In this day and age, we use online and offline research to shop for items as monumental as houses or as minor as a haircut; doing research is part of being a savvy consumer. But doing your research on cryptocurrency, especially for newcomers, can feel a little more daunting than researching a new restaurant or shampoo. Although some websites have started sharing basic coin ratings to help consumers, we’re still years away from reliable Consumer Reports or “the Yelp” for cryptos.
It may be tempting to skip your research and buy the most popular cryptos that you’ve heard of–after all, if people are talking about them, then they must be good, right? Maybe your friend with a history of making good buying decisions has gotten into a certain token. Or perhaps you’re struck by a case of FOMO when an affordable coin’s price begins to climb.
But while popularity, personal references, or valuation changes are factors to consider, they’re no replacement for comprehensive research. Because the unfortunate fact is that like startups in any other sector, plenty of cryptocurrencies fail. TechCrunch estimates that over 1,000 projects failed within the first half of 2018. Projects fail thanks to factors as trivial as lousy timing or as malevolent as white collar crime “exit scams.”
But that shouldn’t scare you out of the blockchain and cryptocurrency industry altogether! Fundamentally, blockchain and cryptocurrency are powerful pieces of technology. However, within both of these spaces, it’s essential to Do Your Own Research (DYOR) and understand your risk tolerance–research can’t eliminate risk, but it can reduce it.
While every crypto-user’s specific research needs may differ, here are five basic metrics that many crypto researchers incorporate into their research process:
Company History and Leadership
Expertise, background, and reputation matter, this is why it is best for individuals with relevant experience to be at the helm of a project. Does the project you’re researching propose a blockchain solution to utility bill payments? If so, its staff and leadership had better feature plenty of expertise in cryptocurrency, utilities, and payments technology.
While good ideas can come from unexpected places, a team is lower-risk when it’s supported by an expert/leader/professional in its target industry. And don’t forget to check that the staff listed on the project’s website includes real people who contribute to the project. One crypto scam was exposed when people realized website photos of its graphic designer, “Kevin Belanger,” were in fact, pictures of actor Ryan Gosling.
Similar to the metrics in the world economy, a token’s economic model (tokenomics) can provide you with a good idea of the current well-being, as well as a snapshot of the future, of the project based off of its economic structure and history. This can give you key insights into the projects longevity and why/when it is likely to increase or decrease in value.
When analyzing the token economics of a project, it is important to ask; what causes your token to token keep, increase, or decrease its value over time? Do the creators intend to fuel an industry-specific platform using the token–and if so, do members of that industry seem likely to use the platform? Does the token have feasible use-cases?
Tokenomics is an intricate area of a token, but it’s also one of the key elements that play a crucial role in creating a successful project. That being said, researching a project’s token economy should be a part of your research that is never skipped or taken lightly.
Understanding your token’s supply and demand doesn’t just involve understanding its intended industry and platform, but how token volume will fluctuate and circulate as well. Remember that scarcity creates demand, which means your tokens’ value could change as the overall market supply grows or shrinks. How many tokens exist, what mechanisms will the project use to distribute them, and who will get what share? Is the token supply finite or is token generation possible? Will later token distributions or burns significantly boost or dilute the value of existing tokens? And remember, active circulation is essential to maintaining token value–are people buying and selling your token? While high transaction volume can be a good sign, watch out for speculation and “pump and dump” schemes–utility tokens are meant to be used on a platform, not rapidly bought and sold as speculative tools.
No token is risk-free–but some are much riskier than others. A clear-eyed analysis of a project’s risk and your tolerance level for those risks is essential. Is the project designed to enter an industry or region where significant regulatory crackdowns are on the horizon? Is it a project intended for adoption in a space where crypto is less familiar? Is the leadership team less experienced than you’d like? Beyond marketing hype, do they have a clear-eyed assessment of what their project needs to achieve to be successful? Does the project combine an already volatile market (cryptocurrency) with an industry also known for volatility? Risk doesn’t necessarily disqualify a project, but understanding risk can help you gauge your appropriate level of financial involvement.
Does your project have competitors? If the answer is yes, that doesn’t mean the project is doomed. What does matter is that your researched project has concrete qualities that give it an edge over its competitors. Similar to how Uber used a ridesharing smartphone app to provide itself with an “edge” over the traditional taxi industry; better tech, better leadership, unique ideas, and proprietary technology can all help crypto companies overcome their competitors.
These five research metrics–company history and leadership, tokenomics, token supply, risk profile, and competition–form a solid foundation for crypto research–but they’re merely a starting point, not a comprehensive list of every metric you may wind up needing to research. Security, technical accuracy, and professional partnerships are a few other essential areas that require investigation. It may sound like a slog, but for a newcomer excited to learn about the booming world of blockchain, approaching research with an open mind and an excitement to learn can create satisfying intellectual (and financial) rewards.