When it comes to cryptocurrencies, you need to consider a few key factors before you decide whether to invest. Whether you're just beginning to get on the ground floor of new crypto projects or are looking to expand your portfolio, it’s helpful to have an evaluation framework handy for crypto projects.
This article will explain a step-by-step framework to assist you in evaluating various crypto projects.
How do you evaluate a crypto project?
During your analysis of a crypto project, it's important to examine the different aspects of the project to make an informed investment decision. You should generally veer away from making impulsive decisions based on emotions, as this could lead to financial loss.
Mull over the following aspects instead:
These are just some of the questions you need to ask during your cryptocurrency evaluation. We'll discuss them in greater detail throughout this guide, which will give you a framework for evaluating crypto projects.
By the end, you should have a pretty good sense of what to look for — and how to make an informed investment decision. Remember that there is a lot of speculation in the crypto world. So, do your research before you begin investing.
How do I research a new crypto project?
There are a couple of platforms that can help you find high-quality crypto projects to invest in, such as Binance Launchpad, OK Jumpstart and Gate.io Startup. These are all initial exchange offering (IEO) platforms, which provide their users with opportunities to invest in startup blockchain projects.
There are also initial coin offerings (ICOs), which are fundraising mechanisms for crypto projects. However, it’s important to note that ICOs are generally considered riskier than IEOs. This is because ICOs are hosted on a cryptocurrency project's website, making them a more fertile ground for fraudsters and scammers.
IEOs, on the other hand, are launched on exchange platforms like the ones we mentioned previously. They are generally more secure because most startups that submit their projects to these platforms undergo a vetting process before they are allowed to launch their token sales.
However, even when going through an IEO platform, you should still conduct independent research. Doing so will help you to determine whether a project is the right investment opportunity for you and if it's something you can invest in long-term.
How to evaluate a blockchain project?
Generally, here's what you should consider when looking at the main aspects of a crypto project:
The vision of the project
When evaluating a crypto project, it’s important to ensure that it has a strong and achievable vision. In crypto, there's such a thing as "vaporware," which often refers to projects with all the bells and whistles — but are unlikely to get off the ground. When evaluating a crypto project, be wary of those that seem too cool and promise too much without having a solid plan or foundation to back it up.
Visionaries in the industry come up with many groundbreaking project ideas, but only a few are ever feasible or practical enough to be implemented.
Background and team
Another key thing to consider is the team behind the project. This is important because, at the end of the day, it's the people working on a project that will make it successful (or not). When looking at the team, consider things like:
- The team members’ experience;
- Their history and level of expertise in the crypto space; and
- How cohesive the team is.
The above factors will give you some insight into whether a team is strong and likely to make their project successful.
Quality of the white paper
The white paper is a document that typically outlines everything you need to know about the project, including the vision, the problem it intends to solve, the solution, the tokenomics and more.
Related: What is Tokenomics? A beginner’s guide on supply and demand of cryptocurrencies
A good white paper will be well written and easy to understand without being too technical. It should also be clear about the problem the project aims to solve and how the solution will work.
If a white paper is vague or uses too many obscure terms you don't understand, it may not be worth your time (and money) to invest in that project. If you don’t have the time or patience to go through multiple white papers, you can also check out the projects’ litepapers. These are abridged versions of white papers but are just as informative.
Potential market and use cases
When considering a project, it's also important to consider the potential market and whether there is a need for the solution the project is offering. For example, if a project is trying to solve a problem that doesn't exist or has already been solved by another project, then it's unlikely the project will make a dent in the crypto space.
It's also important to think about the potential use cases for a project. For example, if a project is trying to solve a problem that concerns only a small group of people, then the market for that project will be very limited.
Tokenomics refers to the economic model of the project and how the token will be used within the ecosystem. For example, if a token is only being used as a means of payment, then its value will likely fluctuate along with the market.
However, if the token is being used to power a decentralized application (DApp), then the tokenomics will be more complex, and its value will be more stable. It's important to understand the tokenomics of a project before investing, as it can give you some insight into the potential value of the token.
Potential for growth
Growth potential refers to the likelihood of the project increasing in value over time. For example, if a project has a strong team, a good roadmap and a solid tokenomics model, then it's likely that the project will grow in value over time. Researching a project thoroughly before investing is important, as many factors can affect its growth potential.
The product refers to the actual solution the project is offering. Again, it's important to ensure the product is actually needed and that it solves a real problem. Take Ethereum (ETH), for example, which was built based on the need for a platform that could support smart contracts and expand the capabilities of blockchain technology.
Solana (SOL), on the other hand, is a blockchain that uses proof-of-history, a unique consensus mechanism. Built on the premise that an “internal clock” can greatly benefit transaction speed, Solana succeeded in becoming one of the best blockchains when it comes to transactions per second.
Community traction refers to the level of interest and engagement the project has generated in its community. A good way to gauge community traction is by looking at the number of social media followers, blog subscribers and forum posts. The more active the community, the more likely the project will be successful.
It's also important to consider the quality of the community, as opposed to just the quantity. For example, a project with a large number of social media followers but very few active users is likely not as strong as a project with a smaller number of social media followers but an active user base.
Market capitalization is the total value of all the tokens that have been mined. It's a good way to gauge the overall size of a project. In the case of crypto that isn’t mined, the market cap can also refer to the total value of a company’s shares. It’s a good indicator of asset stability, given that crypto can be volatile. Generally, cryptos with larger market caps tend to be more stable than those with smaller market caps.
A project’s platform refers to the underlying technology the project is built on. For example, Ethereum is built on the Ethereum blockchain, while BNB is built on the BNB Smart Chain (BSC). Each platform has its own advantages and disadvantages, and it's important to research a project thoroughly before investing. For example, Ethereum is the most popular platform for building DApps, while BSC is designed to offer high performance and low fees.
Transparency refers to the level of information that the team makes available to its community. A transparent team will regularly communicate with its community and provide updates on the project’s progress.
A non-transparent team, on the other hand, will be secretive and withhold information from its community. It's important to invest in projects that are transparent, as it's a good sign that the team is confident in the project and willing to be open about its progress. Additionally, it will keep you safe from various scams like rug pulls.
Related: Crypto rug pulls: What is a rug pull in crypto and 6 ways to spot it
The roadmap should outline a project’s business plan and give you some insight into how the team plans to execute its vision. A good roadmap will be well-thought-out and realistic, with clear milestones that the team plans to achieve. It should also be updated regularly to reflect its current status. If a roadmap is outdated or unrealistic, then it's likely that the project won't be successful.