This is the second part of my series: “How to analyze and evaluate Cryptocurrencies” You can check out part 1 here if you haven’t already.
Because of the massive hype surrounding blockchain and cryptocurrencies, Investors have a hard time, filtering information and seeing through all the noise. Comparing different projects to each other on a valid basis is not easy. This second part of my analysis framework, therefore, can be seen as an addition to part 1 and adds a second layer on top of it.
If you’re looking around for interviews and articles about this topic, you will most likely come across very similar frameworks to the one we discussed in part one. Background and Team, Vision and Product, Quality of the Whitepaper, or the simple question about the value proposition and problem-solving abilities of a project are critical factors for the success of a project.
However, I believe there is more we can do to make better decisions.
The great thing about blockchain projects is that most projects are open source, which means most of their code is public and many discussions are held in a very transparent way. The data we can gather through these channels should also enter our evaluation process. In this article, I will show you how I structure and analyze this data to determine the legitimacy and potential of a project.
Therefore I have developed a Framework which ads quantitative data on top of the qualitative factors from part one. By doing so, we are creating a holistic, new perspective on specific projects and cryptocurrencies. The starting point for this framework is 23 factors, which are broken down into six categories and rated on a scale from 1 to 3. The six categories are (very similar to part 1):
The Data is gathered from different sources like GitHub, CoinMarketCap, BitInfoCharts, whitepaper, social media. Here’s the full spreadsheet. I have listed every category below and to give you a better overview I added some examples to it.
Let’s take Ethereum as an example. Ethereum offers a comprehensive and clear White Paper (3). There are a few competitors (EOS, NEO, LISK, etc.) Many of them claim that they have solved the technical problems that Ethereum is currently struggling with.
On the other hand, this has yet to be proven, and until it is, Ethereum will continue to hold the most significant market share in its space and has set a powerful barrier to entry for new competitors (2). Current blocktime of the ethereum blockchain is 15 sec. (2). The Blockchain and its smart contracts are building the basis for many use cases and decentralized applications (3). The Ethereum roadmap offers a clear perspective on the projects future plans (3). Ethereum scores a 13 out of 15 points in the “product” category of our Framework.
Tip: At this point, it is important to mention, that different aspects should be rated differently among different categories of cryptocurrencies. Blocktime, for example, plays a significant role in projects that are building on scalability, where in other cases (coins which function as a store of value for example) it is not that important.
In this category OmiseGo scores a 14 out of 15 points. The online presence can be rated 3. With a Reddit score of 3 and a Telegram score of 2, OMG achieves a good average for a project of its size. Vitalik Buterin and Joseph Poon are on the advisory board (3), and many influencers talked about OmiseGo in a positive way (3)
Tip: As we have discussed in part 1, Twitter is a fascinating source for information if you can identify good and valid opinions among the tons of bullshit that is spread around. Because of the high number of bots and fake users, the network is not a source of reliable quantitative data. We will come back to this later on. The Reddit score is put into perspective (market cap), to not discriminate against smaller (younger) projects and ICOs.
In this category OmiseGo scores an 8 out of 9. The product is live, but the code isn’t public (2). Many merchants and customers are using the network in south-east Asia (3), the company established partnerships with 200 McDonald’s branches in the area (3).
Tip: 5000 transactions may seem like a very random number, but again, the concept of different standards depending on the use case of a project. Also, it is important to mention, that these numbers are moving targets, with a higher rate of adoption these benchmarks will have to change.
In this category, Bitshares would be rated 9/12. The developers behind the project are anonymous and cannot be identified (2). Github says there are 5.300 commits from 79 developers (3). Over the last month, there were 80 commits by 23 developers (3). However, top developers are responsible for nearly 50% of all commits (1).
Tip: A rating based on the distribution of contribution to the project might be the most controversial point of this framework. Although it might not be inevitably negative to have a small group of leading developers, it increases risk if a critical factor for success is concentrated on a small group of people.
In this category Augur is rated 10/12 points. The price fell over the last month by nearly 70% (3) but also gained around 1700% over the previous year (3). Augur is listed on two top exchanges (Binance and Kraken) (2).
The total is capped at 11 Mio. REP. Nearly all token have been distributed in 2015, and the team holds 20% of the total supply (2)
Tip: When evaluating the potential return of a token you should always consider your own investment strategy and goals. If a project gained 10x, 20x or even more during a short period, it might be not the best short-term trade in the near future. If the fundamentals are right though, the same project could be a great long-term investment. The same logic applies to exchange listings. For short-term trades, you want a project which is not already listed on many big exchanges, and you want to speculate on future listings.
In the mid -to long term, the success of a project is highly dependent on network effects and hype. The more users, fans, investors a token has the easier it will be to reach mainstream adoption. The data of this category is aimed at the number of people who own, use or heard about a specific project or crypto.
Bytecoin would score a 7.5 out of 12 in this category. The project has close to 7.700 mentions on Twitter (2) and 350 News Mentions over the last month (2). The Reddit community includes 13.000 people, and they have a twitter following of 44.000 (1+2=1.5). The google trend score is 0.006 (2)
The first part of my analysis focuses on evaluation cryptocurrencies and blockchain projects based on qualitative data. It is more about understanding the background, team, product, and vision of a project. Use the questions presented to dig deeper into the real value of these companies.
After that you can use the guide, presented in this part, to bring your framework and evaluation process to the next level. I can’t promise you that everyone of your moves in this market will be successful, only because you copy these steps but take this model as a guide or map to find your own way of researching crypto, and if you do so on a constant basis and with a lot of effort and discipline, I promise you, the number of successful investment will increase.