts to negative news is more important than the news itself in my opinion. You want to see leadership and transparency in the chaos and it’s often at these times when the market overreacts and presents a buying opportunity for more established projects.
Usually when something major and negative happens there will be an initial plunge or liquidation cascade followed by a bounce and then a slow decline as investors slowly sell off.
Positive news can include partnerships, milestones and new exchange listings. All of these can have a impact on price so it’s beneficial to understand what is in the pipeline and what news factors could affect price in the future. Most projects will publish a timeline which will include anticipated development and business events.
The blockchain sector is probably the only place you can get billions of dollars invested into a platform called Pancake Swap. There’s an argument that branding doesn’t matter or perhaps I put to much emphasis on it because of my background in marketing.
I still see a strong domain name and brand as a big plus for the long term prospects of a project. Synthetix is a good example as the branding is so inline with it’s niche of synthetic assets it creates a moat that new entrants would find difficult to displace.
What Are Tokenomics
Tokenomics is the economy within a token ecosystem. It equates to what will drive demand for a token and how this balances the initial and ongoing token supply. If a token provides utility or is burnt using protocol fees then this will increase demand beyond just investor interest.
There are many great cryptocurrency projects with very capable teams where the tokenomics just don’t justify investment for me. Governance tokens with no burn mechanism are an example where there is no value proposal other than a voting mechanism on protocol changes.
Quantifying Existing & Future Supply
There are a number of metrics to understand here.
Initial supply = also known as a pre-mine. This is how many tokens were distributed at launch.
Fixed supply = a hard cap on the total number of tokens that can ever exist
Circulating supply = the current supply of tokens held by users that have the ability to trade them (doesn’t include vested tokens usually)
Market cap = the market capitalisation is the token price multiplied by the circulating supply. This is often quoted as a valuation metric for a project.
Liquidity depth = how many tokens are currently available via existing limit orders within a reasonable price range on exchange.
Staking rewards and incentives are often used to bootstrap liquidity in the early stages of most DeFi projects. A fixed supply of tokens will be distributed to investors that stake liquidity provider (LP) tokens. So a user will provide an asset pair to Uniswap for example such as the native token and ETH or USDT. This incentivises the growth of the liquidity pool and encourages yield farmers to buy tokens to stake.
There isn’t a fixed formula that I’ve found although one would be useful but all of these factors together can provide insights into who supply might affect market price in the future.
If VC’s have been allocated tokens then check vesting schedules to find out when that supply might hit the market. Often VC’s wont dump all their tokens at once but will add sell pressure over an extended period once the lock up period is over.
For ERC20 tokens we can use a block explorer like etherscan to see the token distribution. Generally more users with less tokens per wallet is beneficial as it means less risk of a single whale dumping their holdings.
Quantifying Existing & Future Demand
On launch almost all demand will come from speculative investment and traders. This acts as a voting mechanism where the market projects their assessment of the best projects.
Later token utility and internal usage can greatly affect the demand on exchange and ultimately price.
Token utility can be designed in many forms, here are some examples.
- Burnable fees, where a protocol charges a token fee for usage and this is burnt decreasing supply.
- LP Staking rewards can incentivise yield farmers to buy on exchange but can also inflate supply.
- Node participation and bonding requirements requires node operators to have a minimum amount of tokens to participate in the network.
- Proof of Stake networks provide staking rewards to hodlers who are less likely to sell newly minted coins on exchange than miners who have fixed overheads.
- Profit distribution, some protocols distribute profits or fees directly to token holders.
Crypto projects will usually publish a whitepaper which will often have a page on tokenomics and how the team intends to create demand on exchange. Assessing the viability and real world usage is key to quantifying likely demand.
In the short and mid-term investor sentiment is still the key driver of supply and demand on exchange. Mr Market tends to overreact to both positive and negative news flow and then correct itself as participants rebalance and adjust.
New crypto projects aren’t so different to early stage startups in growth sectors. We can borrow frameworks from venture capital investors and apply it to crypto markets.
VC’s and angel investors have a moonshot mindset where they accept the risk of loss on around 70% of their investments in return for the opportunity to get in early with the next break out tech company which will more than cover all their losses. They will usually have a portfolio of 10+ companies they are invested in at any one time to diversify this risk.
Investments have a long time horizon as their exit opportunity may not come for years. Early stage investors may need to wait until the company has built a product, found product market fit, gone through the growth stage and eventually IPO’d or sold off to become part of AWS.
Some stats from the Angel Resource Institute:
- Average ROI 2.5x Capital
- 10% of exits generated 85% of returns
- Failure rate 70%
- Average holding period 4.5 years
Deal flow is critical for early stage investors in crypto markets as much as it is in traditional markets. We’ve spoken about where to find new crypto projects but there’s work that needs to be done to set up systems to regularly find new opportunities. That might be signing up and contributing at hackathons or automating a weekly report on the traction of defi protocols. The best deals and opportunities might not be available at a single moment in time and finding a way to have constant access to deal flow is critical to success.
A commonly used framework for angel investing is the Market Team Product Distribution assessment.
- Market – What is the total size of the addressable market? What market share would the competitive landscape permit?
- Team – Do the founders have the domain expertise and technical skills required? Are interests aligned between the team and investors? Do they have the grit and determination to achieve their vision?
- Product – Does the product add value? Is there a moat? Is it 10x better than what is currently available?
- Distribution – How will this scale? Is there a obvious marketing channel? Does the product have in-built virality?
There is also the popular Harvard framework.
- People – Founders, team, investors
- Business Opportunity – Market size and potential returns
- Context – Macro situation and timing
- Deal – Pricing and deal structure
These frameworks can give us an overview of what VC’s and angels are looking for in their investments.
To get more granular we can start to build valuation models for crypto projects. In later stage venture capital deals valuations are based on some multiple of predicted future revenues or profits. For cryptocurrencies we first need to standardise our thesis on sector growth over the next 5 or 10 years.
If I believe that the DeFi market will double every year for the next five years then I can use this thesis to start predicting future valuations. We can look at a projects current adoption and growth rate relative to sector growth (measured in financial terms or on-chain metrics like number of wallet addresses).
From there we can start to model how future fees and revenues will impact tokenomics and put together a potential valuation. For me this isn’t about predicting the exact token value in a few years time as much as it is about figuring out how investment opportunities compare relative to each other.
If you are doing it right, you are continuously investing in things that are non-consensus at the time of investment. And let me translate non-consensus, in sort of practical terms, it translates to crazy.Marc Andreessen A16Z
Long Term Fundamentals
To find the next ten bagger token you either need to be early or you need to buy in at an opportune time and be right about the long term fundamentals of a project.
The blockchain sector is growing at an incredible pace, we can track this via metrics such as the market cap of Bitcoin currently $750B or the TVL in DeFi currently $66B. It’s not ridiculous to think both of these metrics will 10x over the next decade but I suspect DeFi will first.
Decentralised finance is one of the sectors that I think will outperform and projects working in the space are in a good position to do very well. Your thesis may differ and you might want to look at NFT’s, Social Tokens, Metaverse, Payment protocols. Bitcoin provides a baseline and as you move up the risk reward curve you accept more risk of loss of outlay in return for expected outperformance.
Market conditions play a big part as well. A lot of money is made during “alt season” when popular tokens are doubling in price every few days. More money is made allocating capital to good projects with long term potential during bear markets when prices are depressed and the upside is greatest. Conviction is key, if the price dropped 80% would you be excited to buy more?
Bear in mind that investing in low market cap projects is most risky when markets are toppy because money flows back to Bitcoin, stablecoins and more established projects very quickly in the event of market downturn. It’s not unusual for Bitcoin to pull back 30% and many microcaps to lose 90% of their value in the space of a few days as sentiment shifts.
One thought experiment you can do is to to think about how a project might evolve over a long period such as 10 or 20 years. Is it more likely that we will be trading on Binance or Uniswap in 20 years time? Will traditional finance institutions use synthetic assets or would regulators prevent it? How will every day users interact with DeFi protocols in the future?
There are going to be tokens that 10x in the next year. If Bitcoin and Ethereum lead the market up beyond all time highs then there will likely be a lot. This provides an opportunity for asymmetric risk bets where you can lose deployed capital but stand a chance of a more than double return.
Doing exact EV calculations on this is difficult and inaccurate but can provide a useful framework for high risk, high reward investments.
Deploying life savings into the latest and greatest TikTok ponzi token during a bull market isn’t going to end well. However putting the effort in to crypto research to come up with your own assessments will provide high conviction investment opportunities.