Introduction to cryptocurrencies (Part 4/4)
How to research cryptocurrencies
With so many competing cryptocurrencies competing for the money and attention of investors it is important to do diligent research to source potential winners. There's no point being at the crest of a technological revolution if you end up putting all your money in the future Netscape's and pets.com's of the world.
A benefit of the cryptocurrency community in general is that there is an incredible wealth of information out there on most cryptocurrencies. Part of the challenge is sifting and discarding the plethora of redundant words written on each one to arrive at a conclusion you are comfortable with.
I follow a similar practice for every cryptocurrency I invest in (and the many more I do not).
My starting point is always a company's website. If they can't get this right, then I am cautious right from the outset. There are numerous examples of companies asking for millions of dollars who have either obvious mistakes (such as spelling errors or out of date information) or less so obvious, but still telling lapses such as an inability to clearly define what their project is looking to achieve or the benefits it aims to provide. If these basic tenets aren't clear then it should be a warning sign. What do they actually do? Is this solving an actual problem? Is it realistic?
The next step is to look at the experience and background of the team. Do they actually have any real experience in the industry they are taking on? Are there actual developers onboard or is it just management and marketing? Are there LinkedIn profiles visible?
Some teams will be anonymous. This naturally is a warning sign, but it is not necessarily a deal breaker - and indeed there are two cryptocurrencies I hold where the founder/team are anonymous.
The whitepaper should be a blueprint of what the team is looking to do, both in terms of what they want to solve and how they are aiming to achieve it. It is therefore of the utmost importance that this is read carefully and thoroughly, because it is the document upon which the company will need to be built. Some whitepapers consist of nothing more than jargon and marketing buzz words which serve simply to obfuscate the real situation - that the team has no real plan of how they will create value for holders. For those who are non-technical, it is also important to carefully scrutinise the technical plans to establish if what is being promised is feasible and if their overall plan makes sense.
The various community channels are vital to see a) how active the devs and team are; b) how active the community is; and c) the behaviour of the team.
I would advise signing up to both the Telegram and Slack/Discord groups in order to see how the team communicate with their community. You can learn a lot, both from the information they disclose on the project and from how they treat people. I am very cynical about developers that are antagonistic and rude to their investors, particularly if it is in dealings with people asking sensible questions in a polite manner. Two examples of this that spring to mind include the Tezos developers on Reddit behaving in an unnecessarily rude fashion on numerous occasions and the needlessly needling manner of responses recently from the Cindicator team who combined a hostile and sarcastic manner with their holier than thou steadfast standpoint of actively seeking to be left off exchanges (a future post will deal with Cindicator and this issue separately). The Tezos project now appears in disarray, whilst the Cindicator team's frustrating responses could have been anticipated by those who listened carefully to them in the run up to the ICO.
It is also worth subscribing to the team's newsletter and Twitter feed, in order to get up to date information (particularly if you need to register for an ICO).
Reddit and other forums
The various subreddits for each project (and in particular the ethtrader subreddit) are a valuable resource of information and opinions, as is the BitCoinTalk forum. They should be carefully read, but with a healthy dose of scepticism. Every user aims, either consciously or not, to promote their own holdings and there are large amounts of misinformation (both positive and negative) surrounding every project. However, you can get a feel for both the general market trends and discover important information through careful reading.
Compare to competitors
How strong is the competition? Are there direct blockchain rivals? What established non blockchain competitors are they competing with? There are some projects that I believe are non starters owing to the existing competition they face. An example of this is Basic Attention Token, which not only has competition from the biggest tech companies (Google and Facebook), but also requires partnership development with advertisers and publishers.
The other reason to compare to competitors is to gauge a potential market cap, as well as looking at differences in development, features and team.
Buying at the right time is crucial. Even if you find a project you like long term, buying at a high can leave you with large losses that you may need to hold for a long time, which leaves you with less scope for appreciation in the event of any upturn. The cryptocurrency landscape is littered with examples of currencies that appreciated too fast and suffered inevitable retraces. Although it is tempting to think so, just because cryptocurrencies are so volatile does not make it an inevitably that those highs will ever be hit again, with former darlings such as Golem (GNT) and Siacoin (SC) sitting months on from their ATH's 3 and 4x lower.
Do your own research
The most important thing to always remember is to do your own research. It can be tempting to buy in solely based on the momentum a project seems to have on Reddit or Bitcointalk, which can certainly be profitable, but over time you will end up buying dud projects you later regret owing to easy to spot mistakes. It also helps you hold a project over the time frames often needed to see real price appreciation. If you never researched or believed in the project in the first place, an inevitable downturn (it is crypto, there will be downturns) will see you potentially fretting if the project will ever recover. Believing and trusting in the project team will make these downturns far easier to handle.