Beginners Guide to Finding Undervalued Cryptocurrency Projects
The Cryptocurrency market is filled with scam projects and malicious actors. Here are some metrics to use to identify undervalued projects, in order to gain an edge against the rest of the market
Note: This article includes a lot of technical jargon, in order to better understand the concepts discussed, it’s recommended you have our “Cryptocurrency List of Terms and Definitions” open to maximise understanding.
There are dozens of Cryptocurrency projects launched every day. It’s difficult for investors to narrow down projects and use due diligence to filter the noise out to find premium, innovative and undervalued projects.
The following are a set of metrics that can be used by anyone to find projects which are undervalued, and invest before the rest of the market catches on.
1) Trade Volume: It’s important that a project has significant trade volume and liquidity in order to allow for buying and selling with tight spreads. Even if a project rallies but has low volume, selling would decimate the project price and be counter-productive to the goal of selling for a profit.
2) Project Road Map: Understanding the vision of the team, their direction with the project and overall timeline is important before investing in a project. Many projects often complete the original goal, then abandon the work to start another project. Being sure of the product having longevity via the team having a long term road map is important to ensure the project continuously delivers to attract new investors.
3) The team: One caveat, especially recently with the increase in the amount of rug pulls and scams is to ensure the project has an experienced and public team. Although there are projects that have anonymous teams in Cryptocurrency, more often than not they are scammers trying to scam investors. Being public-facing introduces many financial, social and legal risks for the team to exit scam, so the odds of this happening are very low if the team is public. Moreover, the team should be experienced programmers in the Cryptocurrency space, having a strong record of development in open-source protocols, smart contracts, blockchain, and have expert knowledge in languages such as Solidity, to ensure they can actually develop a product people want to use.
4) Investors and Project Sponsors: There are many reputable hedge funds and private investors that are investing in cryptocurrency projects. This means that the project will have enough liquidity to execute its vision, whilst at the same time having access to world-class investors to help guide the project in the right direction, and provide liquidity where needed.
5) Inflation/Deflation Rate: It’s important to figure out the token unlock rate or emissions rate for a project in order to decide if the project is viable for investment. For example, if a project unlocks 50% of the non-circulating supply after a year, that event can cause immense sell pressure, as holders exit to prevent being inflated and losing the value of their investment. Conversely, mechanics like EIP-1559 which have built-in token burns are bullish long term, as it makes the token naturally deflationary, creating positive buy pressure over time.
6) Integration Partners: Who is using the technology? How are they using it? Will they bring value to the network? It’s important to ask these questions in order to ensure that enterprise partners are wanting to integrate their own software into the project use cases. An example of this is AAVE building special liquidity pools for centralised financial institutions to access.
7) Open-source Codebase: The nature of crypto is that many projects are open-source. If they are not open-source, there are significant risks that the team is over-hyping what they are building, and that the project is either vapourware or just a fork of another protocol. It also opens up the project to external audits making it easy to spot bugs and potential back doors implemented, either accidentally or intentionally.
8) Social Metrics: The continuous surge in dog-themed coins has demonstrated the power of social media when it comes to driving a project. The larger and stronger of a social media presence a project has, the higher the potential the project has at going parabolic. Tracking the social metrics of a project is also a good way to find bottoms and tops of cycles, as the fewer people talking about a project, the higher the likelihood that buy pressure will decrease.
9) Data mining websites and forums to find new market trends: Data mining websites like Coinmarketcap and Coingecko. Building simple bots in Python that can pull data and aggregate it is a useful way to quickly and easily identify new trends in the market. Bots can be used to detect unusual trading activity on certain altcoins, picking up and identifying early accumulation trends before the rest of the market is aware. Furthermore, data mining social media websites like Reddit or Twitter is a great way to track market sentiment and also find new and interesting trends.
10) Following whale wallets: One of the easiest ways to find premium alpha is to follow whale wallets. Whales move large amounts of funds, so they must accumulate slowly in order to not risk attracting abnormal attention to their trades. Using automation and scripts to automatically track wallets is a great way to follow whales and decipher what technologies/trends they are investing in and why. There are some useful tools like Nansen that allow users to easily track whale wallets. Alternatively, building a simple script that automatically pings users when a whale makes a trade/transfer is not difficult, however finding the whales to follow is the difficult part of the operation.
11) Project Contracts and Audits: It’s important to ensure that a project is audited and has no back doors in the contracts before investing. This is important as developers can create loopholes in the code to remove liquidity, prevent people from selling the token etc. It’s important to check smart contracts against these vulnerabilities and to be 100% safe having the project undertake a security audit from a reputable firm is even better to confirm the project is legitimate and not trying to scam investors.
12) Locked Liquidity: The process is quite simple: the pool token's movement is restricted by a time-based function. This means that once the restriction is set, they cannot be moved or redeemed until the pre-selected time has passed. Basically means the team can't inflate the token supply and dump on holders and also ensures the pool has significant liquidity to ensure trades with tight spreads can take place.
13) Network Activity: The more active a network is, the more fees are paid and the more supply is decreased. Furthermore, network activity is a sign of the liveness of a project, the higher the better. Low network activity for long periods of time is not good for the longevity of a project.
14) Development Activity: Having an active, and well-maintained git is important for any project to succeed. Continuous development and iterations on the product to draw in new investors and users are important to drive up the buy pressure of any project. If a project has not had its codebase updated in what seems to be a lifetime, it is not worth investing in, as future technologies will make it obsolete.
These are some core tenants/strategies to follow when investing in Cryptocurrencies. It’s easy to spot trends by looking at market data, and using the above-mentioned methods is an easy way to spot undervalued projects in the market, and filter out the noise.
See you again for the next update. - q
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