In this article, we will go through our personal methodology to rate cryptoassets and other ICOs, in order to answer the question: is investing in a particular cryptoasset worth it ? When Coinhouse discovers a new project, our team attempts to deliver precise information by completing a thorough research analysis. Our methodology is a decision-making tool which has gone through multiple revisions. We recommend to consider it before making your own investment decisions.
Different kind of tokens exist (payment tokens, utility tokens…). Investing in a project involves owning its tokens. So it’s crucial to understand the kind of token you own and its usage. Having information about the token distribution model allows you to anticipate its scarcity and evolution.
Viability and reputation of the company
When investing, checking the long-term viability of the company and its reaction when facing problems is a must-do thing. It proves the seriousness and can justify a long-term investment. To qualify the seriousness of the project, you also need to know if the country where the company is based offers transparency. Legal institutions and government have to be favorable to the cryptoassets industry.
The legal status of the token can be rated thanks to the Howey test. It will determine whether it should be considered as a security by the SEC. These legal aspects are fundamental to determining a project viability. Regulation in the cryptoassets world is still unclear in a lot of countries. Projects with consulting and support services are more susceptible to survive through difficulties
The SEC often issues recommendations. This institution has a huge impact on financial markets. So we advise to double-check if the project is in line with the SEC recommendations. A strong investigation about the team, the advisors, the partners, the contract-workers is also necessary to estimate possible conflicts of interest, market or price manipulations. Right now, legal authorities are overworked so it is important to be very careful to avoid an investment in a fraudulent project.
Checking the road-map offers an overview of past realisations and those to come. The road-map has to be coherent with the overall project, with well-detailed steps allowing to reach the project purpose. A long-term vision must prevail over the founders’ short-term interests.
The stages already accomplished and those to come give an idea of how fast the project progresses and if the deadlines are respected. A roadmap without a timeline is not necessarily a red flag, but potential investors will need to check if the team only wants to deliver top quality work without time constraints or if it’s just shoddy work
How the company decides to communicate can be an alert. it must be coherent with the users and the community expectations (presentation on bitcointalk, progression and news on Medium…). If the project has aggressive commercials, there is unfortunately a high probability that it is a scam.
The project must be visible on different digital and communication channels and not only on the social networks. Otherwise, vigilance is recommended.
Team, advisors and partners
The team, the advisors and the partners are the key foundation of the company and its future. A careful analysis of these points is therefore required
The founders had the original idea of the project. They represent it and are responsible for the credibility and the success of the company. They must lead the long-term vision and create emulation within the team. It is important to look at their previous projects and to establish a skills profile with their strengths and weaknesses. A bad reputation on specialised forums should often be considered as a red flag for investors.
A good understanding of the technical aspects, challenges, mechanisms and economic issues related to the project is essential to put everything together and to be sure that the goals are realistic, considering the team skills.
The team is the engine behind the project. A good team building with motivation and energy is a key factor in a project success. Investors need to be sure the team gathers all the skills needed, and that all the departments are equally represented. Ideally, team members must have a strong interest in the project through a long-term perspective. Their previous experiences, successes and failures have to be analysed.
The advisors can help or be ambassadors for the project. They will spread knowledge about it through their network. Or, through their expertise, they will help take the right strategic or technical decisions. The Advisory Board is a real strength if the project is relevant. The Board involvement is necessary for the project to succeed, via regular discussions with the founders. On the contrary, it is never a good thing if one notices a disengagement between the advisors and the founders, especially if they have a strong reputation in this area of expertise.
Partnerships are essential for most projects. The kind of partnership can be important regarding its relevance and is nature (legal institutions, banks, companies, market places…) Partnership content provides information about how far the members are involved and what are their final goals. When a project needs partnerships, it is important to verify if the team is busy with active research and if they achieve new partnership signatures.
Network, technology and development
This is the most important part of the project, the reason why it exists and why a specific team is working on it. Potential investors have to understand the project, the technology that is being developed, and the goals to reach in order to evaluate its chances of success.
In the cryptoassets industry, the technology is essential. The first metric to analyse is decentralisation. Decentralisation provides censorship resistance and immutability. It is the most valuable characteristic of a DLT. If the project is built on top of a well decentralised smart-contract platform like Ethereum then there is no issue, but if not, investors have to estimate how well the system is censorship resistant.
Understanding precisely the token’s usage, present and future function, is mandatory. Be careful if the token is not essential to achieve the project. The odds for success are way higher if the technology is disruptive compared to the present solutions. A revolutionary project like Bitcoin or Ethereum will probably lead to a lot a discussions and debates.
You also want to keep an eye on the tokens’ security. Losing all your tokens because of an exchange hack will be dramatic if you don’t have any other solutions. Cryptoassets make transactions without trusted third party possible as soon as it is decentralised. Knowing the system environment is essential to ensure it really is a tamper-proof technology.
Development / Github
The development team is essential in the project progression.
The source code is the cornerstone because it is the foundation text which defines program instructions as wanted by the development team. It can be totally or partially replicated from an existing project. If so, it is called a fork.
In the cryptocurrencies industry, the open source is a sign of transparency. A project that is not open source is immediately suspicious. Bad quality open source projects also exists, so investors will have a look at the code before considering a project is valid.
Some indicators can give clues about the energy put into the project development on Github, such as the number of commits, the number of updates and frequency or how big is the community. An audit request by a recognised institution gives reliability to the project and can securise system flaws.
Global and specific communities
Cryptoassets industry has a very active community from all over the world. Each project can gather its own community. Checking that the project’s goals are in line with the community’s size and nature is important.
A project who succeeded to create an active community of professionals and investors has better chances than one with poor activity. If the project creates its own work environment, like Ethereum, you have to check what is really permitted for the professionals who use it. A community who is really aggressive and insistent in its communication and inquiries is a red flag for investment.
A project can be well backed by its community but fail to create a consensus in the overall crypto community, like for example OneCoin, which was a scam. It is crucial to get analysis from recognised experts in the crypto community (on BitcoinTalk for example).
Network, stability and modifications
Looking at the average number of daily transactions and how it evolves is important.
The network stability must be considered through the current status of the network: an alpha version is, for sure, less stable than a beta or main net version. It is also wise to be aware of the methodology used by the team for tests and modifications on the test net, main net and final version.
Market analysis is a key thing to do to have an overall vision of characteristics and opportunities in the sector. Market’s appeal can be determined with a SWOT analysis (Strengths – Weaknesses – Opportunities – Threats)
Identify the relevant competition is also important. Strengths and project positioning among competitors have to be analysed. If not, you must at least identify the competitors and learn about their projects.
Market size and capitalisation are indicators to analyse carefully, regarding the liquidity in crypto markets.
Cryptoassets are a new market. Speculation is still the main reason for market movements. Even if more and more projects’ technology are reused, as for example Decentralised Applications development or predictions markets creation.
Market volume is a good indicator to see if people are really interested. A market without volume is a sluggish market, but stay aware that strong volume can also be created by bots (automatic softwares) interacting with the market to create buy and sell orders and generating fake volume.
The market trend can be perceived with technical analysis (Trading). But in no way a trend is permanent. Trend changes can happen really fast. You must be able to quickly detect trend changes to adapt your investment strategy.
In case of fundraising projects
A deeper investigation is necessary in the case of a fundraising project. Indeed, less information is available and you have very few elements to make your decision.
Fundraising information is useful to identify the project characteristics and values. It can be ICO based or DAICO based. DAICO are still rare but bring fairer situations between founders and investors, especially regarding corporate governance.
Looking at the tokens distribution gives a good idea on how its wealth is centralised or decentralised. The rules establishing how the tokens are given to the team members and foundation are also important to know.
Fundraising duration is a good hype indicator for the project. Price evolution can be up, down or neutral but has to be justified regarding to the project nature. Caps are fundraising objectives. The soft cap is the minimum amount required during the fundraising, the hard cap is the maximum amount which will interrupt the fundraising immediately. These caps must be relevant with the project objectives.
A benchmark with a SWOT is a good tool to evaluate the project environment, and if it will answer to a specific need and create interest in the future.
The Whitepaper is the key element for a fundraising project. Project’s objectives and technical solutions are described. This technical document is ideally written in LaTex. This is not a commercial brochure. The Whitepaper must explain precisely the solutions that are proposed, how it will work, the technology that will be used and why it will bring a real evolution. Token utility must be defined too, with a total transparency.
Stages already done and stages to come
Keep in mind that investing in a cryptoassets project don’t necessarily give you a power of decision on the project. Better ensure the team is proactive to deliver a proto-product. A MVP (Minimum Viable Product) or a PoC (Proof of Concept) are a real plus for fundraising projects.
Roadmap must be clear and precise when you look at a fundraising project. If it is too ambitious or irrelevant, that’s a red flag. Burnrate presentation (how and when the funds are used) is a good thing and shows a mature reflexion around the draft.
Analysing cryptoassets projects, before or after fundraising, requires strong knowledge and multiple skills, especially technical and financial. It is a very rigorous process to apply if you want to avoid bad decisions. But a project success is never a guarantee, even when using this strict methodology.
The knowledge of Coinhouse’s experts is here to fully support you at all stages of your investment.
But keep in mind that, in this new cryptoassets ecosystem, better to miss an opportunity when you are not sure than to take too many risks with sloppy projects.