Risk comes from not knowing what you’re doing. The more information you have, the less risk you take in any given action.
Everyone says, “Do your own research!” But how? Where should you start? What red flags should you look for? What tools should you use?
At Simplicity, we conduct due diligence for investors as WeDYOR. Hence, although there are a few great videos online on doing your own research, we wanted to provide you with our view.
Scroll to the bottom for a list of red flags, green flags, and a research template to download and use.
Note: this article is for retail, who do not get access to pitch decks, financials, or other internal documents, and have to rely on public information.
Everyone has a different level of risk tolerance, thus, there is no one-size-fits-all strategy. Some people prefer to invest for the long term and forget about it, whilst others prefer to dive in and out of investments, maximising gains.
Generally speaking, to research a long-term investment you need to look for fundamentals, and to research a short-term investment you need to look for sentiment. Hence, these are the two types of analysis we will be explaining in this article.
For reference, we can visualise what the typical price chart looks like for the projects that have either one, both, or neither of these qualities. After seeing this, you should be able to identify what camp you would rather be in; if the answer is bottom left, just remember that that requires double the time and effort spent on research.
Quick note: projects that focus on building sentiment and have weak fundamentals are not necessarily going to scam. Some outright scam, some slow rug - i.e. the team just stops building, but some are genuine projects that are just bad ideas or have bad execution which therefore fail.
Let’s dive in.
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Good fundamentals will keep a project going during the bear market and beyond, but this often comes with long-term returns on investment - i.e. the price doesn’t shoot up by 1000x, but it also doesn’t crash down. It’s crucial to understand that the fundamentals of a project stem from its product/service, not the token. There are a few things to consider, namely:
The idea is the actual product/service the project is launching, and the market is the users/buyers of said product/service.
Idea: watch Dragons Den - it’s the UK version of Shark Tank, and is way more realistic; they grill bad companies and invest in good ones. One of the main things they grill is the idea because most ideas do not solve real problems. In 2022, 25 new crypto wallets were launched daily with their own tokens. What problem were they solving, given that Web3 already has infinite crypto wallets? None. They all failed.
Furthermore, most ideas do not actually solve their problem. A wallet claiming to onboard the next billion users because it has a nice UI will never onboard the next billion users because the problem isn’t the UI, but the fact that most people think crypto is a scam, ironically due to projects like this. The next billion users will be onboarded via the BTC ETF, neo-banks like Revolut, or regulated companies like Coinbase.
Understand what the idea is and whether it solves the, or any, problem.
Market: you need people to use your product/service. If the market is small, or non-existent because the idea is bad, the project will fail - it’s just a matter of when. For example, a wallet launching on an L1 with 500 active users (which you can find on DeFiLlama) will never make enough revenue to survive. Search the web to find data on the potential amount of users a project is trying to sell its product / service to.
Competition: having unique selling propositions (USPs) and asymmetric competitive advantages over competitors is critical - innovative, patented technology, founders with more connections, targeting a better market, more funding, and so on, are all examples of USPs and ACAs. That being said, do not assume that a lack of competition means success. Maybe the idea is bad, and other competitors died.
Understand the size of the potential market, the total revenue in a particular industry, or simply how many people fall into the category of a potential user. Understand whether the project has an advantage over its competitors.
The team is incredibly important. Companies can pivot if their ideas are bad, but a bad team is a non-starter because founders need to have the experience and reach to make their project succeed.
Experience: find the team’s social media accounts (namely LinkedIn and Twitter) and check if they have (a) experience in Web3, (b) experience in their narrative, and (c) experience in their role.
a. If a founder hasn’t been in Web3 before they’ll likely not possess the necessary knowledge to succeed. Web2 is very different to Web3.
b. If a founder worked in retail his whole life yet is launching an infrastructure project that’s putting supply chains on the blockchain, they simply will not have the knowledge or experience necessary to succeed.
c. If a founder worked as an accountant his whole life yet is now a CTO of a project, that project’s code will likely be bad - not only because the founder only has hobbyist coding experience (if that), but also because they never managed a team of developers before.
Bonus point: a founder who started successful companies in the past will likely succeed again.
Reach: a founder with a lot of reach (i.e. loads of followers, or someone who holds a big role in a key organisation (e.g. a board member of the WEF)) is more likely to succeed simply because they have access to more people that can help. More in the “Backers” section.
Understand whether the founders have the necessary experience and reach to make their projects succeed. Verify whether the founders are real by checking different social media.
PSA: avoid any anonymous teams - they’ll almost certainly either rug you or will get shut down by the government because they’re doing something heavily illegal which requires anonymity; it’s easier to just avoid.
If the project is supported by a lot of solid investors, launchpads, and exchanges, as well as advisors and partners, it is much more likely to succeed.
Investors, LPads, Exchanges: use the hyperlinked websites to determine whether a project’s backers are good. Simply put, the more, and the higher quality, the merrier = more support, capital, and publicity. Plus, high-tier backers are a confirmation that the project is fundamentally strong, given they do their own due diligence.
Advisors, Partners: good advisors and partners help with connections and experience. For instance, a project tokenizing music for artists will do much better if it had Taylor Swift and Jay-Z as advisors, and Spotify as its partners.
On the flip side, watch out for either useless partnerships or fake partnerships. Many projects put “Amazon Web Services (AWS)” or “Google” as partners - it just means they got some free credits from Amazon or Google to use their cloud storage services. Not good.
Understand whether the backers are going to be helpful, and verify whether they are legit. You can do this by going on the social media pages of these entities and searching for the name of the project you’re researching; if they have not publicly announced anything, it’s very likely the project is lying/exaggerating (although not guaranteed).
This is a deep topic. We urge you to read more about token value, token utilities, and tokenomics. But, to summarise, you need to look at the utilities, vesting schedules, and the valuation/market cap. The buy pressure is determined by the utilities and users; the sell pressure by the vesting schedules; and the valuation/market cap is the token’s price. Long story short, are there more people buying or selling?
Utilities: are the utilities going to make people buy the token? Good utilities stem from the product. For instance, a token that’s used as “rewards” will be earned by users, and then sold; no good. However, if the token is also used to buy premium stuff in the GameFi world, people will buy it. Now, determine whether you think the product is good enough for there to be more people buying than selling (as per Idea & Market).
Vesting: if a project had an all-time-high of $10 when they had 10% of their token supply on the market in 2021, and they unlocked the remaining 90% of tokens over the last 3 years, that means it would require 10x more buy pressure to reach the same all-time-high. You need to compare the circulating supply in the past, to their circulating supply now. If there’s a huge gap, it’s unlikely to reach those prices even in a big bull market, given that the institutions will be investing into Bitcoin, not any random coins.
Then, when it comes to newer projects, we can analyse them like investors do before launch. If the entire supply is being released onto the market in the first 12 months, the market will get flooded with tokens, and it’s unlikely that there will be enough buy pressure to keep the price from falling. On the flip side, if the vestings are long (2+ years), it means there is enough time to accumulate enough people to buy the token, given the utilities are good.
Some key points:
Valuation/Market Cap: first, let’s look at this via the image below to understand supply and demand.
Where S1 and D1 meet is the current price of the token - this shows there are the same number of buyers and sellers at $10.
If only demand increases (shifts right, D1→D2), the price of the token rises to $12 (where S1 and D2 meet), because there is more demand for the same number of tokens. If only supply increases (S1→S2), the price falls to $8 (where S2 and D1 meet) because there are more tokens but no new buyers.
So…
Valuation - unlaunched project: if the project is launching at $10, and has 1M tokens, its public round valuation is $10M = price × quantity. Long story short, this means that the project will need to get about $10M worth of buy pressure (i.e. people need to buy and not sell $10M worth of the token) by the time it releases all of its tokens. Otherwise, the price will decrease.
Market cap - launched project: same as the valuation, except only some % of the total supply is left to be unlocked. This is where you can look at the difference between Market Cap (MC = current price × circulating supply) and Fully Diluted Market Cap (FDMC = current price × all supply).
If the price of the token is $10, the MC is $500M, and the FDMC is $5Bn, in order to stay at the current price, it needs $4.5Bn more buy pressure. If it doesn’t get this buy pressure, the token price will simply keep falling.
PSA: do not assume that because a competitor reached $n market cap, this project will too. The people who would invest into this project, already invested into the competitor. This isn’t a logical assumption, unless the project aims to take over from the competition, in which case it needs strong fundamentals.
To summarise, to ensure the price doesn’t fall there needs to be more demand than supply at any given time.
Understand whether the utilities incentivise people to buy the token, whether tokenomics aren’t too inflationary, and whether the launch price/market cap makes sense.
PSA: if the market cap of a project is huge but the fundamentals are not - e.g. no fees generated, only a few thousand unique wallets, only a few thousand transactions (use DeFiLlama and DappRadar for this data) - it is likely super overvalued and held up by speculation, which can disappear in an instant.
Unique active wallets (UAW), fees, transactions, volume, NFTs sold, TVL, etc. are all good metrics to see the number of real users because they can’t be easily botted. The more users, the better. This can be figured out by looking on-chain at tools like DeFiLlama.com and Dune.com/home.
Looking at the amount of social media followers etc., aka the “community”, is good for analysing sentiment, which we’ll explore in the next section, however, as far as the fundamentals go, the “community” does not matter without the real numbers mentioned above…
This is because most “communities” are just bots and a few real people simply farming airdrops, whitelists, or trying to pump their own bags. Remember, token holders are not users: a project focused greatly on token holders instead of users will prioritise marketing about staking APY (annual percentage yield), TVL (total value locked), or other vanity metrics, instead of a good product, revenue, and actual users.
These projects do not survive for long, because the token holders eventually leave for a shinier new token that belongs to a better project, or simply leave during the bear market.
Understand whether the project has actual users that use the product. Remember, if the token utilities are good, then real users will equate to real, long-term buy pressure.
It’s important to analyse the past to confirm progress, and the future to see potential.
Past: check whether the project kept up with its expected timelines - if it has Public Launch Q1 2023, but it’s already Q1 2024 and it’s still not public, that’s not good, but still find out why. If the reason is legit like unforeseen technological difficulties, and the team is open about it, then it’s fine. If there’s no explanation, then it’s because there are deeper problems that likely spell a short future.
Future: the project needs to have clearly identified and reasonable goals for its future. If it’s a DeFi protocol that aims to become the new global bank, it will fail, because the current system will never let that happen. But if it aims to get into and dominate a particular market, from which it will expand further, the chances of seeing success are much higher (plus it shows the team are smart).
For example, PayPal targeted eBay auctioneers instead of the entire global population, completely took over from other payment systems, got acquired, and then expanded to the rest of the planet.
Understand whether the project has been on track with their progress and whether they have a good idea of where they’re going.
Remember the pet rock? A great product with bad marketing will fail, but a bad product with great marketing will not (for a short while anyway). Marketing isn’t just advertising - it’s how the entire brand comes across, and is crucial for success; we need to assess the alignment, quality, and quantity. That said, marketing is for projects that are ready to hit the market, not early-stage stuff, so keep that in mind.
Alignment: check whether marketing avenues align with the product. For instance, it makes sense to advertise an energy drink on anything extreme and fast-paced - a la RedBull, and it makes sense to market sunglasses on beach huts in sunny countries. When it comes to Web3, a great long-term project will not use influencers who promote random coins to pump them up like BitBoy Crypto to do its marketing, but will opt in for reputable companies like Coin Bureau.
Quality: you don’t notice great marketing. You feel it. It’s hard to summarise what great marketing entails, but looking at good advertisements is a good starting point - check out this video. A good example of great marketing is Apple; from their stores, to the unboxing experience, to the product itself - everything is aligned, shows luxury, and portrays a new lifestyle.
For projects that are too early to be marketing, analyse the CMO (Chief Marketing Officer) on the team - have they done a great job in the past? Has their previous company succeeded?
Quantity (i.e. advertising): more so for projects that are already in the position to start marketing (i.e. their product is near finished, they’re ready to launch, or they already launched) - are they doing any advertising? Have you seen their logo anywhere? Some companies (e.g. OpenSea) in crypto have been around since 2017 and have done no marketing, allowing new entrants (Blur) to capture a majority market share (although, Blur is also a better product).
But you need to put quality and quantity together. For instance, below is a list of different PR advertising and other services and their prices. You can see that someone with $10k can do a lot of advertising to create an illusion of popularity, but it’s short-lived and low-quality if done alone without any other fundamental marketing.
Understand whether the project is in a position to start marketing, and whether they’re doing / have the ability to do a good job at it.
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Sentiment research, although not as time consuming, requires a lot more vigilance and attention throughout the day which may be more difficult for some people than sitting down one evening and doing research.
Good sentiment will yield big and fast price increases, but will almost always come crashing back down - i.e. the price shoots up by 1000x, and then crashes back down. As long as you cash out on time, and hopefully don’t get rugged, you’ll be good. As we said, risk comes from not knowing what you’re doing.
The analysis of sentiment is slightly different because you’re just assessing whether the project is building hype to get other people to buy into it:
Everything that was discussed in the fundamental analysis section also plays a role during sentiment research, but there is 1 big difference: a major lack of care.
Although you, the reader, evidently seem to care about research, about 95% of other investors do not. So, take everything that we said above - good idea, team, backers, tokenomics, users, roadmap, and marketing - and just don’t verify any of it. As long as the project claims to be great, most people will believe it, and the amount of people buying the token will grow. The more stuff, doesn’t matter if it is good or bad, the merrier.
More token utilities, more partnerships, more team members, more words on the whitepaper. That’s what gets people excited. If you’re looking for sentiment, don’t be the guy in the middle.
The size and quality of the community, aka the buyers, aka the exit liquidity, is crucial. Why is Tesla at $800Bn market cap? Because of the community that Elon has built. People invest because they think the price will go up even more, despite average fundamentals. Why? Because other people will invest. Why? Because people want to invest somewhere, so they may as well invest in companies that everyone is talking about.
Web3 is the same.
Size: the bigger the community - Twitter, Discord, Telegram - the more demand the token will experience, thereby absorbing the sell pressure and pushing the price up. Big is good. However, projects which are not targeting retail don’t need huge followings, so it depends on the narrative: memes = ~100k+ community is good; supply chains = small community ~10k is fine.
Quality: however, 95-99% of crypto projects’ followers, likes, and comments are bots. You want to cross-reference how many of these likes etc. are real by doing random checks on the accounts, and by checking across different socials.
There is a great tool for analysing sentiment across the internet - https://app.santiment.net/ - when you search for a project, it checks for project mentions, follower counts, dominance, and so much more across all social media profiles, as well as trades, volume, and other classic market metrics.
Another thing to consider is who is there for the long-term vs who is there for the airdrop, or whitelist, or whatever else. If you see mainly “GM” and “Wen launch”, it’s likely most of the community is simply racking up points to earn more tokens, and will sell everything once the airdrop etc. happens. Use this fact to exit on time.
Understand whether the real community is big enough to generate enough buy pressure to pamp.
These are things that aren’t particularly beneficial to the product/service in the long-term, but big number = good, because big number = people talk = people ape in. Plus a project can combine these metrics with cheap marketing tactics (discussed in the fundamental, marketing section) to rocket boost a token’s popularity for a short while.
APY: staking yield that you’ll get, which likely comes from the money that other users stake, or from the project simply giving out new tokens. Any project advertising high APYs is likely a pyramid scheme or hyperinflationary, but people will still ape in.
TVL: although a way to measure legit users, it’s also often used as a vanity metric because it doesn’t mean anything to the long-term success of a product / service UNLESS it’s something like a decentralised exchange, or an L1, or a borrowing/lending protocol, or something that requires a huge pool of assets staked.
Regardless, high TVL = big community and a lot of trust. However, TVL only applies to projects which have some sort of staking, but luckily nearly every project has staking because it’s an extra utility that incentivises buying and locking tokens, allowing the price to go up more easily. Hence, high TVL = easy marketing = good sentiment.
The bigger the numbers, the more likely other people will think the project is a good investment.
There are loads of advertising strategies that projects utilise to grow in popularity. Still, the ones that build the most sentiment in Web3 are those that focus on how much money users can earn: airdrops, whitelists, showcasing leader boards of activity, incentivising referrals, APYs, and so on. Although these are often used by fundamentally strong projects, they are particularly great at building sentiment.
Keep an eye out for the token name in group chats, on exchanges, in news feeds, in social media ad banners, in messages Tweeted by bots, and so on. When projects use influencers with loads of followers who constantly shout out coins, that’s a good sign of likely sentiment growth.
Keep an eye out for tactics that gloat about monetary gain or general metrics about progress - signups, volume, etc.
Hopefully, this article helped educate how to conduct fundamental and sentiment analysis. But, things are not this simple, and it’s always advised to aim for projects that have both fundamentals and sentiment at least to some degree.
At the end of the day, projects that have good fundamentals may not always perform as well in terms of token price as projects that are simply good at sentiment. Moreover, some projects that are good fundamentally today may simply die in 5 years, as nearly half of all companies do.
On the flip side, some projects that do very well in building sentiment then use their newfound capital to reinvest into product development and actually build something fundamentally solid.
The world is not white and black. It is incredibly complex. But we hope the above article helps make it a bit easier to navigate.
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These are primarily for fundamental investors, whereby if the project has a couple or more red flags it’s worth moving onto a different one.
On the other hand, for sentiment investors all that matters is the strength in sentiment. So, even if a project has a lot of these red flags, yet the sentiment is strong, there is still an opportunity to make some returns by getting in and out before anything bad happens. However, the more red flags, the more likely the project is going to scam. So be warned.
Green flags on the other hand are great to have, but not particularly necessary, and a lack of them does not imply the project is bad fundamentally.
Red flags:
Green flags:
All resources to research apps, on-chain, off-chain, news, whales, wallets, and so on.
https://docs.google.com/spreadsheets/d/15yad0D8yM3MlHEHT5dcOAwjzUgvlg_em2BfDrOzlsNA/edit#gid=0
Checklist template for conducting fundamental research.
https://docs.google.com/spreadsheets/d/1pSHyn0t_3bFodKLl8PHES1J20BnLlCjH/edit#gid=2008647917