How to choose the right cryptocurrency to invest in? Am I putting my money in a good token? Is the token that I choose for my portfolio a good choice of investment? These are some of the questions that haunt any user in the cryptocurrency market. Be it users who are new to the crypto world or experienced users who are left bereft of choice in this bear market, all users have these questions in common and we can even say that the answer to these questions is common as well.
When selecting a token to invest in, research has to be conducted both on-chain and off-chain. It is better to start with off-chain analytics as they form the fundamental core of any token.
Off-Chain Fundamentals
The fundamentals can be divided into two areas — About the tokens and About the project. Aside from L1 blockchain tokens which can also be classified as source tokens almost all tokens are issued by some project either a DeFi dApp or some gaming platform etc. Even if it is an L1 source token, it is better to take a look at the background of the chain.
About the project — There are several key factors to look out for when looking at a project. They are -
- When looking at a dApp/newly budding L1 blockchain it is very important to see who is backing the project. The VCs, founders and core team — what background and expertise do they have and what is their goal with this new project?
- Take a good look at their whitepaper to see the ideas and inspiration behind their project. Do your own research or check out experts’ research on specific areas online to see if the ideals and goals behind the project have the potential to make it big in the market or if it has demand among the community.
- Any good project has a sizable social community following. This community won’t just be made up of KOIs and airdrop hunters but actual developers and prospective users who are looking to make it big and profit from the founding of this project.
- Finally, take a look at their roadmap, see how they started out, how much they have accomplished and what is their attitude and response towards queries from the community. The way the team addresses questions from the community and works towards achieving its milestones will speak a great deal about their commitment towards their project and their credibility as the team behind the project.
About the tokens — Similar to paraments for the project, there are key factors to look out for when researching the tokens as well. They are
- Market Cap — What is the total market capitalisation of the token? How much was the market cap when the token was first listed for trading and What is its current market cap of the token?
- Supply — What’s the total number of tokens planned to be minted by the project/blockchain in its lifetime? How many tokens have been minted to date and What’s the demand for tokens in the market during the bull market and during the bear market? Any token that has shown resilience in some form and managed to retain a certain level of market activity during the bearish run are tokens which possess great value even if they performed relatively moderately during bull runs.
- Use cases — The use case of a token is determined by broader use case scenarios of the project which released these tokens. An L1 blockchain or a relatively well-known dApp with multiple use cases or a single high-level use-case scenario would guarantee that the tokens released by a project can be used elsewhere. As there are more scenarios to use these tokens, they will always retain a minimum level of market value. But the tokens and projects with limited use-cases aside from token use of trading would often collapse easily in a bear market or when the project takes a hit from market event-driven momentum. Such tokens will find it hard to reacquire their market cap and may go broke.
On-Chain Analytics
After determining the potential of a token from various fundamental oriented factors, it is time to verify the hypothesis by matching them against on-chain data. While on-chain data helps get better clarity on the accuracy of our analytics, there is one major challenge, to get on-chain data, a user has to run his own node in the blockchain network or be capable of reaching someone who owns a node in the network. By gaining access to a node in a blockchain network, we can gain complete access to all activity in the network be it related to a single dApp in the blockchain or the entire blockchain network’s ecosystem. Alternatively, you can also check out data from third-party on-chain data providers like crypto quant for analytics on various market and on-chain data. But, data available here might be limited to popular chains or tokens and blockchain networks they have tie-ups with. You may need to look out for other similar providers on your own in-case you choose to invest in a relatively new project or just look for data from node in the chain directly.
These are the three factors to look out for -
- HODL Status — HODL also known as Hold On for Dear Life shows the data of how tokens are stored and made use of. Among the tokens minted to date, how many are used for regular transactions, how many are owned by VCs, founders and whales and how many are used for trading purposes and how many tokens are owned by retail traders who have chosen to retain ownership of their tokens for a really long time.
- Token Activity Trends — This data will show the activity trend of both source tokens and other altcoins/stablecoins minted using the L1 blockchain. How are they traded in the DeFi market and how much are they used for actual use cases highlighted by their projects?
- NVT Ratio — Network Value to Transaction Ratio compares the market cap/market value of the project against the actual level of transaction activity taking place inside a particular L1 chain/project. A regularly high transaction volume is a sign of healthy user activity and when a large project has a consistent level of high volume activity it shows that the project has good demand among its targeted user base and general audience.
A comparison of these three factors will help in clearly interpreting the results from fundamental-oriented research data. A good token will reflect healthy scores on off-chain fundamental research and on-chain technical data. When the data from one side doesn’t match with the other, there is a cause for concern. More research needs to be done in areas where flags were raised to see if the project behind the token has a chance to stay in the market for the long run or if the project shows any signs of crumbling apart someday.
