1. Circulation Supply, Total Supply, & Market Cap

Market Cap

One of the first things I examine when evaluating a coin is the market cap. I check to see if the market cap is reasonable for the target market it is aiming to disrupt. I consider how it relates to the coins which have a similar market cap and imagine what the market cap could be in a year or two. With this rough estimate, I get a general idea of how the value of the coin will change in the future. Keep in mind how the circulation supply will grow over this period. The reason this is important is that if you expect a 10% growth in the total market cap over the next year for a coin, but the circulation supply is growing faster than 10% per year, then the price of the coin would actually decrease. By looking at this, we generate a rough growth expectation for the coin.

Circulation Supply

There are several key elements to evaluate when looking at the circulation supply. One of the first being how fast the circulation supply is expanding. This means at what rate are new coins being introduced into circulation. The faster new coins are brought into circulation, the more difficult it will be for the coin to climb in price. Next, note what portion of the total supply is occupied by the circulation supply. As the circulation supply reaches the total supply, this means fewer coins will be brought into circulation and could force a price ramp-up. On the other hand, if the circulation supply is only a fraction of the total supply, this indicates the price will be influenced by future dilution in the market.

Let’s look at a simple example of how an increase in price impacts the market cap based on the circulation supply. Say we have two coins that are both worth $1, but one has a current circulating supply of 1,000 coins and one has a circulation supply of 1,000,000,000. If both of the coins increase in value by $1, that means the market cap of the small circulation supply coin will reach $2,000 and the large circulation supply coin will approach $2,000,000,000. This shows that while a change of $1 in one coin only changed the market cap by $1,000 in the other it increased the market cap by $1,000,000,000. This illustrates why it may be harder to increase the value of an asset which has a large circulation supply.

Total Supply

The total supply of the coin goes hand in hand with the circulation supply. The total supply states how many coins in total can ever be minted. This value can help you understand the long term potential value of the coin. If the total supply is incredibly large, this could indicate that as the circulation supply expands, the price may remain stable as new coins being introduced into circulation offset a rise in price. Factoring in the total supply can help address if it’s practical for the coin to increase in value over the long term. The higher the total supply, the more impact a small change in value will have on the market cap in the future. This can be observed if we hypothesize a very extreme scenario. Let’s say the current circulation supply of a new coin is 1,000, its total supply is 1,000,000,000, and the current price of that coin is $1,000 for each coin. Although the current market cap is only $1,000,000, in order to maintain that price while the circulation supply increases to the total supply, that coin would need to have a market cap of $1 Trillion when the circulation supply reaches the total supply. This suggests that the price of the coin could decrease as it becomes diluted.

2. Diversify

Market Cap

Diversifying based on market cap means selecting coins that vary in market cap. A portfolio with a diverse market cap will have several large market cap coins (large-cap), mid market cap coins (mid-cap), and small market cap coins (small-cap). For example, it’s common to see portfolios with a 50%, 30%, 20% split between large, mid, and small-cap coins respectively. It can allow you to see great short term and long term growth without taking on too much risk. One question I have been asked recently is “what constitutes large, mid, and small-cap?” While this varies depending on who is answering the question and the current state of the market, a simple metric is to consider the top 10 coins as large market cap, the next 20 coins to be mid-cap, and the remaining coins to be small-cap. At the time of writing, this means that coins above ~$1B in market cap would be large-cap coins, coins below ~$1B and above $500M would be mid-cap coins, and coins below ~$500M would be small-cap coins. As the market grows and changes, the coins which are considered large, mid, and small-cap may also change.

Target Market

There are a variety of markets that cryptocurrencies are attempting to address. Anything from publishing (Po.et) to storage (Storj) to lending (ETHLend) is being disrupted by cryptocurrencies. This doesn’t mean that all of these markets will survive. In order to prevent your portfolio from crashing when one of these markets shrinks, it’s ideal to diversify your investments across many different industries. Instead of only investing in one industry, pick a diverse set of industries that are promising. Some industries to consider include: decentralized storage, computing, lending, development platforms, micropayments, privacy, distributed exchange, advertising, and social media.

Coin Technology

Not all coins use the same technology and not all technologies are equal. Coins can be divided into a variety of technology types with different advantages and disadvantages. There are different mining hash algorithms such as SHA256, Scrypt, and X11. Then there are different proof systems such as proof of work, proof of stake, and proof of activity. All of these differences in cryptocurrency technologies impact their ability to become adopted. When building a diverse portfolio, it is important to remember that each of these technologies has advantages and disadvantages. When the market shifts, it may begin to favor a specific type of technology, this can drastically impact your investments if it isn’t considered when building your portfolio. For this reason, it’s a good idea to pick a variety of coins that use different technologies.

Learn more about how diversity affects the performance of a portfolio in our technical study:

Portfolio Diversity: A Technical Analysis

3. Team & Advisors

Team

Similar to coin diversity, a well-rounded team should have strong diversity. The team should consist of a group of respected engineers, designers which have experience in branding/designing for startups, marketers with a demonstrated track record of running successful campaigns, and a leadership team that has managed successful projects in the past. The best teams in the industry will have these qualities and more. Evaluating a team is one of the most difficult aspects of evaluating a coin, especially when there may not be a lot of information about the individuals. Catchy titles and flashy past experience doesn’t always translate well into the startup environment, so accept hype that revolves around a team with caution.

When evaluating the members of the team, don’t take anyone’s word for it, dig into the details. They should have LinkedIn profiles listed for each member, Twitter handles for those that tweet, group Facebook pages, blogs, and more. Going through their online profiles can help you get a detailed view of their team and if they are actually committed to the product they claim to be developing.

Advisers

Advisers shouldn’t be overlooked. Although they likely aren’t involved in the day to day activities of the team, these advisers tell us something very important about the team. They tell us how capable a team is at pitching their idea, convincing high profile people that the endeavor is worth their time, and demonstrates they have a strong sphere of influence. When looking at the advisers consider their relevance to the industry the project is trying to address, look at how influential each adviser is within their respective industries, and determine how large of a network each adviser will bring to the team.

4. Investors & Funding

Funding

Funding can be an important indicator of the potential of a team. Without sufficient funding, it would be an incredible feat to overcome the odds and succeed. Also, note when the ICO took place and how many team members they are employing. This can determine their burn rate and establish how promising the future looks. Without branching out to other industries, all ICOs have a discrete runway. This means there is a cap on the amount of funds. Once those funds are used up, development stops unless engineers decide to pick up the unfinished code for free, which shouldn’t be expected. Personally, when I see a company that hasn’t raised a lot of funds, has a large team, and the coin they created has a small-cap, this signals to me that they are burning through money quickly and won’t be around very long.

Investors

Sometimes the person who gave you money is more important than the amount of money received. By examining the initial investors, you can get an idea of how much trust is being placed into the team. Venture capital firms have begun investing in ICOs and cryptocurrencies, so seeing a big name VC supporting a cryptocurrency can be a good signal. This demonstrates the team is able to network and influence decision-makers in the industry to trust their team with significant amounts of money.

5. Product Development & Activity

One of my personal favorite parts about evaluating a new cryptocurrency is digging through their public code repositories. I will generally start with a high-level evaluation by looking at things like how frequently they commit code, how organized is their repository, how many different contributors have pushed commits to the repository, how many and how severe are the reported issues, and how many pull requests have there been. Two of the more important of those being the frequency of commits and the number of contributors. I have come across too many mid and large-cap coins that haven’t had a single commit in years or only have a single developer making all of the changes for the entire cryptocurrency. Both of these are not sustainable and will lead to the downfall of the asset.

Once I have a general idea of the state of the repository, I start digging into the code. I get an idea of the organization of the code. Have the developers been writing clean code that’s documented? Do they have a strong test environment that actually executes critical sections of the code? If the code isn’t documented well or there doesn’t seem to exist a strong test environment, this can be a sign that the coin is going to have trouble scaling in the future. The final stage is actually understanding portions of the code. It’s not necessary to understand all of the code, but you can generally get an idea of the developer’s competence by skimming the code. I check to see if their code design is logical and precise, I look for the use of optimizations when it’s possible and obvious, and I like to see that they use strong object-oriented designs.

I consider the code the team writes to be proof of my team assessment. If I evaluated their team as one with strong potential, then their repository solidifies my view of the team. Outside of the proof of work by reading through the repository, there are other ways to see if the developers are engaged. By following the developers on Twitter, looking for appearances in technical conferences, and participating in technical discussions indicates the developers are ready to engage the community, have strong communication skills, and are willing to share their knowledge.

6. Whitepaper

While the whitepaper is important, there has been a significant over-reliance on this document. While the idea could be profound, it matters very little if the team is incapable of implementing the ideas. Many large and mid-cap coins have grand visions that will never be reached because either they will run out of funding, the technology won’t be possible/reliable/practical, or people will simply understand it’s not as useful or convenient as they thought. Ensure while reading a whitepaper that you look for key indicators that can signal if the vision is a pipe dream designed by someone who doesn’t understand cryptocurrencies or there are technical and practical grounds for what they are developing. Several examples of a pipe dream that will likely never come to light are coins that try to do everything. Coins that promise the world don’t understand the trade-offs of the various algorithms and technologies that are currently being employed today.

7. Community

At the end of the day, although a product is made, that doesn’t mean people use the product. As a result, the community is an integral part of a coin’s success. Without a strong community supporting the coin, it’s unlikely to succeed. This doesn’t mean there will always be a strong community behind a coin that is rising, but it means there needs to be an evaluation of the trend surrounding the community that supports the coin. By gathering involvement on social media, forums, and technical discussion boards, it’s possible to get an idea of how the community involves themselves. As a coin grows in market cap, presumably, so should the community involvement. A coin that recently got pumped without a match in community involvement could be a sign that something is going on behind the scenes that will quickly result in a following dump. Natural growth happens when a community gathers in support of the coin, involves themselves in the development, marketing, and use of the coin and even starts to build things around the coin. For example, third party block explorers, price trackers, integration into 3rd party wallets, etc. As the community grows in support, it’s possible the market cap will follow. If the market cap leads the support, tread cautiously.

8. Marketing & Hype

Outside the actual product development, it’s important that the team is capable of marketing the product. In addition to marketing, producing meaningful partnerships, sponsors, and support is in some aspects just as important as the product. There needs to be a balance between product development and marketing. A product without proper marketing will likely falter and fizzle out over time as funding dries up. In comparison, a coin that is over-marketed can cause the hype to get ahead of the product causing the market cap to far exceed the value of the product. This can induce crashes later on as the public begins to realize this fact and becomes concerned for the future. This volatility may lead to uncertainty. The ideal marketing is one that pairs closely with product development. Organically growing marketing campaigns and scaling them up as the product comes to fruition is a positive scenario.

9. Timeline

The timeline is an important indicator of how well the team is maintaining their course and hitting objectives. Even the best teams need to deliver. Without delivering on schedule, investors become concerned and the value becomes unstable. A trustworthy team will keep the community in the loop as far as their timeline goes. A good team will hit their goals or in the least provide ample evidence supporting their reasons for not hitting deadlines.

Additionally, the timeline should be reasonable. While a team that doesn’t hit their deadlines causes issues, so does a team that has an unreasonably long timeline. Without haste, any team can get toppled with new ambitious coins that are introduced into the market. This means there should be a reasonable balance between haste and making sure there is enough time to complete a task well.

10. Resources

Investing in cryptocurrencies is a continuous process. While the industry matures, there will be new technologies and opportunities that arise constantly. It’s important to stay on top of the news in order to understand the future outlook on your investments. Don’t be afraid to change up strategies when mistakes are made. There are also a lot of good resources that can be used to gather information about the market, manage your portfolio, and track the progress of development teams. I will provide some of those resources below.

Market Analysis: https://coinmarketcap.com/

Portfolio Management: https://www.shrimpy.io

Coin Ratings: https://www.coingecko.com

Social Analysis of Each Coin: https://solume.io

Discussion Groups: https://bitcointalk.org/

High-Level Explanation of Coins: https://www.iconomi.net/digital-assets

Collection of Resources: https://cryptominded.com/

Market Analysis: http://coinpuffs.com/﻿

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