Are you looking to invest in a crypto project? Maybe a friend made a recommendation or you heard about a new project online?
You have likely heard, it's very important to Do Your Own Research (DYOR), but what does that exactly mean? How do you get started and what does it involve?
To help answer these questions and more, this article outlines a straightforward sequence of steps to help you down this road.
Your approach and mindset are key when performing research and while it’s really easy to qualify a project, a much better (and contrarian) approach would be to look at potential investments with an eye to disqualify them.
If the crypto project ticks all the right boxes and you find it difficult to disqualify it, chances are you have stumbled upon a decent project.
With this in mind, let’s get into the sequence of steps to evaluate a cryptocurrency project.
Step 1: Check the Market Listing
The first step is to look up the project on a cryptocurrency aggregator. The two largest cryptocurrency aggregators are CoinMarketCap and Coingecko. CMC is the most well-known while CoinGecko is known to more smaller-cap projects.
These sites provide a high-level overview of the project: trading history, crypto ranking, a brief description of the project as well as the primary links to the project website and the project’s social media links.
The project ranking provides a quick assessment of where the project ranks when compared to all other cryptocurrencies. There are well over 10,000 different cryptocurrencies actively traded and the ranking (which is determined by the project’s market capitalization) is a good initial indicator of where the project currently stands.
Depending on your investment style and preferences, you may only be interested in the top 100 ranked projects, which generally offer the least risk. However, if you are looking for those lesser-known ‘gems’ with massive growth potential, then you will likely want to be looking for those projects ranking in the 1,000s and above. Projects ranked 5,000s and higher are generally considered highly risky projects and in most cases should be avoided.
The project ranking is determined by the Market Cap and it is calculated by multiplying the current price of the coin/token with the total number of coins/tokens in circulation. In general, the higher the value of the market cap (the higher the ranking) the less volatile and safer the investment (relatively speaking of course).
Taking a quick look at the daily, weekly, monthly and yearly trading history will provide a high-level overview of the price and performance of the project, trends and also highlight any potential issues.
Trading Volume & Liquidity
The trading volume is how much is bought and sold over a period of time and is a very important metric. Liquidity is a measure of how easily a crypto asset can be bought or sold and this is important as it will allow you to buy and sell when you want, especially when considering low-volume projects where you may not be able to sell out when you want.
A low trading volume of a medium-cap project can also be an indicator of a project which has been abandoned, lacks a real-world use case, or small community and something to watch out for.
Circulating Supply vs Total Supply
It is also important to distinguish between the circulating supply and total supply of a project. The circulating supply is the number of coins/tokens which are in actual circulation while the total supply is a fixed value of the total number of coins/tokens that can ever exist.
Bitcoin offers a good reference point when considering the circulating supply and total supply of a project. For Bitcoin, there are only 21 million in total supply while there are about 19 million currently in circulation.
When compared to a project like XRP, which has a total supply of 100 billion and a circulating supply of around 47 billion, the scarcity of Bitcoin coins can easily be seen (thus the higher value for one Bitcoin). Also, in cases where the total supply is of many magnitudes larger, a large influx in the circulating supply can quickly debase the price.
While projects which are traded at less than a penny may seem like a good opportunity at first glance, the total supply and circulating supply need to be taken into consideration.
Going back to Bitcoin as an example, with only 21 million in total supply, it has a much lower total supply than many other cryptocurrencies. Using XRP as a comparative example, it has a total supply of 100 billion and a trading price of less than $1.
It’s important to realize that low-priced cryptocurrencies have the psychological effect of seeming like a potentially good deal, but this can only be determined after taking into account the circulating and total supply.
Be wary of projects which an extremely large total supply, which in turn results in a very low market price. Take a look at these up-to-date price statistics for cryptocurrencies if you would like further information.
Step 2: Visit the Project Website
If the initial review of the project details on the cryptocurrency aggregator site looks positive, then the next step would be to check out the project website.
Visiting a project’s official website is a must!
There is no excuse for a poorly developed website. Today it is very easy and relatively inexpensive to develop a clean and functional website. The project website should be well put together, functional and openly share details about the project, the people behind it, the roadmap and the investors (if applicable).
If the website is of poor quality, has spelling mistakes, is reluctant to disclose to the team members or even worse is a copy-and-paste of a prior fork, then these are all cause for concern and should be avoided.
The Team (developers, executives, partners, advisors)
For most projects, especially newer projects it is the team and developers involved in the project who are the most valuable assets. It’s the credibility and experience of the team behind the project which will have a direct result in the success or failure of the project. It’s for this reason, I personally am reluctant to move forward on projects whose team is not openly disclosed.
When assessing the team, determine the prior experience in the market and prior projects. Is this their first project or do they have a solid history of developing successful projects in this market?
Unfortunately, many smaller projects have been known to fake their team (using AI-generated photos), so it isn’t enough to take at ‘face’ value what the website says. If LinkedIn of other social profiles of the team is provided, it’s always prudent to follow up and verify their authenticity.
When assessing the team, it’s also important to take into account the leadership (executives). Projects with partnerships with well-known firms are also a good sign, but as with most information on the website, verify where possible.
The Road Map & Vision
As an investor, you are looking into the future potential for the project and the road map and vision are also critical components to the assessment.
A solid project will have a strong and well-defined vision with a roadmap and dates attached providing details for the development at each stage. It goes without saying, without a clear vision and roadmap, the future success of the project is in doubt.
Does the project already have investors and if so, who are they? Projects which have already been invested in by well-known investment firms are an excellent sign. These firms often specialize in specific niche markets and if they have already invested, chances are they have also done their due diligence and believe in the project.
Step 3: Check Social Media Profiles
If everything looks good at this point, the next step is to check the social media profiles. This step will take a bit more time to assess.
The first social media site to visit is the project's Twitter account. Twitter is a quick method to determine how socially active the project is and the most recent tweets. It's also good to note the interaction within the tweets. The number of Twitter followers is another important metric to be aware of.
Telegram / Discord
Telegram and Discord are chat groups that can offer even greater insight into the project, the team and the community. The follower count is a good indicator to look for. Within chat groups, take some time to read through the posts and get a feel for the type of people interested and involved. Are their questions being answered? Groups that overly engage in psychological tactics such as inducing FOMO should be considered red flags.
One of my favorite sites is Reddit. Oftentimes Reddit will have non-project sponsored groups and or discussion subreddits about the project which are not under the direct control of the project. With the upvoting system employed by Reddit, it is a great source for ‘street knowledge’ which may not be otherwise publically available.
Things to look for on Reddit include, how active is the community? How many followers are on the subreddit? Does the team offer AMAs (ask me anything)? Is the team helpful in sharing information about the project?
If the coin has potential, there is almost always a Reddit discussion about it. If Reddit isn’t yet talking about it, you are either really early to the party or it's yet another potential red flag.
Step 4: Assess the Community
It’s likely been said many times and worth saying again — No community, no future. It is the community supporting the project which makes it successful!
It can’t be underestimated the importance of the community. If you are familiar with either Doge or Shibu, it was the community that brought these projects to great heights. The enthusiasm and size of the community play a large role in the initial and continued success of the project.
Look for cryptocurrencies with strong, active communities. This is a good sign that there is genuine interest and belief in the project. Again, it’s worth noting that Reddit is a great place to start researching the community and gaining ‘street knowledge’ not otherwise available anywhere else.
Step 5: Read the White Paper
A white paper is a document created by a crypto project that provides investors technical information about the project, including the concept, the roadmap as well as how the project plans to grow and succeed.
A project’s white paper can provide insight into the inner workings of the project. Although many white papers may be highly technical, it is an important data point for assessing the quality of the project and the team behind it.
If there is no White Paper, generally this is seen as a red flag. Also, White Papers with spelling mistakes, unnecessary technicalities or lacking basic grammar and punctuation are also red flags.
Step 6: Understand the Utility & Use Case
For the long-term viability of a project, it needs to have a well-defined and clear use case. Does the project solve an important problem? If you are looking to invest in this project for the long term, then the answer needs to be a definitive YES.
A project's success is directly related to something which its users will need (or want). While gaming and metaverse projects may not at first glance solve an important problem, they do offer something people want. No matter the niche or project, it must be able to solve an important problem (or need).
When assessing the utility or use case of a project, it’s important to look at both the current demand and potential future demand. Does the potential future demand include worldwide adoption or is it only local? If you are not able to determine the reasons or motivations for significant future demand, then then it’s likely not a project you will want to hold for the long term.
Step 7: Scam Checks
Unfortunately, there are many scams within crypto and these scams are becoming increasingly more sophisticated, such as malicious contracts and rug pulls which are very difficult to detect for the average investor.
To help protect against these potential scams as well as provide additional (technical) analysis of the project, there are many free online tools that can help.
Some of the tools I use include:
Provides token information, honeypot check, liquidity check and audit information. Also uses data collected from BSCheck.eu, TokenSniffer.com & StaySafu.org → Scamsniper.net
Provides overall risk assessment, dev wallet information, token owner and top holder information → BSCheck.eu
Offers overall assessment of smart contracts and identifies potential rugs. Works for BSC, FTM and POLY contracts.→ RugDoc.io
Offers overall assessment of smart contracts for ETH contracts.→ Tokensniffer.com
Offers overall assessment of smart contracts → StaySafu.org
This article offers a generic 7-step process for evaluating any cryptocurrency and offers a starting point for those looking to DYOR. However, it needs to be noted that specific niche markets within the crypto space will require slightly different and more specialized assessment approaches, as would be the case in gaming or DeFi projects.
Nevertheless, it’s always good practice to have a standardized approach for evaluating cryptos and your approach can be adjusted and improved over time. Having a standardized approach will help to avoid emotional buys and help you to become a better analytically based investor.
While every investor is looking to get in early on the next ‘Bitcoin’, what is more important, is making sure you buy into projects which are solid (if you are planning to hold for the long term) so that you can leverage the success of the project and its growth over time.
There is no shortage of new and interesting projects and with the many new exciting projects being developed, there will continue to be many projects with tremendous growth potential.
Most importantly, the skills necessary to be able to assess and evaluate a cryptocurrency are skills that need to be honed and practiced. If you are looking to spend any time in the crypto space, this is likely one of the greatest skills you can develop. If you do well with this, it may very well turn into a highly lucrative and very profitable skill set.