Original compilation: 0x137
Original compilation: 0x137
This article is based on the views of Soundwise founder Natasha Che on his personal social media platform, and BlockBeats organizes and translates it as follows:
In today's encryption market, simply holding BTC and ETH may not bring you considerable returns. High-return investments often come from betting on unremarkable projects. Admittedly, finding these high-return investments is hard, but even so, crypto is more equal than tradFi. So with a solid approach, you can beat most players.
The following is my 5-step framework for selecting high-quality projects, which may help you get rid of the dependence of KOL and some "experts".
Note that if you had PTSD from previous crypto cycles thinking all altcoins would go to zero, you need to deal with that emotional baggage right away before it hurts you more. Compared to 4 years ago, the adoption rate of encryption technology in real use cases has increased by more than an order of magnitude, and there is no intention of stopping, if you can't keep up with it, you will be eliminated.
Still, crypto is an immature and extremely risky market. High yields come from investments that take the risk curve like early stage VCs, so you have to embrace the VC mentality: Most investments may not pay off, but some of them will pay you off if you make choices based on sound principles 10x or even 100x returns.
Below I will use my recent investment in Octopus Network (OCT) as a case to show and explain my screening steps. Of course, this does not constitute investment advice.
Step 1: Scouting
First of all, we need a series of "high potential" investment logic as the basis for screening the watch list. So how to find these logics? Two ways: top-down or bottom-up.
Top to bottom:
Identify the next likely high-growth area and look for projects in that area.
For example, I mentioned 3 growth themes earlier this year:
1. L1 and L2, because ordinary people have a huge demand for low-cost, high-speed public chains.
2. GameFi, as it is the next frontier in crypto to reach the masses.
3. Interoperability, because with various public chains, the demand for cross-chain communication will surge.
Once the growth themes are identified, we just need to find the "potential stock" projects that fit those themes. This is how I found OCT - when I was researching NEAR, OCT was listed on the home page of the NEAR website.
This caught my attention, a project that allows applications to easily and cheaply deploy their own blockchain and communicate with other chains. In my opinion, it fits both growth themes 1 and 3, with a very clear value proposition. If the team can realize their vision, the market demand for OCT will be huge.
Another "top-down" approach: look at the "ecosystem" or "projects" pages on the L1 website and find projects that fit the high-growth theme. Analytics sites like DefiLlama and DappRadar also list projects by chain, where you can get data about their growth track record, which will likely come in handy later.
bottom up:
This might be the easiest method of reconnaissance ever: When the market falls, find those projects that are still performing strongly, and investigate why. Add them to your watchlist if they fit your growth theme.
If you're under $10 million, you don't really have to be limited to the top 300 projects by market capitalization. Because even for tokens with weak liquidity and low market capitalization, the impact of your bid is relatively small, which is the retail advantage.
Twitter is another way of "bottom-up" scouting: By reading the replies under the big V, you will find that everyone likes to promote the projects they hold, for example, when I mentioned in the "Daily Notes" tweet After 3 items, the response received usually involves 10 unrelated tokens. If you see a new name in there, you can take a quick look at it.
Step 2: Investigate
Once you've perfected your own watchlist, it's time for further forensics: read project websites, docs, blogs; search for them on youtube, podcasts, reddit; join their Discord, and if it's a consumer project, you can Experience it for yourself.
All of this information is intended to help you answer 5 main questions:
1. Does the project address an important problem?
2. What is its token used for?
3. How attractive is it?
4. Does it have a moat mechanism?
5. Can the team deliver on its commitments?
In the case of OCT, the information content is not very rich, so I found the project's YouTube channel and watched all their videos. Their founders clearly have deep insight into the industry, are down to earth, and are humble.
After a round of information gathering on OCT, here are my first answers to the 5 questions above:
1. Does the project address an important problem?
Very important, it tries to solve two main bottlenecks of blockchain growth: scalability and interoperability.
2. What is its token used for?
It is used to verify node pledges to guarantee all application chains built on OCT. The more application chains built, the higher the demand for OCT Token.
3. How attractive is it?
not much. At the time of my initial research, only 1 application chain was deployed on OCT. But the team’s roadmap says they plan to launch 17 more Lisks in the third quarter of this year, although it’s not known if this will be successful.
4. Does it have a moat mechanism?
OCT has obvious strategic importance to the NEAR ecosystem. Once the application chain is launched, the switching cost for users is very high. The more application chains, the greater the network effect and economies of scale. Also, it has a similar proposition to Cosmos & Polkadot for developers and users, but cheaper. Therefore, if executed well enough, OCT will have a strong moat.
5. Can the team deliver on its commitments?
OCT has currently launched 1 application chain and an application incubator, and has also done a good job in executing the roadmap.
Step 3: Calculate
Now that you've answered the 5 main questions about the program, you now need to do some math to determine if the program's current cost of admission is appropriate. We can do this by looking up a project's market cap, fully diluted market cap, and token issuance schedule and distribution, and comparing them to competitors.
When I looked at the OCT, it had a fully allocated $300 million market cap and less than $100 million floating market cap. This is very small compared to competitors solving the same problem ($30 billion for DOT, $10 billion for ATOM).
Admittedly, OCT is still very new and therefore much less attractive. But even with that in mind, it seems cheap compared to the big room for growth (one reason could be that the project team is not based in the US and there's not much marketing to do).
Step 4: Rebuttal
Now that you've found a project that has potential and is cheap, it's time to play devil's advocate. Think about when your investment logic will go wrong, and what are the main risks?
For me, the biggest risk of using OCT is that its growth is at stake with Lisk's performance. Although the application chain launched this year can still be regarded as a new project by definition, the late stage of the bull market is not the best time to launch a new project. If market conditions deteriorate this year and Lisk fails to gain enough traction, OCT's momentum could die.
The second risk is related to NEAR. The actual usage of this chain is still very small compared to other L1s. Whether NEAR can reach the heights of the top public chains is still an open question. If it is still a 2-echelon public chain in the future, it will obviously not be beneficial to OCT, because it indirectly bets on NEAR.
Of course there are zillion other risks, but one thing I've noticed is this: all the risks I can think of will become more relevant as the project grows, but compared to OCT's $100 million market cap cap, it seems It doesn't matter that much.
Obviously, how much weight you give to each risk factor is a matter of judgment, and good judgment is a practiced art that takes time to build up.
Step 5: Put it all together
Let’s say you think the project is worth investing in after looking at the project’s fundamentals, valuation, risks, and consolidating all the information. Now you need to decide two things: how much to buy? and when to buy?
The first question depends on your assessment of the pros and cons of the opportunities and risks. A general rule of thumb for small early-stage projects like OCT is: they should only be 1-5% of the portfolio, if they succeed, they have a lot of upside; if they don't, it's not the end of the world.
Incidentally, this is also why early-stage small-cap stocks are a real advantage for retail investors. The liquidity of these projects is very low, if you are an institution with multi-billion dollar capital, it is almost impossible to allocate 1-5% of your funds to a project like OCT. So the crypto market is one of the rare places where retail investors can get ahead of the big players.
As for when to buy, we need to consider whether there are any short-term catalysts, or whether we can wait a little longer, since any investment has an opportunity cost. If you know technical analysis, it can obviously help too.
For OCT, I quickly identified its short-term catalysts: NEAR has seen strong price action over the previous month and has just launched a large incentive fund for ecosystem projects, which will make OCT and Its application chain benefits.
TL;DR: 5 steps to finding a crypto winner:
1. Scouting candidates (top-down and bottom-up)
2. Investigate fundamentals (5 main questions)
3. Calculate valuation (relative to attractiveness and competitiveness)
4. Counter logic (main risk)
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