How to dig deep into a crypto project?
Compilation: TechFlow Intern
Compilation: TechFlow Intern
Researching a project and building your own convictions is a critical step in the on-chain investor journey. Once you (1) can identify projects, (2) can research them, (3) understand hype levels/implied expectations, and (4) understand the macro context, you're a level above just looking for ideas on twitter.
I'm not going to explain how to research major currencies like BTC or ETH here.Your first step is to understand what your project does, you can go to the project's website, Twitter, Discord to find out (1) if this looks like a scam, (2) if anyone I know is following the project on Twitter, (3) it's a VC Supported or anonymous. You can use tools such as Coinmarketcap, Messari Research, Nansen, etc. to get an overview of the project and key KPI indicators. After reading it, you will be able to outline in a few sentences what the project does,and how it makes money(Taking GMX as an example, it can be summarized that it is a decentralized leveraged PERP exchange).
At this point, you can understand whether the project is at the protocol level (such as AAVE, MKR, DPX, GMX, SPELL) or at the layer/chain level (such as ETH, NEAR, AVAX, FTM). The research process for the two types is different, so we can start with chains - the caveat here is that chains tend to be "low risk", which has more VCs involved (still high risk), but Its market valuation is usually much higher. So it may have limited upside compared to earlier protocol-level investments (unless you join very early).
study a chain
Each chain can be thought of as its own "crypto-nation". They all differ in their attributes and transactions, and some sacrifice certain security measures to reduce transaction costs. I'm by no means an expert, and you don't need to be! Because while people are debating the merits of each of these cryptochains, you as an investor just need to see where it is used. Usage can be looked at in terms of number of transactions, total value locked (essentially an indicator of how much capital is being put to work on the chain) and the number of users on any given chain to see if people like to use it. Rather than arguing about who is the future "Ethereum killer", I prefer to just focus on what people like. The current situation is that institutional/whale-level DeFi mainly exists on ETH/Arbitrum, while protocol usage such as games exists on Avalanche.
To me, non-major chains should generally be viewed as short-to-medium-term trades, not long-term holdings. Why? Because there are over 100 different layer 1 chains competing for TVL and users, and most chains go through some "hype" cycles driven by "funding" or initiatives that incentivize use on chains (e.g. real high APY farming), so there was a massive influx of mercenary capital at the time. But that capital left again as the incentives dried up. A recent example is FTM, whose TVL skyrocketed on the hype of Andre/ve(3,3) incentives, as did the FTM token price. But after the hype cycle is over, TVL sinks. Please see below the hype cycle for Defi Llama's TVL and how FTM tokens are trading:
Token goes up → TVL goes up → Token goes up and vice versa.
If you want to make money on these "chains", you're really trying to front-run the hype cycle. So how do I research these things and find out which cycle is next to come?
A recent example is NEAR. All readers of my Whale Watching Primer will be able to see that smart money move by NEAR earlier this year. To research NEAR, you go through their website, learn more about it on Messari, and try to find some real or not-so-fake-looking posts on Twitter. More importantly, you will build the bridge yourself and use L1 to feel the user experience. High level is just another first layer using Proof-of-Stake, and it's going to change the world (I realize this is an oversimplification, but generally it doesn't matter if it's revolutionary or not). The network itself was launched in April 2020 (you can find this information on Messari).
You can tell by Dune Analytics' stats that the total assets bridged via NEAR's Rainbow Bridge never really had traction until late 2021 (when the smart money starts buying), and it recently bridged nearly $1.5 billion.
You can observe that the number of transactions is still growing well (still Dune Analytics statistics).
What triggered it all, and when should you be interested? As I mentioned in the overview of the chain, some incentive or grant program usually kickstarts an L1 hype cycle. In this example, NEAR is offering $800 million in grants in October 2021 in order to gain market share for DeFI.
You could see some smart money trading ahead of this announcement, but on-chain activity slowed down shortly thereafter, only picking up as recently as early 2022. It then raised $150 million from a group of cryptocurrency investment firms, including 3AC, Mechanism, Dragonfly, A16z, Jump, Alameda, and others.
I don't pay attention to the public chain, and the chain itself is difficult to value. But these L1 "hype cycles" are all the same. Take for example a chain with limited usage, it rolls out incentives to attract mercenary capital, the main fund invests, the price goes up, then after 6-12 months the hype may fade and move to another chain (this Might be different than NEAR, but that's just to illustrate how it usually flows). How do you know if the hype is dying down, or if the coin is going to underperform? I would look at the following 4 areas:
1. Smart money/whale movements (they start moving after the show ends);
2. TVL growth/decrease (when the incentives are exhausted, the TVL will start to decline);
3. Number of transactions/users (this is also true. The current situation is that the inflowing chain and outflowing capital are not balanced, so if you see the opposite situation, it may be that the period of profit is coming);
4. Observe supply distribution;
Therefore, TVL is still growing explosively now. At this stage of the cycle, it's still probably fine to be long the coin (if you're a full-time Degen, you should research the underlying protocols, which will move much more on NEAR than NEAR itself, but watch out for scams/scams ).
Distribution/dilution of supply is another critical thing to be aware of. Remember, these are just liquid markets for tokens, and the supply and demand for tokens is what causes prices to go up and prices to go down. At the point where you have a really crappy supply side structure, tokens are going to fall for a long time. This applies to both chains and protocols.
What is a "crappy" Supply-Side Structure Wizard anyway? Mainly look at two points:
Is there any deviation between the circulating market value and the diluted market value?
What does the unlocking schedule look like on vested tokens?
Case: Unique SRM
According to Coinmarketcap, SRM (the decentralized exchange on Solana) has only a $350 million float market cap, while FDV has a $27 billion float market cap. In other words, the ratio of FDV to circulation is 77 times. In layman's terms, this means that there is currently a large amount of funds being exercised, waiting to be sold to you! When will they sell off? Check out Messari for the "serving schedule".
Looking at the unlocking schedule for SRM, its circulating token supply will increase by 2.4x over the next 12 months, roughly 9% each month.
Given the mismatch between circulating market cap (which can be seen as USD demand for tokens today) and FDV, such a supply-side structure means that the token will face significant selling pressure. Since the unlocking phase of SRM began in September 2021, its token supply has increased by 6 times! Since the unlocking began, SRM has been just a model of decline.
Back to NEAR again. In order to become a more sophisticated investor in on-chain and on-chain protocols, you need to pay attention to these unlock schedules as they can have a significant impact on token prices. NEAR is much better structured, with a circulating market cap of $11B compared to FDV's $16B, and only increased its circulating supply by ~36% over the next 12 months.
Hopefully this gives you some high-level mental models to leverage when doing chain-level research. I personally do not pay attention to public chains, so public chain analysis is not my specialty. I tend to focus on protocols to find investment ideas (more upside, more risk).
study a protocol
It's more like my main business. Likewise, my introduction to whale watching and my introduction on Twitter will fill your "idea funnel" (the top of things to research). With thousands or even tens of thousands of projects in the world to research, how do you know if your tokens are worth something?
A key start is again getting to know via the website, discussion boards, using the product (if it's announced), reading real twitter posts, via Messari, etc. Your first goal is to be able to explain (1) what the project aims to do, (2) whether the project/product has a need or addressable market (3) what are the implied expectations, (4) what is it using, What is the competition in terms of valuation, hype, etc.
Again, I want to reiterate that the goal is to build your own beliefs, not someone else's. If you don't have confidence in an investment, when it drops 50% (which it almost certainly will), you need to have the confidence to stay invested or buy more of the investment at a cheaper price.I also tend to keep myself engaged by following projects that I'm interested in and are using or will be using, which often leads me into DeFi tokens.
Just start with what the project is - you need to understand its features, its roadmap, why people will use it, and how big is its target market. For example, I'm a big fan of Dopex because options themselves are a better way to hedge and gamble (instead of perps) and I think whales and retail investors will use it more over time (huge amount of perps = Lots of TAMs). Instead of being liquidated on the 30x leveraged ETH long-term, I can get leveraged upside risk with no liquidation risk by buying ETH call options (or using them when the Atlantics come out).
When observing an item, you cannot observe it in a vacuum. As part of the hard work, you need to map out a competitive landscape (my token vs other tokens) not only in terms of TVL/usage today but product differentiation, investor/advisor engagement, roadmap differentiation and community differences. A project with a cult community, low but growing TVL, and continuous development of new and innovative products will outperform a token with high TVL but no growth and limited innovation.
Most losers are stuck comparing their tokens only to the market cap of the next market leader. They love that comparison, but all protocols are hard to value, and you have to realize that token prices are driven by hype and storytelling a lot more than fundamentals. But at the same time, growing fundamentals also lead to hype and storytelling.
To hit a home run, I usually look for low starting valuations (typically $500-150M market cap), and I think they're building something special that can hit $1-2B. I don't work on plagiarized projects because if the project can be easily forked, then its competitive advantage is very, very low. "Build something special" can be subdivided into: (1) completely new concepts (e.g. Dopex's IRO+Atlantics, JPEG's NFT loan, SPELL's yield token loan at the start, BTRFLY's hidden hand) or Is (2) a better user experience or cutting out the middleman (like GMX).
Alright, I found a small scale project that I think builds something different than its peers, what's next?
Please go to the discussion board and ask some questions. Even if you ask a stupid question, the way the community and team approach your problem can tell you a lot. Information If they take defensive measures or block you, it's not a good community, and it's probably a sign that the product will break (or the product won't launch). If the token has a product, use it! Provide feedback to the team if you run into issues.
For protocol-level projects, I tend to just write a small page about what it does, which whales are investing, suggesting, which one of the whales, retail will use it, or both, the current Valuation, and what I think it might be, how its usage/TVL has changed over time, and what are the upcoming catalysts.
You can find whales participating in the project through Nansen or directly click on Debank. Also, the website usually states who else is advising on the project, and you'll even see some people overlap in various projects on discord.
Valuation is very, very difficult. Meme tokens without any functionality can reach a market cap of $1B-40B, while a key building block for DeFi like Curve/Convex is $3B-8B FDV. My personal best investments come from $100M buys and $800M-2B sells, so that's my recommended framework. Obviously, there are actually other ways, but if you want to get 10-20x over a 4-6 month period, a lower market cap might suit you (but obviously it can go to zero).
If the project's product has been launched and has mapped usage over time - you can usually find this information from the Dune Analytics page, or rely on it to build analytics for you. Take GMX for example, their stats page gives you everything you need to know about growth over time.
As for DeFi projects, it would also be good to delve into how the project makes money (how fees are withdrawn, is it recurring) and whether it is given back to token holders (in GMX's case 70% goes to GLP and the rest goes to GMX) .
If the product hasn’t launched yet, then you want to know the catalyst for their launch up front, as tokens usually have an “alpha burst” around the launch date. You can get this information by lurking in project conversations and find out which team members tend to leak alpha. In some cases you can also check a project's Github to see if they are working on something that is missing in the market. Then it boils down to (1) position sizing and (2) dollar cost averaging/buy points, this part will need to be written separately, but it's high level. To buy when the hype is low, you have to buy weeks or even a month before a major product release, or if the product is already out, DCA at a price you like or when the project explodes.
For the protocol, you also need to complete a supply distribution analysis/exercise similar to what I have done on SRM, and focus on the vesting of team tokens and observe how long the vesting period is. A long vesting period indicates that the team has hope of keeping building long-term, while an aggressive, short-term vesting means it may be a cash grab, their incentive is to raise prices in the short term (and still make money on that front), but in the long run would abandon the project.
This post is too long for email subscribers, so I'll post part two and dig a little deeper into the protocol research, but hopefully this gives you a good starting point. I would like to emphasize that you should keep the following points in mind:
1. Look for projects that are unique and difficult to replicate;
2. Projects supported by excellent teams and consultants;
3. The market value was low at the beginning, and there were very few CT scammers (projects);
4. Have a good supply-side token structure (projects);
5. Has an upcoming key catalyst or partnership that you discovered during project discussions;
6. Build your own beliefs instead of outsourcing it from CT scammers;
Original link
