Deep Dive : How to Analyze a Crypto Project ?

Crypto Summer

We all have our reasons for being involved in cryptocurrencies. It may be because of the fascination toward a truly decentralized digital currency like Bitcoin, a composable blockchain like Ethereum or the massive growth of meme tokens like Shiba Inu.

For me, it was Elon Musk and Dogecoin.

The pandemic was slowing down, and countries were getting back to normal.

Last year during crypto summer, we witnessed one of the significant bull runs in the entire financial industry. Every coin was at its All-Time High.

I was pumped up to see my investment grow 3x within a few days. I could not believe I had become such a reasonable investor in two weeks of Twitter research.

All on the foundational thought that Elon will sort out everything.

He was on Saturday Night Live, and we were going to the moon…🚀🚀🚀

When I first invested in Dogecoin, I did not even know why it was created. I was highly overconfident with minimal knowledge of how crypto works or investment in general.

The Crash

After the market crashed in May 2021, I got hurt. And that made me ask myself:

  • How could this happen?
  • Why would the price go down?
  • We are going to the moon, right?

I would say that was the first lesson of my crypto journey. We were going to the moon, just not how I imagined it.

I overestimated my skills and the knowledge required to understand a particular cryptocurrency.

Did you know Dogecoin has an unlimited ♾ supply?

Source: Coingecko

This simple fact proves that the price of Dogecoin could not rise forever.

Bitcoin has a max supply of 21 million.

Source: Coingecko

This is why Bitcoin’s value and the price will go up due to its limited supply.

It creates scarcity.

Rise of Digital Ownership

Bitcoin runs on a decentralized network that a single organization or government is not controlling. Instead, it is connected by a network of computers {nodes} who volunteer to keep the network running. And the network rewards them with Bitcoin.

Bitcoin is the most revolutionary invention of our generation, but it also has its limitations. Bitcoin can handle only five transactions per second, and it’s not very easy to build apps on it.

After the launch of Ethereum in 2015, the idea of decentralized finance has emerged as one of the fascinating concepts in finance. Money has genuinely changed its form and the way we invest our funds. Decentralized Finance or DeFi has enabled developers, investors, artists, and believers to monetize their work more frictionlessly.

Satoshi gave us the power to beat the centralized system and take control of our assets.

Vitalik took it a step further to build a composable blockchain, which other developers can use to build apps on them. We can call them decentralized applications or dApps.

Anyone can create their apps or tokens, and the people who believe in the project would invest in it to reap the early bird rewards.

Decentralized Apps — DAPPS

Let’s take an example of a decentralized application called Uniswap.

Uniswap is a decentralized exchange running on Ethereum. Anyone can trade their tokens on Uniswap without going through any formalities like KYC or phone verification.

One might ask, how do they get the funds to make the trades happen?

Well, here arrive the believers of Uniswap.

The coolest part about any DeFi project is that the code is open-source, so anyone can see the code and review it. If they feel the code makes sense and the protocol will do what it says, they can choose to invest in it. Those investors are known as liquidity providers {LP}.

But why would they solely invest based on code?

Well, there is an incentive involved.

Every time a user swaps a pair of a token, Uniswap charges a fee of 0.3%. This fee is split between liquidity providers proportional to their contribution to liquidity reserves.

Uniswap has a daily trading volume of $1.5 to $2 Billion, making it very lucrative for investors to provide liquidity.

It also has its token, Uni. Uni is a governance token, so owners of Uni can participate in the decisions being made on the platform.

For example, if most Uni holders vote to increase the trading fee from 0.3% to 0.5%, they can alter the code to make it a reality. Governance token plays a crucial role in shaping the trajectory of any DeFi protocol.

The fundamental idea is to create organizations which are run by their community. It is permission-less, open-source, and there is no single point of failure. In short, it’s decentralized.

Welcome to web3. It’s incredible, and you are going to love it.

The rise of web3

Web3 is a term coined by Gavin Wood, co-founder of Ethereum, and this term has witnessed a hockey stick growth since 2021.

In simple terms, web3 is the new internet built on decentralized networks like Bitcoin and Ethereum. These networks are unstoppable and permission-less. Anyone with a smartphone or a computer can transfer their assets seamlessly without requiring a bank.

Web3 doesn’t just provide banking services to the unbanked; it gives a whole bank.

But just like the old internet, we face a lot of challenges while we are transitioning from web2 to web3. These challenges include scalability, evolving UI and UX, hacks, rug-pulls, etc.

Finding Solutions or Creating Problems?

We need to understand that not every token or coin has a real-world utility. Some projects are working hard to solve the most significant challenges, but some projects want your money so that they can shut the network one day and cash out.

Now that we know how it feels like to invest in a cryptocurrency solely on hype and without knowing its essentials, we can discuss the fundamental factors to keep in mind before investing our hard-earned money.

How to Analyze a Project?

Let’s take an analogy on how we can analyze a crypto project.

Many things play out in the background if you want to lose weight. It’s not just about the diet or the type of exercise you do but a combination of many aspects like diet, exercise, sleep cycle, emotional life, and even your motivation to do the exercise.

Similarly, while evaluating a cryptocurrency, we need to consider many aspects to make sure the project is legit and is trying to solve a real-world problem.

Let’s go through them one by one.

Technical Analysis

Technical analysis is the study of the past price of an asset. It involves looking at the charts and understanding the patterns created by market cycles.

Let’s take Bitcoin’s last week’s price movement.

Source: CoinGecko

Those graphs create patterns, and they tend to correlate when seen from a larger perspective. While most of us won’t be able to understand the details behind those ups and downs, analysts and traders look at them very frequently to find patterns and make profits.

This strategy is not suitable for beginners as the crypto market can fluctuate.

Sentimental Analysis

You might have seen the Fear and Greed Index trending on Twitter. It shows the market sentiment and how investors feel about a particular asset.

Bitcoin’s market sentiment shows how likely it is that the price will go up or down in the future and how the community is feeling. You can sum this up by asking what the market is saying. Sentiment score keeps track of the community health and if people are talking good or bad things about the project on social media. We also need to know that the market sentiment is not long-term, can be manipulated, and is difficult to analyze.

Fundamental Analysis

Fundamental analysis, as the name suggests, is the study of the core ideas behind a project.

As I mentioned earlier, Uniswap’s code is open-source, and anyone can take a look and verify its authenticity. You can connect with the founder Hayden Adams and other developers of Uniswap.

You can join their Discord and dive into their community.

Source : Freepik

This is known as Fundamental Analysis, where an investor studies the core principles behind the project. We are not bothered by the daily fluctuations in the market but rather the entire use case.

If you believe in Bitcoin and its underlying value, you won’t have to bother if its price goes up or down. An investor does the fundamental analysis if they wish to invest in a project for an extended period, say 3–5 years or more.

Tokenomics

Tokenomics is the way a particular cryptocurrency would get distributed.

Tokenomics = Tokens + Economics

Uneven distribution may lead to a few wallets holding the majority of coins. That’s not a very healthy sign.

Bitcoin has a very simple tokenomics:

  • A fixed supply of 21 million
  • Even allocation
  • No VCs

Only the people who were curious enough to read the whitepaper, download the software, and use it firsthand for transfer, got to know the magic behind Bitcoin.

You didn’t have to be a genius to believe in Bitcoin; you just needed to be a believer in a truly decentralized currency not controlled by the government.

We can use many approaches to understand tokenomics, like reading the whitepaper or connecting with the founders to know the basic idea behind the project.

There are a few significant points to keep in mind while evaluating tokenomics:

  • Token allocation: Allocation is an allotment of tokens or equity that may be earned, purchased, or set aside for a particular investor, team, group, organization, or other related entity. It should be even, and the protocol should avoid a few whale wallets with more than 80% of tokens.
  • Token vesting: Vesting is when the allocated tokens are locked and can only be accessed after a fixed period, generally 3–4 years. This is usually done to make sure founders and early adopters don’t dump a large portion of their tokens in the market, which can cause a significant dip in price.
  • VC/Seed price: It’s essential to notice if VCs hold many portions. I agree that VCs can help take the project off the ground with early financing and critical advice, but if VCs own a majority portion of a project, it’s not a very healthy sign.
  • Token Utility: This might be the most crucial aspect of any token. What utility does it provide? What are the real-world use-cases? Does that problem exist?
  • Wallet distribution: How extensive is the wallet reach? Is it a token on Ethereum blockchain like Shiba Inu which can be sent using existing wallets like Metamask? Or is it a coin from a different blockchain like Solana, where users need to download a wallet other than Metamask, in this case Phantom.

Web3 is about permission-less and trustless protocols that give back the users control of their data. Community is the foundation on which any web3 protocol is being built. Early believers invest funds and contribute in the form of content and marketing. Bitcoin has a market cap of more than $700 billion with zero marketing budget. The community becomes the investors, advocates and marketers.

Community is everything in crypto. You can become a 10x better investor by learning to evaluate the community.

It’s not about the number of followers or how many unique wallets are connected with the product. You might be early, and that might be an opportunity. Here is a fantastic thread by Covduk on the importance of community in any crypto project.

Framework

There are many frameworks which can be used to evaluate the crypto projects out there. Please keep in mind that none of them would guarantee success. You have to do your research and trust your instincts.

We can try this simple 4 step framework which can give you a brief overview of the significant ideas working behind the crypto project.

Before investing in any project, we should ask these questions:

  1. Utility/USP: What is the unique problem the project is targeting? Does that problem exist? What are the alternatives in the market?
  2. Tokenomics: How does the distribution of tokens or coins take place? What is the max supply? How much share is for VCs, Founders, Insiders and the community?
  3. Community: How engaging and vibrant is the community?
  4. Founders: Who are the founders? What are their previous projects?

After understanding these four aspects in detail, it becomes pretty straightforward if the project is trying to solve a problem or not. And more importantly, does that problem need to be solved?

There is a lot of money being flown into crypto projects from all around the world. It’s a massive opportunity to build the next generation of open, secured, and decentralized internet.

If we play our cards right, we can create generational wealth in the coming few years. But remember, there is no free lunch in this world. Be ready to learn new things, and unlearn some old things which might not be very relevant in the future.

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Documenting DeFi projects, stories and data. Let’s build the future of finance.

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Kai Space

Documenting DeFi projects, stories and data. Let’s build the future of finance.

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