How to Pick Micro Crypto Projects
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Hey everyone,
It’s Luca, investor and writer of the newsletter.
Welcome to Investing Tuesday—our free weekly newsletter where we share investing tactics and market insights.
Today I’m gonna share a simple tool to analyze & select micro crypto projects.
Imagine being an early investor in coins like Solana, Chainlink, or Dogecoin – that's the dream.
When you invest in a token early, you get in on the ground floor. If the asset takes off, then your modest investment could multiply exponentially.
But not every token is a winner. Most will probably fail.
How can we increase the probability of success?
Evaluating Early Crypto Projects is a mix of art and science, just like any other startup.
In today’s article I want to share with my personal valuation checklist, hoping to give you some serious edge.
Here it is:
Team
Market
Product
Community
Tokenomics
Financials
Let’s dive in!
1. Team
The success of a crypto venture is significantly correlated with the skills, expertise and influence of its team.
What I usually look at:
Core team: the people working within a project. Do they have a history that aligns with the project they are launching? Do they have insights into the industry? Are they working on a problem worth solving?
Backers: the people supporting it outside through early investments, endorsement and strategic partnerships. Do they have a strong track record? Are they influent?
2. Market
How big is the target market?
The bigger the target market, the bigger the size of the opportunity. You don’t want to look for small niche markets here, but for multi-billion opportunities.
For example, Web3 infrastructure is quickly becoming one of the hottest sectors. According to Messari, file storage, computation, wireless connectivity, and blockchain data will be will be some of the most important areas of crypto investment for the next decade.
Furthermore, legacy cloud infrastructure is a $5 trillion global market cap sector, while DePIN is just a $3 billion market cap sector for crypto players.
You want this kind of market size.
In other words, what could become the Microsoft, Oracle or Intuit of Web3??
3. Product
Crypto projects are just like businesses. And what’s a successful business without a good product?
A few things I frequently ask myself:
Does this protocol solve a relevant problem?
Is this product unique and offers something its competitors doesn’t?
What is the total number of users and activity on the product?
Here are some metrics you can use to evaluate the traction of crypto projects:
Total Value Locked (TVL)
Daily Active Users (DAU)
Developer currently building
4. Community
A strong community is no guarantee of success, but some of the most successful projects have had (and still have) a strong community at their base. Think of Solana, Dogecoin, Shiba Inu, Ripple, Cardano & Polkadot.
Here are some metrics you can use to evaluate the popularity of crypto projects:
Reddit Followers & Growth
Reddit Community Score
Twitter Followers & Growth
Tags, tweets and retweets
Private community members
5. Tokenomics
At its core, tokenomics, gives you a clear idea about the supply of a given token and its demand.
What I usually look at:
Insider Ownership: knowing how many tokens are distributed to the team tell us if core team and backers have skin in the game. For example, our last pick has more than 50% of its supply distributed among core team and backers.
Supply of Coins: According to economics, the value of a token rises when there are fewer tokens in circulation. The supply of coins is a crucial criteria in evaluating projects’ tokenomics. We need to consider both the total and the circulating supply. Bitcoin, for example, has a total supply limit of 21 million coins, with the last coin expected to to be minted around the year 2140. On the other hand, Solana has a total supply of 508 million SOL.
Token Utility: It is essentially the token's ability to generate value for its holders. Avalanche holders, for example, can stake their tokens to secure the network and earn more AVAX in the process. Some protocols allow stakeholders to profit from protocol income. Anyone who owns SushiSwap, for example, is entitled to the protocol's earnings. In the long term, investors won't own a token if it does not have a fundamental value.
6. Financials
Financials are less relevant in early stage tokens as they would be if we were evaluating more mature blockchains and investing much money in them.
Let's remember that with micro altcoins, the most effective strategy is to create a portfolio of small bets and so that means taking even projects that are still very far from profitability or with strong financials.
If you’re interested in learning more, we created a FREE Google sheet model to help you build your micro altcoin portfolio.
Anyway, it’s important to consider financials in the valuation process.
Here are some metrics you can use to evaluate crypto financials:
Revenues and Fees: they measure respectively the money the platform makes and the total fees paid by users.
Token Incentives: To guarantee sufficient security and the continuous handling of transactions, compensating validators is a top priority for any network. To ensure the existence of consistent network validators, their effort is incentivized with various issuance rewards.
Fee/Incentive Ratio: A Fee/Incentive Ratio of less than 1 entails that the operating expenses exceed the amount of fees generated by the network. Excessive token incentives lead to high inflation, which coupled with weak buying pressure can devalue the price of a blockchain’s native token on a higher time frame.
Valuation metrics: Market Cap/Total Value Locked, Price/Sales, Market Cap/Daily Active Users are some of the metrics we can use to compare different projects in the same market and/or sector in order to understand how and why the market is pricing those projects.
To Sum Up
Team: core teams & backers
Market: look for multi-billion opportunities
Product: invest in great products
Community: strong communities boost adoption
Tokenomics: verify insider ownership, supply and demand
Financials: buy good businesses
That’s all for today
Cheers!
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