How to analyze cryptocurrency projects on your own?

Trading is a daily meticulous work that involves studying market trends, monitoring specialized forums and social networks, and performing technical analysis. One of the key skills for a successful trader is the ability to analyze the market. Even for a beginner to find the right entry point, basic knowledge of economics and mathematics is required, as well as a good understanding of price formation rules in the market and the fundamentals of technical analysis.

Technical analysis is one of the main tools for traders. It allows analyzing price charts and finding entry and exit points for trades. However, successful application of technical analysis requires a good understanding of its basic principles and tools.

At the same time, there is fundamental analysis, which is based on studying the economic, financial, and technical factors of a project. It also includes monitoring news and events that potentially can influence prices.

If your goal is not to become a professional trader, then for long-term investments, it is more important to understand the fundamental basics of the chosen project, how tokens derive their value, and what prospects they have in the future.

By analyzing a large number of internal and external factors, it is possible to determine whether an asset is overvalued or undervalued, which is important for making strategic decisions in forming an investment portfolio.

First and foremost, it is necessary to identify reliable indicators that are difficult to manipulate.

For example, followers on Twitter or users in Telegram and Reddit chats are not reliable indicators since it is easy to fake or order fictitious activity on any social network.

To evaluate projects, on-chain metrics are often used, which are internal characteristics of the blockchain itself, as well as project documentation.

1. Number of transactions.

The simplest and at the same time reliable indicator is network activity. By assessing the number of operations in the blockchain over a given period of time, one can observe not only the level of activity but also its change over time.

However, it should be remembered that this metric alone cannot be sufficient. The fact is that in the blockchain, it is also impossible to guarantee that network activity is not created by a small number of participants who simply transfer funds between themselves.

2. Active addresses.

From this, it follows that the number of transactions should be evaluated in conjunction with the number of addresses that have shown activity in the last few weeks or months. To make an assessment, it is sufficient to understand the total number of unique addresses and their ratio to the number of transactions during the same period.

3. Transaction cost.

Evaluating the total transaction cost enhances the reliability of the assessment and eliminates the possibility of creating a large number of dummy wallets that can generate numerous empty transactions. In other words, this parameter shows the total volume of funds transferred within the network over a certain period.

4. Network security.

Currently, blockchains use many different consensus algorithms, each with its own characteristics. But they all play an important role in forming blockchain security. For this reason, it is important to conduct an analysis, including the mechanism used for consensus. The most popular and common ones today are Proof-of-Work (PoW) and Proof-of-Stake (PoS) and some of their variations.

For networks with a PoW mechanism, the hash rate, which is the total computing power of miners' equipment, is the most important factor. The higher the hash rate, the more reliable the blockchain.

For networks with a PoS mechanism, the size of funds frozen in staking is important. The main idea of PoS is that participants "freeze" their savings to participate in block validation. In other words, they risk not energy resources, as in PoW, but their own money.

There are several mechanisms for finding consensus; we wrote about them in a separate article: What are PoW and PoS?.

5. White Paper.

Also, before investing in any project, it is essential to study its white paper. This is a marketing document that provides a detailed overview of the project. A good white paper should define the project's goals and provide an understanding of several characteristics:

• Technologies used and whether the source code is open;
• The value proposition of the project;
• The problem the team aims to solve;
• Roadmap of updates and planned features;
• Partnerships, if any;
• Tokenomics, i.e., the token distribution scheme.

In a broad sense, a whitepaper provides detailed information about the market utility and prospects of a project. One of the most important facts from the whitepaper is information about the initial distribution of funds. It should specify how the list of initial holders was formed: through an ICO, IEO, or pre-mining. In other words, the documentation must include the share of founders and the team, as well as the portion available to investors.

Analyzing token distribution can give insights into the risks of price manipulation and the formation of a "rug pull" scheme, where the development team sells all their tokens after the launch, causing a price collapse.

If you have a grasp of technical terms, it would be helpful to assess the project's Yellow Paper. It provides a deep technical and mathematical description of the project's functions and algorithms. Even the mere existence of such a document (or including its contents in the White Paper) sets any project apart from the rest.

6. Team.

Every cryptocurrency project is backed by a specific team of developers and administrators. Therefore, after evaluating the project's plans, it is important to check the track record of team members.

It is crucial to understand if they possess the necessary level of experience to implement the planned objectives. Have team members been involved in successful projects in this industry before? Do they have sufficient skills and expertise to achieve the set goals? And, equally important, have they been associated with projects with questionable reputations or even outright fraudulent activities?

7. Liquidity.

A liquid asset is one that can be easily and quickly sold at market price. High liquidity helps combat the problem of being unable to sell assets at a fair price.

The most important factor in evaluating liquidity is trading volume and the number of platforms (exchanges, brokers, and DEXs). The more frequently an asset is traded, the easier it is to buy and sell it under more favorable conditions.

8. Analytical platforms.

There are several organizations that professionally analyze projects that come under their scrutiny. They typically offer both paid detailed reports and free summarized information. It's worth looking for information about a project from giants such as Glassnode, Coinmetrics, and Binance Research.

Conclusion

Before investing in cryptocurrency projects, it is crucial to thoroughly research the project information and the market as a whole, while also considering possible risks. Only by doing so can you protect your savings and even generate profits. Identifying promising projects while simultaneously reducing the risk of investment losses is an important and relevant question for all investors. We have tried to disclose the necessary minimum parameters that need to be studied before investing funds in a project.

However, even with a comprehensive assessment, it is important to remember the key principle of reliable investing — not to invest everything in one project. The more diversified your investment portfolio, the better you minimize the risk of losing money.