Before we start with this article we want to say, that this is no financial advice. But we strongly believe in this space and in the crypto industry in general. One day, there will be a next bull run. When? We don’t know. But if you keep learning and developing your skills, it can be life changing. This article is intended to give you a rough overview of what to do before investing in the secondary market and what to look out for.
What Does Do Your Own Research Actually Mean?
Before we get into detail let use an analogy to understand what types of research people do.
Let’s assume you want to loose weight. There will be a lot of factors, that play into your success.
Some people say, that you have to exercise more, other say it’s the type of exercise you do, which helps you losing weight. Other say it depends on your diet or your mental health. In reality it’s probably a combination of everything. The amount of exercise, the type of exercise, your diet, your sleep cycle, your emotional life and even your motivation. So in reality there are many different factors, which decide how much weight you lose.
The exact same thing can be said about a successful investment.
In basic research there are three types of analysis we can do and many people claim, that only one of them matters. But as we learned through the analogy all of them matter.
The first one is technical analysis, which we can describe as “study of the past price of an asset”. We’ll get to this later on this article but it’s mostly looking at charts and making educated guesses based on how other people made their educated guesses, which than produce certain patterns. Of course you can’t make a great decision by only looking at charts, but it can be very helpful.
The second one is sentimental analysis. It sounds very complicated but it’s basically the “study of what everyone is feeling about a certain project or token”. We can’t really measure what people are feeling directly but what we can do is looking at the words they’re using on the internet. You can sum this up by asking „What is the market saying?“. There are a lot of advanced tools, like Nansen or LunarCrush, that look at conversations and news articles all over the web, compile them together and then come up with a sentiment score, that tells you if people are saying positive or negative things about the project.
But be careful. This can easily be manipulated, isn’t long-term in nature and difficult to analyze.
The third type of research is called fundamental analysis. This is the “study of the actual ideas, team, and progress of a specific project”.
This is what we’ll focus on in this article, since many people think technical analysis is bollocks and many people don’t have the knowledge to perform sentimental analysis, but anyone can perform fundamental analysis very easily.
Before we dive deeper into fundamental analyses please be aware, that the world is not black and white, not exercise or diet, not technical analysis or fundamental analysis. It’s a multivariable environment, where patterns may emerge among all of these areas and if you study it enough you might be able to take advantage of it.
The Goal Of Research
The goal of research is to try to make an investment look bad. Wait, what? Isn’t this counterintuitive?
Humans are very biased and anyone can make an investment look good. But it takes a lot more effort to make an investment look bad. That’s exactly what we want to do. The goal of making an investment should be to make a project look bad.
Any project can look good especially when it contains a new und unique idea. That’s what marketing is doing. But if you try really hard to convince yourself, that this is a bad project and you’re not convinced, then it might be a profitable decision.
After establishing the simple goal of trying to convince yourself not to invest, the next question you should focus on in terms of making a profitable investment is asking yourself, „how many other people are going to buy this coin or token?“.
Coins and tokens are essentially securities. Most of these projects do not have profit generating mechanisms, meaning that most will only be profitable if other people buy the coin or token. So ask yourself, „can a million people find out about this coin and buy it too?“. If the answer is yes, you’re probably looking at a very profitable project.
Research: Deflationary Or Inflationary
Now we can get to the specific actions, that fall under the research category. Just like in our analogy at the beginning of this article, if you wan’t to make constantly good investment decisions you need to put in the time and work of doing research and combine different kind of information to come to your final investment decision.
First up is tokenomics, which means economics of an asset. For early coins there isn’t much long-term data, so the initial tokenomics is a great source of information. Many times you can view the tokenomics on the projects website or their whitepaper.
The first thing to find out about a coin is, if it’s inflationary or deflationary. Inflationary simply means, that the coin will continued to be created. Inflationary assets usually decrease in price as time goes on, if nobody else continues buying. So unless there is a reason to keep buying, the price will go down. For example, the US dollar is inflationary. The US keeps printing more dollars and over the years it’s worth less, meaning it takes more and more dollar to buy the same thing.
The opposite of this is deflationary and this means, that the coin will actually be burned or reduced in any kind of way. Deflationary assets usually increase in price because when time moves on, there are less token to buy. For example oldtimer or rare wine fall under this category.
Some token are actually a mix of these. For example Bitcoin is actually inflationary right now because miners keep mining more coins, but one day there will be no more Bitcoin left to mint and when that happens it will stop being inflationary. We can reasonably assume, that some people will loose their key, forget their private keys or send their Bitcoin to an address, that nobody can access. Eventually Bitcoin will become deflationary.
Another important part of research is to find out the presale data. Some token are sold to private investors, others are given out to early users and some are mined by a closed group set of miners. Basically what you need to find out is, how does the token initially get out to the public. Each of these launch mechanisms can effect the overall tokenomics and the price of the coin.
A very important factor while doing research is the team. Imagine a team with less to no experience in the crypto space but a great idea compared to a team, that successfully launched a project, already has a great network in the space and knows all the problems, big and small, that come with setting up a project or a company. Be aware, the people behind the project are very important and always ask yourself, „do I trust these people enough to give them my money?“.
Research: Social Media
One good signal of a coin increasing in price are the content creator on the internet mentioning it. Look for content creator, that specialize on one project or one vertical in the space. For example start following DeFi experts and look, what kind of DeFi projects they are promoting. Start following infrastructure experts for interesting projects in this vertical. Smaller accounts with a specific niche can be much more valuable, than big accounts, that post and write about the whole space.
But if someone spends time and energy creating content for a specific token or project it doesn’t necessarily mean, that it’s a good project. Nonetheless it can be a good indicator, that a community will be formed and might bring new investors to the table.
Research: What Problem Are They Solving?
This is one of the most important parts, when doing your research. You can even change that question to, „how are they going to solve a problem using your money?“. In the case of bitcoin, it solves inflation. So when you ask yourself why Bitcoin and not another ERC-20 token or a fork of Bitcoin? Because it was the first, when you talk to people about crypto almost everybody has heard about Bitcoin and that is why it’s probably the best coin for inflation even when other coins could solve this problem too.
Another example is Ethereum, which solves the problem of expensive and slow banks. Ethereum actually solves many problems, but the existence of banks seems to be one of the main factors. You can’t have a negative account balance with Ethereum. With Ethereum you can send money very fast and it may not be that cheap at the moment, but if you’re moving anything over 7 figures, it’s cheaper than a bank and nobody asks you questions about you moving money. In addition you can do it anonymously and privately and it’s similar to Bitcoin as it’s first of its kind.
One more example can be Chainlink. It gives blockchains off-chain information. With a growing space of blockchain technology, developers are really struggling with getting real world data onto the blockchain in reliable manner. Chainlink seems to offer a solution to that.
So to zoom out, always look for the problem the project is solving and never invest in one, where you don’t understand the problem it’s solving.
Another part of fundamental analysis is reading the project’s whitepaper. A whitepaper is an official paper, where developers describe the problem, that they want to solve, how they’re going to solve and why they want to solve it. It can be difficult to read and understand a whitepaper correctly but with a little training anyone can do it and it will help you a lot while researching a project. There are many good articles and Twitter threads out there, that explain you exactly how to read and understand a whitepaper correctly.
Research: Where Does It Deserve To Be?
This is something that can help you to create a fair price prediction for a coin. Ask yourself, „does Ripple deserve to be the number one cryptocurrency?“ „Does Bitcoin deserve to be number 100?“.
By thinking about this, we can make a better prediction where a coin might be by in the future. Near might not deserve it to be number one, but also doesn’t deserve it to be number 2,000. Using these guesses, when can then divide the market cap by the total distribution of coins to get an idea of a fair price. This is just a model, that you can use, but there are also many other models out there, that might fit you better like checking whale wallets or checking locked liquidity.
Of course there are many more indicators, that you can check and that might be important, if you’re able to take advantage of it. This article is just an overview of what we think is important, when you invest in the secondary market and might help you to understand certain indicators a little bit better.
But never forget, this is no financial advice and always DYOR.