Fundamental Research Strategies for Crypto
By: Will O Leary
Tags: Crypto, Cryptocurrency, Bitcoin

Before I presume to tell you how to evaluate cryptocurrencies, let’s get some necessary disclaimers out of the way.

All of this stuff is speculative . Investing in crypto in 2017 is exciting in large part because it is uncharted territory and everyone is in the same boat — trying to make sense of it all using whatever logic we can piece together.

. Investing in crypto in 2017 is exciting in large part because it is uncharted territory and everyone is in the same boat — trying to make sense of it all using whatever logic we can piece together. I am pro crypto. That doesn’t mean I am a believer in every coin that’s out there — far from it. But if you want to know my “bias” (if you can even call it that), there you go.

It’s critical to find the approach that works for you. Make sure you can justify why you do what you do, never invest more than you’re willing to lose, and never invest in anything you don’t understand. If you don’t understand or agree with my advice and suggestions, do not listen to me. I don’t claim to know it all and I’m 100% sure that many of my ideas will be hilariously wrong in hindsight.

With that behind us, let’s talk about some key questions to ask so that you can better prepare yourself to sort the thousands of cryptocurrencies out there into “cash” or “trash” piles. For the purposes of this post, I’ll be focused on investing in coins using a long term buy and hold strategy (there are other ways you can invest in crypto which I won’t cover here).

1) What’s the point?

The first and probably most critical thing to understand with any cryptocurrency is — why does it even exist? Not all cryptocurrencies are created to accomplish the same thing. Most see bitcoin as a potential alternative to dollars, euros, pesos, etc, but not all cryptos are out to do that. The best place to find out the point of a crypto that you’re considering is a company’s whitepaper. Think of whitepapers as abridged business plans for the coin. Most can be found on a crypto company’s or coin’s website. If you can’t find a whitepaper for a given coin, that’s probably not a great sign.

2) Ok, I think I get the point…will anyone else?

Once you understand what a coin is all about, think critically. How hard would it be for your mom, friend, or coworker who knows nothing about crypto to understand what the goal is? The reason this is so important is because if you’re banking on a coin really taking off and accomplishing its goal, people have to understand it, trust it, and use it. Remember when I said that you shouldn’t invest in anything you don’t understand? Many people have that instinct anyway, which in my view is the most significant barrier to entry for people who haven’t yet stuck their toe in the water with crypto.

3) So, what’s in it for users?

Do you agree with the coin’s purpose? If not, can you see how it provides value to the people or organizations who would use it? If there doesn’t seem to be an obvious reason that a consumer or business would trust Coin X to be exchangeable for something of value, you should be very skeptical.

To help with this one, I envision a hypothetical world where the cypherpunks behind a given coin are able to perfectly communicate why their tech matters to simpletons like me who just don’t get it (sounds crazy, I know). In this mythical and definitely not real world, lack of understanding is eliminated from being a barrier to entry for crypto investors.

In this magical, faraway place, would people actually use the coin in question? Why? If your answer is yes, that is a good sign. If you can’t envision why someone would use it, it’s probably best not to invest.

4) How much does the crypto market care?

This can be a tricky one, because I feel confident that the overwhelming majority of coins will fail to truly take hold. A good way to get a sense of whether the crypto market has taken notice of a coin you’re eyeing is to look at trading volume data on coinmarketcap.com. If no one is buying a given coin, that could mean that investors don’t yet see the value. On the other hand, trading volume could be very high — and flooded with sell-offs. It’s important to understand this metric, but to use it as one piece of data in your overall decision-making. I care more about trading volume than market cap, especially for coins that haven’t really taken off.

It’s also good to see where the coin is being exchanged. If you can’t buy it in many places, you may want to wait until you see a coin start to get some traction with bigger names like Coinbase, Kraken, and Bittrex. If you’re the type to take a flier on a lottery ticket by getting in really early, disregard this advice and strap in for the ride.

5) What does the news say?

Is your coin showing up a lot in the press? Is the tone mostly positive or negative? What sources are covering it? From this point of view, it means a lot for a coin’s mainstream awareness prospects if it’s getting picked up by Bloomberg and the Wall Street Journal, or even an industry-focused outlet like Coindesk. Don’t overrate tips in a vacuum — research and verify through the news.

If the news on a particular coin is hyper-focused on negative stories, I don’t necessarily look at this as a bad sign, especially from mainstream sources that tailor their content to mainstream (often skeptical and ignorant) audiences. Many proponents of crypto will tell you that mainstream sources covering bad news about bitcoin, for example, is proof that it is here to stay.

6) Any whales lurking?

Influential people can impact the price of an asset with as little as their words. They can come from the crypto community, traditional finance, government, or really anywhere.

Does Jamie Dimon have a strong stance on your coin in particular? What about Richard Branson? Michael Novogratz? Chuck Schumer? Bear in mind that a strong negative stance from one of these types doesn’t mean your coin is doomed, just as much as a strong positive stance doesn’t mean you’ll be rich if you swim in their wake.

This is about trust. Should you trust the CEO of JP Morgan Chase when he goes public with bitcoin hate? Do you believe the hedge fund manager with half a billion dollars invested in crypto when he says that bitcoin will blow through wildly high target prices? I tend to look at people and institutions (big banks, the Fed, etc) that stand to be disrupted by crypto calling it a scam as a positive sign for the future of these coins, while tempering expectations that I’ll be able to afford my own private plane overnight.

Like #4 on this list, use this as a data point, but not as gospel. You are likely not an investor with millions or more to spare making speculative bets on crypto. All of these big, important, successful people got to where they are for a reason, but they have all been wrong plenty of times. Consider both the information and the source before acting on their advice.

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Have a good crypto research tactic that you use? Love or hate my opinions? Let me know on Twitter — @uncryptwill