How to Research Digital Assets

In the digital asset space you often hear the term “DYOR”, but what does that really mean? In a brand new and technologically advanced space, figuring out how to do the research to invest is often the hardest part for beginners. 

DYOR in Digital Assets 

Doing your own research in regards to digital assets can be pretty tricky. One reason for this, is because nobody is quite sure how to value these protocols. The process of evaluating traditional companies, who regularly publish financials, is still often debated among finance professionals. This means there truly is not one way to correctly evaluate these digital assets, and each opinion also includes personal preference. 

In this article, I’m going to walk you through my own personal process for evaluating digital assets. At the end of the day, the most important aspect is fully understanding what you invested in and only investing inside your “sphere of competence”. This helps you narrow down where you should invest and also greatly limits emotional reactions. 

It is important to remember that everyone has different ways of valuing these digital assets and it can be a bad idea to directly copy someone else. Most people who lose money in the digital asset space often didn’t understand what they were invested in due to blindly following what others have said. This is why it is important to do YOUR OWN research and create your own opinion after thoroughly immersing yourself.

When investing in any digital asset, regardless of the amount, it is helpful to imagine you are purchasing 100% of the company yourself. This puts you in the mindset of needing to fully understand how the business works and where the money is going and coming from. 

Evaluating the White Paper

The white paper is one of the first places I like to start my research at. A white paper is supposed to, in my opinion, simply explain everything about the protocol. This includes how it technically works from the economics to the future vision. A big key here is that personally, I only want to invest in teams who know their product well enough to explain it to a foreign 12-year-old child. The white paper should answer 90% of my questions in a very concise and simple way.

If a white paper sounds overly technical, doesn’t answer fundamental questions about the business or sounds like a sales pitch, I run for the hills. This method has more than likely caused me to miss one or two decent investments but probably saved me from many scams. Rules like this can be important to set for yourself for a long-term investing strategy.

Solid questions to have on your mind while reading the whitepaper might be…

  1. What problem is this solving? Is it a real problem that requires blockchain technology?
  2. What exactly do they do? Fully understand.
  3. What is token economics like? (More on this below)
  4. Who is the team behind this?
  5. Who are the investors behind this?
  6. Was the white paper simple to understand? 

These questions should be easily answerable after reading through the white paper and possibly doing some light googling on the technical side of the software. The most important aspect of the white paper may be token economics. 

Evaluating the Economics

Economics in the digital asset space is commonly referred to as “tokenomics”. What these are is how the token actually works. It is important to remember that investing in a cryptocurrency is very different than investing in a stock. You are not purchasing ownership of the protocol, but ownership of the digital token that typically fuels the ecosystem of that protocol. 

How the protocol and token interact with each other, is extremely vital for any investor to know. Some ecosystems completely revolve around the token, while others only use the token for specific actions. Understanding how the price of the token moves, and more importantly why is potentially the most important aspect of the research.

Good questions to keep in mind while researching the tokenomics may be…

  1. How does the token price move? 
  2. Where does money come from?
  3. Where does it go? 
  4. Who has access to funds?
  5. Is the token distribution fair? 
  6. Vested or locked up funds and when they are released?
  7. Deflationary or inflationary economics? To what extent? 

These questions should be made very clear on the white paper. If rewards are included, where does the money come from? If there are any network fees, who are they going to? Knowing exactly where every dollar is going and coming from as if you owned the entire business, is the best way to go about this process. 

Token distribution alone can make a decentralized protocol, centralized if a small number of people have too much control. This would allow the group to artificially impact prices as they wish. Tokens are often distributed to early investors and the team, and there are two things to pay attention to here. First is the amount, if less than 60-70% of the tokens are distributed directly to the retail community, there’s a good chance the team has too much control over the token price. 

Second is token vesting for early investors is often enacted meaning although investors receive the tokens, they cannot sell them for a certain period of time. These vesting periods can impact the price based on a larger than normal supply hitting the open market, making it an important thing to look for in tokenomics. 

Digital Asset On-Chain Data

BitInfoCharts and CryptoQuant are two great resources for on-chain data. On-Chain data provides great resources for research into crypto tokens and specifically the movmenets on the blockchain. Some of my favorite on-chain metrics to watch include…

  1. Total Value Staked – The total value staked on a network. Oftentimes, staked coins are locked up and cannot be sold for a certain period of time. High amounts of staking is typically a good sign of confidence from investors.
  2. Hash Rate – The average numbers of hashes per second across all miners. High hash rate means more tokens being mined on average.
  3. Fund Holdings – The tokens held by digital asset funds like ETFs. This could include Grayscales GBTC ETF and high fund holding can be a sign of institutional confidence in the token.
  4. Active addresses – The total number of unique and active addresses on the blockchain. Important to see how many people actually use the network.
  5. Liquidations (long/short) – Liquidated positions in the derivative market. With high amount of liquidations, a sudden price movement can force the token price to either “squeeze” up or get “shorted” down. If there are many short positions and the price breaks a certain point going up, all positions are forced to purchase the shorts and hence the price gets squeezed up. This is what happened during GameStops meme stock frenzy.
  6. Exchange reserves – The total number of coins held in an exchanges reserves. Low exchange reserves can force the exchange to purchase large amounts of tokens at the market price in a pinch.
  7. Miner reserves – Tokens held in miners wallets. A drop in reserves often shows miners selling the token.
  8. Estimated leverage – Open interest divided by coin reserves shows how much leverage is being used by users. Increased value shows high risk taking.
  9. Miner flows (in/out) – The average amount of coins per transaction with miner wallets. 
  10. Miner Position Index – The ratio of total miner outflow to the one year moving average of total miner outflow. Higher values typically mean miners are moving and selling coins. 

Market dominance can be good to watch as well, as typically Bitcoin dominance movements can signal cycles. Cycles occur when the Bitcoin dominance falls and the alt coin dominance rises, signaling a rotation of money flowing into alternative digital assets. CoinMarketCap offers a great interface for cryptocurrency tracking and even shows dominance.

Evaluating the Team

The team is an important aspect of the project, and is often where you might find red flags. Extensive research on the team is required to make a sound investment decision.

  1. Are these people you would want to work with? 
  2. Would you trust them working for you if you were the boss? 
  3. Would you trust them loaning them money? 
  4. Would you tell your mother to invest with them?

These are three major questions to ask about any team before making a purchase. Verify identities and past achievements, find alternative social media profiles and do a few Google searches. Sometimes just a quick search will show past shady behavior. 

The team should be professionals, experts and have a history of being able to deliver products. Only invest in people that you have the utmost confidence and trust in.

Evaluating the Project

This refers to both the community of users, the community of developers, investors and the competition. The developer and the general community should both be growing and active online. The market that the project is operating in needs to be understood thoroughly, as well as any relevant competition. 

An important part of the project, is to have what is commonly known as a MOAT. This refers to the ability to maintain a competitive advantage over others in the space.

  1. What sorts of partnerships and endorsements have they received?
  2. Is the community large? Active? Growing?
  3. Is the community there for the project or there to flip for a quick buck?
  4. Any big name investors aligned with the company?
  5. What sort of market is the project in?
  6. Whats the competition like? What advantage does the project have over others?
  7. Is there a solid, growing developer network? Are developers prioritized?

Evaluating the Potential of Digital Assets

Utility. The new favorite word in Web3. Do not get fooled by big fancy words and a white paper packed with the word “utility”. Evaluate the potential of the protocol for yourself. What is the utility provided, and is it real? Oftentimes, companies in the Web3 space refer to “utility” while talking about a random airdrop that provides no utility. 

Utility means you actually get something out of it. Utility means even if you’re no longer interested, someone else may be interested in the digital asset based on the utility it provides. Evaluating the potential slightly goes into evaluating the competition and market space the project is in to determine the best possible investment. 

  1. Why is it better than a Web2 solution?
  2. How big is the market?
  3. Relevant Web3 competition?
  4. What utility is 100% guaranteed? What utility is promised?
  5. Is this the best option? 

The Difference Between Cryptocurrency and NFTs

Technically speaking, cryptocurrencies are fungible tokens and NFTs are non-fungible tokens. This just means that NFTs are unique, although every cryptocurrency (like Bitcoin) is the same. 

While investing in NFTs the white paper is very important, as is a doxxed team (not an anonymous team with NFT images). The general community of retail investors is extremely important for NFTs, and if real utility is being provided that can also be huge. Art and the physical attractiveness of the image associated with the NFT is also a key factor to the success of a project. 

Cryptocurrency investing is a bit different. Less about the retail community and more about developer communities, solving a problem and having a competitive advantage are all big parts of crypto. White papers are the most important aspect of crypto tokens, often supplying most of the information. 

Investing in digital assets really boils down to fully understanding every aspect of the protocol, token and project in general. It often takes anywhere from 6-24 hours of research to build real confidence in the position. The time ranges are based on prior knowledge about the specific technology and prior industry knowledge. 

The best advice after thoroughly doing this research is to ignore your investments. Once a quarter, or bi-annually, check each individual investment and reassert that the investment thesis has not changed. Beyond this, keep up with the general industry/portfolio for about 3-4 hours a month. This will help avoid missing any big news or being surprised by certain price movements. 

Before diving into researching projects to invest in, it’s important to understand blockchain technology in general. Understanding how blockchains work, how smart contracts work and the general lingo of the digital asset space must be done prior to anything in this article. Social media can be a valuable tool while jumping into the Web3 space, so make sure to follow all the best Twitter accounts.

For media, content or writing inquiries please contact Patrick Hagerty at PatrickJHags@gmail.com

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