Evaluating a Project
We would like to reiterate that we are not recommending that you invest any funds into cryptocurrencies. However, if you've already decided independently that you're going to invest money into crypto, the least we can do is try to teach you the best ways to avoid making bad investment decisions.
Many people are quickly persuaded to invest in a specific cryptoasset on the spur of the moment, because of a flashy advertisement, or because someone that they trust says that it will be "the next Bitcoin." This is a terrible approach to investing your money. If you're the type of person who goes into a restaurant and compares the price of different entrees on the menu, being aware that your choice will affect the dinner bill by a few dollars, then why would you EVER spontaneously invest hundreds or thousands of dollars into a project that may not even have a working product? And yet, this happens all the time. At some point, the crypto markets will have a big shakeup and a flight to quality (the 2018 crash was not that shakeup). When that happens, unsustainable or technically problematic projects will undergo large-scale devaluations, and only a relatively small number of crypto projects with actual real-world impact will maintain their trading value. Unless you're the sort of person who is comfortable with going to a casino and throwing significant sums of money on the roulette table, you should be very concerned with preservation of capital. The first rule of preservation of capital is to understand what you're investing in. Sadly, too many people are throwing money at weak cryptoasset projects with no real knowledge of how the project works, and whether or not it fills a basic need. Does your project solve a significant problem, or is it just looking for a problem to solve?
Metrics for Analyzing a Cryptoasset Project
The Technology: If the project has a whitepaper, read it. If you don't understand it, read it twice more. If you still don't understand it, at least you've probably learned some things, and at the very least, you probably have a better idea of what the project is all about than you did before going through the whitepaper.
The Vision: Does the project fill a need? Is this a need that couldn't be just as easily filled without blockchain? If the same problem could be solved by using a database instead of blockchain technology, then there may be no need for the project to exist.
The Competition: Is the project revolutionary or a first mover in its space, or is it simply copying a similar crypto project? The first mover will always have an advantage, although in some cases, superior technology can overcome that advantage.
The Project: Is the product/blockchain currently functional? If so, does it work well? If it isn't functional, when is it expected to be ready?
The Team: Who are the developers? Who are the advisors? What are their pedigrees? Can you see real links to their profiles on sites such as LinkedIn, and are you confident that these are real people participating in a real project, or just a bunch of random photos which have been posted to make the project look legitimate? How do they collaborate and move development forward? Is there a foundation or oversight group that is separate from the development group, and if so, how does that relationship function?
The History: How did the project get started? Was it a fork or clone of a different crypto? If so, what makes it different/better? Has the project met past goals and timelines on time and according to community expectations?
The Present: How do original founders/developers/advisors influence the project? What are developers working on at the present time?
The Future: Does the project have a defined roadmap? Are the goals attainable? Are the time frames reasonable? Is there a chance that goals might not be met?
The Financial Structure: Did the project have an ICO? What about pre-sales? Were any coins pre-mined? Do the developers hold coins in escrow that originated at the project's inception? Is there a foundation that defines and controls how funds are collected/allocated/spent? Was venture capital involved? Were there any institutional investments? Does the project rely wholly or partially on donations from the community?
The Marketing Approach: Does the project have a specific marketing team? Is it an in-house team, or a hired PR firm? What social media channels are utilized? What kind of advertising budget is the marketing team working with? What are the specific educational goals of the marketing campaigns that are in place? Have they been effective so far?
The Investors: Is investment open to all investors, or are there geographical restrictions? Are there any restrictions based on KYC regulations, or can people invest anonymously? Does the project have functional paper/desktop/mobile wallets for off-exchange storage?
The Environment: How might future regulatory oversight affect the project, either with respect to regulations affecting cryptoassets in general, or with respect to regulations that could affect specific aspects of this project?
The Potential: What kind of growth potential might this project have, based upon factors such as current price, current coin/token supply, inflation, liquidity, and ease of trading?
Analyzing Your Research
Once you've analyzed the answers to all of the questions above, you need to make a risk assessment of the project. Is this, insofar as crypto projects go, a relatively low risk, medium risk, or high risk? A healthy portfolio will probably have a mix of all three types of projects. There is probably a high chance that a large number of projects will catch your eye. You shouldn't invest in all of them. Unless you have no other job, and can "work" full-time at keeping up with cryptoasset research, we recommend that you hold no more than five to a dozen different types of cryptoassets at any one time. If you have any more than that, you probably don't have time to properly stay on top of research and on-going evaluation of your assets. Every portfolio should be re-evaluated on a regular basis, perhaps once every month to two months.
Don't allow yourself to become overly optimistic. Blockchain will change the world for the better, but we strongly believe that at least ninety-nine percent of crypto projects will probably fail in the long term. The project (or projects) that will become the dominant global cryptocurrency in the future may not even been conceived yet. The problem with looking at the world through rose-coloured glasses is that every red flag just looks like a flag.
We presume that all of your funds will not be invested into cryptoassets. That would be very risky. Just as you should have a diverse crypto portfolio, you should also have a diverse financial portfolio. Consider what portion of assets you should keep in property, real estate, traditional stocks and bonds, precious metals, treasury bills, and of course, in a savings account. We're not suggesting that you need to invest in all of these traditional financial instruments, but we do recommend some diversification. Your investment approach should be based upon your income, your age, and your risk tolerance. At a minimum, always keep enough in a savings account to cover food, housing, and other basic necessities for at least three to four months, in case you lose your job. The crypto markets are known for their gut-wrenching corrections, and when those happen, you don't want to be forced to sell at a loss simply to pay for groceries. A market correction can last much longer than you expect, even if it doesn't make sense. Be prepared for the worst. Remember that the markets can remain irrational longer than you can remain solvent.