Traditional finance would have you believe DeFi is an unreliable ecosystem, where the lack of centralized intermediaries means the industry is rife with financial scams in an industry that has no inherent value.
Very few investors think of cryptos as companies and their tokens as valuable stocks. Crypto projects continue to prove themselves as viable solutions to real-world issues. The trustless, programmable, and often open-source aspect of crypto projects solves common TradFi challenges like contractual disputes, unequal access, and consumer and investor vulnerability.
In this piece, we’ll outline four steps investors must follow to identify crypto companies with substantial user bases and a bright future.
Key Takeaways
- Social media sentiment can heavily influence crypto markets, so investors should monitor discussions while being cautious of paid influencers.
- The success of a crypto project often depends on the team's connections and previous achievements.
- Key quantitative metrics to analyze include daily active users, transaction fees, and market capitalization to gauge a project's long-term potential.
4 Steps to Properly Value Crypto Assets
Because crypto assets are neither issued nor regulated by a single bank or governing body, their prices are primarily affected by quantitative and qualitative analytics, namely market sentiment, demand, and competing cryptocurrencies.
Reading the whitepaper
In the crypto space, the whitepaper provides the reasoning behind the project, its utility and use case, and the blockchain architecture behind it. The whitepaper provides deep insight into the project and converts potential investors.
Beware of white papers with obvious red flags, such as typos and poor language, vagueness, and omitted sections. Whitepapers that make vague claims such as “revolutionizing the crypto industry” without precisely explaining the technology should be taken with a grain of salt.
Scrolling through social
Social media platforms like YouTube, Twitter, and even LinkedIn have a major impact on influencing investor’s behavior. As the crypto space constantly evolves, social media provides a place where users can discuss projects and share their opinions.
When evaluating a crypto project, it would be helpful to know what other users are saying about the project. Check their social media and read their posts. See if people are engaging with the project and subjectively assess market sentiment and investor behavior. The crypto market is highly susceptible to changing investor sentiments and positive sentiment expressed by prominent figures can lead to investor confidence and higher trading volumes, creating a good buying signal.
Be wary of influencers who are paid to promote crypto projects, as their opinion may be biased.
Verifying the team
What better way to evaluate a crypto’s future than by starting with their team. A cryptocurrency’s success depends heavily on the network around them. A team with deep ties and connections to other projects may be more trustworthy, whether they worked there previously or know someone on that team.
If possible, check in with the team’s previous projects and how they’ve fared. While history does not always repeat itself, it remains a good indicator of what to look for.
Studying the market metrics
Facts and fundamentals rule all forms of valuation. While qualitative analytics can take you far
Metric 1: Daily Active Users
The number of Daily Active Users (DAU) represents the number of customers that visit and use the project or platform each day. Again, crypto companies are not that different from traditional projects. If a crypto company has no daily users, then it is safe to say that it’s not a great long-term investment.
In the world of crypto, network is everything - platforms with a large network of users, investors, stakeholders, and partners are far more likely to succeed in the long term over those that do not.
That said, DAU by itself will not tell you much. You’ll also need to compare DAUs against other crypto companies, analyze whether DAU is going up or down over the long term, and factor in extrinsic forces the crypto project had no control over. Examples include bull or bear markets that affect the entire crypto ecosystem.
Metric 2: Fees
Every crypto project needs a way to make money. Fees act as a service charge and provide a sliver of insight into a crypto’s profitability, smilar to how you would pay a transaction fee for wire transfers.
Fees rise and fall with the supply and demand for transactions. High fees indicate heavy usage and high network congestion, while consistently low fees indicate not much traffic.
Essentially, fees give us insight into public consensus, helping us determine whether the market believes that a crypto product is good enough to have to pay to use it.
Because fees represent a crypto project’s profits, it’s also important to determine if these profits are being reinvested into the company for future growth.
Metric 3: Market Capitalization
Similar to TradFi markets, market capitalization is important because it allows potential investors to understand the true value of crypto projects while comparing the size of one in relation to another.
High market caps usually indicate a more established company, while a lower market cap often represent speculative investments with a higher growth potential.
It answers the question: “Amongst all products in this industry, how does X coin compare to Y?”
Market cap should be used with DAU and Fees to paint a full project picture.
The “market capitalization” equivalent for projects like Peccala would be AUM, or Assets Under Management, of which Peccala has grown X% over the last year.
A Great Example: Putting it Together
Let’s say crypto X has entered your radar. You’re looking to make an investment but are not too sure yet. Here are key questions to ask yourself:
Reading the whitepaper:
- Does the whitepaper clearly explain the project’s goals and how it plans to achieve them?
- Is the whitepaper well-written and detailed?
Scrolling through social:
- What is the general sentiment about the project on social media?
- Are there prominent figures who support the project?
- Does the project’s social media reflect its growth and transparency?
Verifying the team:
- Who are the project’s key members?
- Do they have a strong network of connections?
- What is the team’s track record of crypto projects?
Studying the market metrics:
- Is the number of daily users growing over time?
- Is the company reinvesting its profits?
- Do the project’s quantitative metrics show a strong, growing project?
By evaluating these aspects for project X, you can easily make a more informed decision about the potential and viability of a crypto investment.
