October 3, 2018 | Steven Buchko
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- A term commonly thrown around by mediocre investors to justify their shitcoin investment. 2. A nondescript attribute Redditors use to describe a cryptocurrency project they know nothing about.
Trader 1: Hey, have you guys seen Apollo?
Trader 2: Of course! The fundamentals of that bad boy are spot-on. I’m thinking of taking out a loan and going all in.
Trader 3: Are you kidding me? Those fundamentals are shit. I wouldn’t touch that thing with a ten-foot pole.
Trader 1: Apollo is my dog…
All jokes aside, researching and analyzing the fundamental characteristics of a cryptocurrency is key to building a strong portfolio. Technical and sentiment analyses are suitable for short-term plays, but if you’re investing in projects for the long haul, you need to make sure the fundamentals are rock solid.
But what the hell are “the fundamentals?” Ask ten different investors, and you’ll probably get ten different answers.
At its core, the fundamentals of a cryptocurrency are the attributes that stand the test of time, generally unaffected by market conditions or community sentiment. In this article, we break down some of the most important fundamental characteristics you should be researching when evaluating your next investment.
Think Like a Venture Capitalist
For the first time in history (at least in the U.S.) you have the opportunity to invest in early-stage startups without needing to be an accredited investor. Because when you think about it, that’s all that most cryptocurrencies are. They’re early stage, tech startups.
So, when looking for your next investment, why not emulate the groups that know startup investing best – venture capitalists. These moguls scrutinize their investments ad nauseam to ensure that they choose the ones that have the highest potential of reaching the moon, figuratively of course.
Venture capitalists eat, sleep, and breath fundamentals. And although they may prioritize different attributes during the evaluation process, the following fundamentals are reasonably consistent across investors when examining startups, cryptocurrency or otherwise.
Problem and Scope
One of the first things you should figure out when researching a cryptocurrency is the problem that it’s solving. This information reveals some critical details about your potential investment.
First, it demonstrates that the team can communicate succinctly and effectively. Be wary of lengthy, complex problem statements stuffed to the brim with marketing buzzwords. This lack of clarity is often a telltale sign of a poorly functioning team.
A rule of thumb: If you don’t know what problem the project solves within the first five minutes of research, you shouldn’t invest.
The project’s mission should be clear and show an understanding of the market.
- Bitcoin is an innovative payment network and a new kind of money.
- Ethereum is a decentralized platform for applications that run exactly as programmed without any chance of fraud, censorship or third-party interference.
- Monero is a digital currency that is secure, private, and untraceable.
- Wanchain aims to build a super financial market of digital assets. It is an infrastructure connecting different digital assets.
- Nebulas is a next generation public blockchain, aiming for a continuously improving ecosystem. What project isn’t continuously improving their ecosystem?
- SmartCash is a community governance, cooperation & growth focused blockchain based currency & a decentralized economy. So, like every other blockchain out there.
- Kin is a decentralized ecosystem of digital services for daily life. Couldn’t get more specific?
The Nebulas problem statement doesn’t clearly state what the project actually does.
Additionally, understanding the problem helps you to measure market size. Some teams will flat-out tell you how big the market is, either on their website or in their white paper. But, most of the time, you’ll have to do some calculations and guesswork.
Market size is an essential determinant of how profitable your return on investment could be. A project like OmiseGo, for instance, that’s targeting the entire financial system, will net higher returns (if successful) than something such as FunFair which focuses on just online gambling.
The financial services market dwarfs that of online gambling.
The difference in market size doesn’t mean that you should invest in one over the other, but you should keep it in mind as you analyze your risk versus reward.
Will Blockchain Help?
Finally, once you know the problem, you can quickly conclude whether implementing a blockchain will help. Remember, blockchains excel at eliminating intermediaries, reducing the need for trust, and increasing transparency in transactions. They are not necessarily faster than centralized systems and are usually more complicated.
If one of the previous attributes don’t solve the stated problem, it may not be a good investment.
Of course, there are exceptions to this rule. 0x and other similar projects are protocols that improve underlying blockchain infrastructure. They facilitate the ability of other projects to more efficiently utilize blockchain tech.
Team, Advisors, and Partnerships
After the problem that a cryptocurrency solves, the team building the crypto is the next most important fundamental to check out. Some investors even argue that the team is actually the most important thing.
The team creating the cryptocurrency should have experience not only in blockchain but, more importantly, in the industry that they’re entering. Blockchain technology is relatively new, so finding a team with blockchain filled resumes is rare. In place of blockchain experience, you can look for past employment involving cryptography or cybersecurity.
VeChain serves as a great example of a team that you want. VeChain is a dapp platform and enterprise blockchain solution for supply chains, specifically luxury goods. Sunny Lu, co-founder and CEO, was previously the CIO of Louis Vuitton China, while Jie Zhang, co-founder and CFO, specialized in IT assurance at PwC and Deloitte.
The VeChain team has ample experience working with luxury goods, supply chains, and technology services.
They clearly know the luxury goods industry better than most other people, and have the chops to maintain an enterprise-level software solution.
Seasoned advisors can fill any gap that a team has in their experience. The support of respectable technologists and businesspeople also brings a level of credibility to a project.
Do you think Gavin Andresen or Vitalik Buterin would ruin their reputation by advising poor projects? Most likely not.
Yes, I’m an advisor of wetrust. No, I do not have tokens. No, my interest in decentralized insurance should NOT be construed….
— Vitalik Non-giver of Ether (@VitalikButerin) October 8, 2017
Like advisors, a project with reputable partners should stay on your radar. Partnerships may take the form of strategic investments, collaborations, or even acquisitions.
Caution: Always do your due diligence on partnerships. Many crypto projects are reasonably loose with who they list as a “partner.” They may include service providers, potential partners, or even flat out lie about who they’re working with.
A team may have the greatest cryptocurrency in the world, but if no one’s using it, it’s worthless. Because many blockchain projects are pre-product, discovering one with significant traction may be difficult. If you do find one with a working product and actual customer base, that’s a great sign. It shows that the team has already made it further than 90 percent of other startups.
In lieu of real traction, you can look for projects that at least have customers using a beta or product on a testnet.
Some blockchain projects target enterprise corporations. For those, try to find the companies with which they already have deals in place.
After evaluating the product, team, and market, the next question you should ask yourself is, “what is the purpose of the token in this ecosystem?” Ideally, you want a token that becomes more valuable as the platform gains adoption. It may seem obvious, but there are projects out there in which the underlying currency is seemingly unnecessary. *cough* Ripple *cough*
You should also be aware of other token information such as:
- Inflationary vs. deflationary. A deflationary currency will experience more upward price pressure than an inflationary one. When a coin is inflationary, its supply continuously increases which typically hurts the price.
- Distribution. The larger the distribution of coins, the better. When a small number of people hold the majority of coins, there’s a power imbalance. There’s a constant risk of the price plummeting if the few on top ever decide to sell.
- Consensus mechanism. Some consensus mechanisms offer what are effectively dividends for token holders. NEO gives you GAS, VeChain produces THOR, and even some Delegated Proof-of-Stake (DPoS) cryptos, like Ark, bring you consistent returns depending on which delegate you vote for.
- Token burns. Last but not least, projects that consistently burn tokens help to reduce the supply which, in turn, pushes the price up. Binance and Factom both implement burning in their token economic models.
#Binance 4th Quarter Token Burnhttps://t.co/2NyGN0osAM pic.twitter.com/nclBSCrn8a
— Binance (@binance) July 17, 2018
Although not surefire by any means, one way to get a gauge on the potential valuation of your coin is to look at its competitors. Competitors exist both in the blockchain space and in traditional industries.
When looking within blockchain, compare the market caps of similar functioning tokens to see if your potential investment is undervalued.
Do not compare prices. A difference in supply could give two coins vastly different prices while they still have the same valuation (market cap).
Let’s do some math on Huobi Token, a cryptocurrency for the Huobi exchange. Right now, the market cap of the coin is about $180 million. This valuation is significantly lower than KuCoin Shares ($290 million) and Binance Coin ($1.5 billion), two other exchange tokens.
At first glance, it looks as if Huobi Token, and maybe even KuCoin Shares, are undervalued. Because the use of these tokens directly correlates to trading volume, we should check out those figures as well. Here are the 24-hour trading volumes for each exchange:
- Huobi: $1.1 billion
- KuCoin: $37 million
- Binance: $2 billion
As you can see, Huobi’s trading volume is a little over half of Binance’s, yet the market cap of its token is just over one-tenth. Additionally, the Huobi trading volume is significantly higher than that of KuCoin, yet its market cap is less.
With results like this, Huobi Token is worth further research as it may be undervalued.
You should never act on any of these fundamentals alone. Instead, use them in combination to paint a holistic picture of an entire project.
Another strategy to put a value on your blockchain investment is to compare it to the non-blockchain equivalent. Let’s look at file storage for example.
Siacoin is the largest cryptocurrency tackling file storage right now with a market cap of just over $450 million. Dropbox serves the same function in the non-blockchain world. As of March 2018, Dropbox has an $11 billion market cap.
With Siacoin meant to disrupt the file storage industry and replace Dropbox, you could argue that it’s massively undervalued at its current price.
The above list of fundamental attributes isn’t exhaustive, and you may find in your own experience that there are more important things to base your investment decisions on. For instance, some traders rely on social media following and community size, while others believe GitHub activity is the most critical attribute to consider.
You need to figure out which attributes are most valuable for your trading strategy and invest accordingly. An established set of fundamental criteria will help you keep your emotions and biases out of your investments.
You should continuously evaluate the fundamentals of the projects in which you’ve invested. Team members come and go, roadmaps change, and launches make or break cryptocurrencies. The only way to stay on top of the rapidly evolving industry is to immerse yourself in it.
Join the Telegram groups of your investments. Follow them on Twitter. Browse cryptocurrency subreddits when you go to the bathroom. And, of course, get your daily dose of CoinCentral articles.
The more you research and get comfortable reading white papers, the better investor you’ll become. There’s no substitute for time, but soon enough, you’ll have no problem weeding out the gems from the bullshit.
Editor’s note: The Crypto lab is focused on providing thorough, well researched, and relevant information such as you see above. To learn more about the Crypto Lab, click here.
This post first appeared at Coincentral.com.
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