How To Research Cryptocurrencies? A Step-by-Step Guide
Find crypto gems without having any special skills and prior knowledge
When I started investing in crypto, I made a common mistake that most beginners share. I did not do my research. Instead, I threw money at different coins that seemed hot at the time to see which coins would fly. As a result, several 10k of my hard-earned money went down the drain.
Since then, I have come a long way. I researched over 100 cryptocurrencies and projects and learned a lot about how to make money in the crypto space.
I Made $3 Million in Crypto. These are the 26 Rules I Learned.
I got to know blockchain technology at the beginning of 2016. That was also the time I bought my first…
Now it’s time to give back and share my experience with others. In this article, I will provide you with a step-by-step guide to teach you how to do your own research and find crypto gems. For this, you do not need any special skills and knowledge. All you need are patience and some determination.
So, let’s go!
Part 1 — Start With the Basics
If you are new to crypto, I strongly recommend that you start your journey with big and established currencies such as Bitcoin and Ethereum. That’s because there are lots of resources on the internet to explore and most of them are free.
Where to begin?
I would suggest you start with reading the original Bitcoin Whitepaper by Satoshi Nakamoto. I also recommend reading the book Mastering Bitcoin by Andreas Antonopoulos. You can skip the programming parts if you are not interested in those. But read everything else to get a basic understanding of Bitcoin and blockchain technology in general.
As a result, you should have a clear understanding of various things such as wallets, addresses, private and public keys, how transactions on the Bitcoin blockchain work, etc.
After gaining enough knowledge and experience with large-cap cryptocurrencies (also try buying and selling small amounts), you will probably want to explore smaller cap projects. By now there are thousands of different projects and coins in the crypto space.
Part 2 — Look Up Information on the Project Website and Read the Whitepaper
For a majority of new or smaller coins in the crypto space, information is not as conveniently accessible as with the big and established platforms. For this reason, it is paramount that you do proper research.
Here’s what my researching process for cryptocurrencies looks like.
First, you want to find general information. For this start looking in the most obvious places such as a project’s website and whitepaper. Check for the following things:
1. Does the project’s website look legit?
This is a first sniffing test to check for any obvious weaknesses.
· How much content is there and is it up to date?
· Do elements on the page look broken?
· Does the site link to external pages citing the project?
· Watch out for poor grammar and spelling.
· Enter the page in https://www.urlvoid.com/ or similar sites to check its reputation and safety.
2. Search for a general introduction of the project and its branch of industry.
You need a clear understanding of what this crypto project is about, the industry it is aiming for, and what issues it tries to solve.
· Is the project aiming for a new or an established market? Is the industry or market growing or do a lot of businesses in that field experience difficulties?
· What do businesses in a given industry do and what are their pain points?
· Does this industry pick up on innovations quickly, or is it more traditional and hesitant when it comes to new technologies?
· Why and how does introducing blockchain technology help the people and businesses in this industry?
3. What does the coin or project do and what problem does it aim to solve?
Dig deeper and find out why the people behind the project think that what they do will help to solve an existing problem.
· How exactly does the project approach the challenges that the businesses in a field have? Does it make existing processes easier and faster? Does it help save money?
· Which problems does the project try to solve?
· Taking a step back, does it make sense to introduce blockchain technology to solve the specified problems? A crypto project only has chances for success when it is an upgrade to the existing solutions. That’s because, without a significant advantage provided to the user, the currency will likely have difficulty reaching wide adoption.
· Based on the information you gather from points 2 and 3, do a SWOT analysis. What are the strengths, weaknesses, opportunities, and chances when it comes to the cryptocurrency you are researching?
4. What is the actual use of the cryptocurrency or token issued by the people behind the project?
This is very important from the perspective of an investor. A crypto project might have a very good use case.
In many cases, the currencies or tokens that go with them have no real use. This in turn means that the coin or token has no real value, even when price trends look attractive on an exchange. As a result, they become objects of speculation and you should refrain from investing in them.
5. Do more research about the cryptocurrency or token behind a project.
As a potential investor, you should know as much about a token or currency, as possible. Here are a few more things to look out for:
· Is it a token or a coin? Does the project build on an existing chain or does it have its own blockchain? For example, many projects issue ERC20 tokens because they are built on the Ethereum blockchain. This ties into aspects such as chain technology and security. Many projects that built their own chains went bust after clever users found a way to exploit certain mechanics.
· What is the total amount of tokens issued, will there be a hard cap to the maximum amount? If the total amount increases over time this can have a negative effect on price. On the other hand, it is a plus when the developers have built a deflationary mechanism (e.g. when tokens get burned after use)
· How many tokens or coins will be held by the company behind a crypto project? You don’t want the team to hold a large amount as their decision to hold or sell will have a large impact on price action.
· Was there a pre-sale or any other action that let a few people accumulate a large amount of the token or coin? Again, you want to stay away from cryptocurrencies that have been gobbled up by a few big players beforehand as they can leverage this to manipulate the price.
6. What is the consensus algorithm of the chain a crypto project uses?
The consensus algorithm is a vital part when it comes to how decentralized a project is. This way you will know how centralized or decentralized it is. The more decentralized, the better.
Why is this important?
One of the most important use cases of blockchains is that they decentralize certain mechanisms or tasks which otherwise would be done by central servers. Trust in institutions and the participants in a network play a big role in this.
Depending on the algorithm, nodes in a blockchain can be run by several partner companies or a few whales. This means that a few parties have a lot of control over the whole system. For example, they can roll back the transactions on the chain.
7. Find out whatever you can about the team behind a coin.
Doing research about the team behind a cryptocurrency or project is very important. You only want to invest in something if you know that the team is qualified to handle all the challenges that might come its way.
· A few names plus some titles on the website are not enough. At a minimum, there should be sufficient information about the previous experiences, achievements, and qualifications of each team member.
· Do not be satisfied with just the information provided on the project’s website. Do more research and see if you can look up people’s profiles on platforms such as LinkedIn and Twitter. Check how active people are on these networks, what things they talk about, and so on.
· Reach out to the team and ask them your questions. If they come back to you and provide you with good feedback you will not only gather more useful information but also a feeling of how dedicated they are.
8. What does the project’s road map say?
Road maps help you to understand what a crypto project wants to achieve in a given timeframe. Keep in mind that software projects are often very complex so delays happen frequently.
· Expect things to take some time to materialize if the team wants to start from scratch. Delays of several months are not unusual. However, if developers constantly miss the timing for milestones, it is a bad sign.
· If the timeframe given in the road map is too short, it is probably not realistic.
· Beware that especially when you invest in the very early stages of a project it might take a long time for results to show. If your money is locked up in a smart contract this means you will have to be patient before there is a chance to turn your investment into profit.
9. Who are the strategic partners?
Established partners are vital for any crypto project because they help the team to tap into additional resources, get publicity, and learn from their experiences.
· Having many partners is good. But quality is more important than quantity. If a project has established a cooperation with a renowned company, official institution, or research institute, it will get a lot more credibility.
· Because it gives them credibility, crypto projects usually list their cooperation partners on their website. Analyze how cooperation is portrayed. As a rule of thumb, the more detailed the information the better.
· Don’t be fooled by a few logos. To make sure that the strategic partners mentioned by a project’s website are real, do more research. Check for press releases or other external sources that give information about the nature of the cooperation.
Probably you will not be able to find every piece of information listed in this guide for how to research a cryptocurrency.
Try to find out as much as you can. As a rule of thumb, the more information a team is willing to publish about its project on their website and in their whitepaper, the more trustworthy it is.
Part 3 — Adding Other Sources Into Your Crypto Research
After you have covered the above points about the project, you need to take a step back and look at the bigger picture.
What do I mean by this?
Expand your scope of research away from the information provided by the developers and make use of other sources. These are your next steps:
10. Research a cryptocurrency’s competitors.
While points 2 and 3 are meant to give you an understanding of general market conditions and how the crypto project you are researching is fitting into that, it is also important to look at other existing projects.
· Are there competitors? Use Google search strings such as “crypto in [industry]” and “crypto [market] use case” as a starting point.
· If there are any competitors, how are they different from the one you want to invest in? How long have they been active and how far is their development compared to the one you are researching? To give some well known examples, check out the differences between Ethereum and Ethereum Classic, ZCash and ZCoin (Firo).
· This way, you can find out more about the project’s competitive advantage, its weaknesses, as well as other aspects. Maybe this will even help you to find other promising projects.
11. Search for more information in external sources.
This connects to points 7 and 9 in this crypto research guide. As important as it is that developers do proper marketing to get the message out, from your perspective it is even more important what others have to say.
· Check different sources for all kinds of information you can find. Sources can be news websites, analysts, and other businesses. Be creative in digging up information.
· By doing this you will be able to find information, the people behind the project probably don’t want you to know about. For example, has the project been hacked before? If yes, how did they deal with it? Did the team show unprofessional behavior such as careless use of funds? Did important members leave the project? Etc.
12. Social media are a very rich source for finding information about a crypto project.
Check whether the project is active on social media and if users are creating content about it. You can learn multiple things from doing so:
· Does the team have its own social media channels to get the news out? Are these channels well maintained?
· Does the team often update their progress in order to keep the community up to date and involved?
· Are there a lot of people talking about it? It is also a healthy sign if there is a lot of engagement not only from the users’ side but also from the developers.
· What is the general sentiment? Is the community friendly and helpful? Are they only interested in the price of the token or coin? What you want to see here is a positive atmosphere surrounding a crypto project.
· Be aware, though, that people who invest money into a token or cryptocurrency tend to easily get hyped and emotionally attached. In such an environment, people try to get something positive from even bad news. For this reason, it is important that you always take a calm look at things. I CANNOT STRESS THIS POINT ENOUGH!
13. Check out Github.
Many crypto projects claim to be open source. As a result, they should have posted their code on Github. Check it out. While you probably cannot understand the code, you can still see on the insight page how many contributors there are.
· Are developers contributing regularly to the project?
· When was the last time the project code was updated?
After you are done with these steps you should have gathered a lot of information from different sources that list up the pros and cons of the crypto project you are researching.
Part 4 — Researching Ways to Buy a Cryptocurrency or Token
The fundamentals are looking good. You think you found a potential crypto gem.
The best crypto project is of no use to you if some of the monetary aspects don’t add up. Here’s what you should look out for:
14. Find out how and where to buy a project’s token or cryptocurrency.
· How can you buy the token or coin? Can you buy them from an exchange or do you have to send money to a contract? In the latter case, there is a risk that your investment might get lost due to technical issues or fraudulent activities.
· For crypto projects with an ICO (initial coin offering), tokens usually have not been listed on an exchange before a certain date. When you invest in those tokens it means your funds will be locked up for a period of time. Are you willing to wait for that long?
· If tokens or coins are listed, you need to find out on which exchanges. If those are very small exchanges, it could mean a higher risk for you, because they are more likely to get hacked or go bankrupt.
· Also due to a low number of users on smaller exchanges, the token or cryptocurrency will probably not be very liquid. This means it could be difficult for you to sell when you want to cash out.
15. How high is the market cap?
If the market cap of a coin or token is very small, it means the price can be easily manipulated by the people who accumulated a lot. As a result, various pump and dump schemes may play out.
16. Is the currency supported by hardware wallets such as Ledger or Trezor?
This will influence how you can store your coins/ tokens. Usually, only well-established cryptocurrencies are supported by hardware wallets. For smaller projects, you can usually use dedicated wallets or keep your coins in an exchange. Both come with risks so make sure to inform yourself in order to find the best solution.
Part 5 — Wrapping Things Up
By now you should have a lot of information at your hands. Now it’s time to evaluate all the data you gathered.
Here’s what you should take into account:
· Not all the information you found might have the same quality or level of trustworthiness. For example, a comment by a random person on Reddit should have less weight than a press release.
· Also, some of the information you found will be more important and more useful to you than others. For example, news about a hack or everything that is directly related to the safety of your investment should be of greater importance than news about a new planned feature.
· Make a list with one column each for the crypto project’s positive and negative aspects. Summarize every piece of information and data as a bullet point. Then add them to the positive or negative column. This format helps you to easily get an overview and compare different aspects.
Based on your list, you will be able to find well-founded arguments for or against investing in a crypto project or cryptocurrency.
Bear in mind that this kind of research can take a long time to complete. While in some cases it might not be necessary or possible to cover all of the points, I listed up in this guide about how to research cryptocurrencies and projects, your aim should be to cover as many of them as possible.
Because in the end, this is all about protecting your investment and avoiding mistakes I made a few years back. I lost a lot of money because I thought it was not worth spending some time to make sure a project was legit.
I hope that you find this guide useful. Let me know what you think in the comments and feel free to post any questions.
For more articles I wrote on how to research crypto projects, please check out my list: https://ren-heinrich.medium.com/list/how-to-research-crypto-projects-5fd393fd0be8
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