The contents of this story DO NOT represent the views of HackerNoon and are meant as information only from the lens of the independent contributor. Please DYOR before investing
Right now, we are living through not the most fun stage of the crypto market. But sooner or later, the bearish market will end, and we will see long and green weekly candles again. In the meantime, I'll share with you the principles of how to choose tokens for investments.
How to Choose Tokens for Investments: Idea
The first thing to look at is the uniqueness and usefulness of the project. For example, another wallet for $ETH is not much of an idea in 2022. And a protocol that allows you to speculate a synthetic asset on a blue-chip NFT at floor price is an exciting idea. Or an EVM protocol for a blockchain that is not EVM compliant - not new, but a vital thing for L1 blockchains.
It takes experience and insight to analyze a project idea well. The better you understand the crypto industry and blockchain technology, the clearer you will understand what is needed for the crypto market. And therefore, it is easier to choose tokens for investments.
How to Choose Tokens for Investments: Community
A strong community is a key to a project's price stability. A strong community contributes to a project's PR and shilling. These people will hold tokens no matter what. They will defend the project when someone writes negative things about it on the web. A good (or bad) example is the Terra Luna community - its community was huge and fanatical.
How to analyze the community of the crypto project:
- Check the activity on Discord
- Check the project's Twitter using analysis services
- Check the project's site in Similarweb for traffic volume
- Analyze news background on YouTube
Checking these nuances will help you find great crypto projects for investing in.
How to Choose Tokens for Investments: Foundations
Before buying a token, analyze the funds invested in the project. The future of the project depends on the quality of the funds. The advantages of quality foundations are:
- They fund the prospective crypto projects
- They help find the right people
- They develop the project, help with marketing, coding, legal, etc.
To analyze foundations, look for information about investments on the foundations' websites.
How to Choose Tokens for Investments: Developers
It is essential to understand what team will implement the project, where they come from, whether they have crypto experience, and what projects they previously participated in.
What you should pay attention to:
Whether the developers are public. In most cases, the anonymous crypto project team is a stop factor for investing.
The relevance of experience with the current project. If the team is going to do a protocol for loans and deposits, and they came from banking - that's an advantage.
What size the team is. If AAA game got together to do 10 people, that's a disadvantage. If 70-100 people - super.
The scale of the current project = the scale of the projects they have worked on. For example, the team wants to make a AAA game. And previously, they only made small mobile games. This is a negative factor.
Whether there is any experience in crypto.
To analyze the development team, find the developers' names on the project's official website, then look for information about the developers on LinkedIn.
How to Choose Tokens for Investments: Tokenomics
This is the stage you should spend the most time on. Algorithm of actions:
- Look at when the IDO was. The token will most likely be more volatile if IDO was recent, and the project may have high inflation in the first 1-2 years.
- Analyze the distribution of tokens. As many people must own tokens as possible, there should not be a large concentration of tokens in one hand. Convex Finance is an example of excellent tokenomics: ~75% of the whole supply is allocated for the community, ~3% for investors, ~10% for the team, and ~10% for tokens. If a team has 40% of tokens and seed and private round investors have 20-40% of tokens, it's a disadvantage, but not always. If most of the tokens are in capable hands, they can only contribute to value growth.
- Analyze the process of unlocking tokens. You have to understand that token unlocking is pressure from sellers. If there is a big unlock ahead, which will increase supply by 10-20%, that's a negative. Small unlocks in projects are desirable.
- Look at the CoinMarketCap indicator Fully Diluted Market Cap and understand whether the token price is overpriced or undervalued. For example, if some average P2E project is more expensive than Near or Polkadot - that's a negative because the token is overvalued. If L1 comes out with cool foundations, a team, and has capitalization with total supply at the top 80-120, then the project is, in theory, undervalued.
- Analyze annual inflation. For example, Cardano now has inflation of around 2%, which is good. And NYM's annual inflation for 2022 will be ~700%. To keep the token price at the same value, you must find buyers for the same large number of tokens.
- Look at the initial supply if the project has recently been listed. If it is small, there will be wild inflation ahead. Ideally, an excellent initial supply is around 10-15%+.
- Analyze token utility. Without utility, there is no point in token holding.
You should pay attention to these main things in tokenomics when choosing crypto for investing.
How to Choose Tokens for Investments: Other Features of the Project
Also, when choosing a token for investment, pay attention to:
- Whether there is staking or yield farming. Ideally, these features should be with the ability to locate the token to increase profitability.
- DAO voting. You need to understand that there are useless DAOs with nothing to decide. And there are DAOs like Curve, where they decide on yield and choose pairs for pools.
- Whether there is staking or yield farming with rewards, not in the form of a native token. For example, you could farm on AAVE and get rewards in Matic.
- The possibility of using a token as collateral. There can be many uses for tokens. The point is that the more utilities a token has, the more reasons to hold it, and the fewer sellers and more buyers.
- Whether there is a distribution of protocol returns among token holders.
- On which exchanges the token is listed. If the token can only be bought on small DEX and small CEX - that's a disadvantage. But if the token is traded on the top exchanges by volume: Binance, Uniswap, PancakeSwap, Coinbase, FTX, etc., that is an advantage. The easier it is to buy a token, the more people buy it.
This is a quick guide on how to choose tokens for investments. I hope it was helpful. I also recommend you to read: