How to Analyse a Cryptocurrency Project? 🤔

in blurt •  2 years ago 

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Project Analysis
In this part of the analysis, the intention is to give context to the project under study. Some concerns that we must respond are related to the following aspects:

Use Case - It is important to determine the use that developers have foreseen for the cryptocurrency or token, in this sense it is pertinent to ask some questions such as: Why will it be used?, Is the project useful or not? What are the problems? Will people use it?

Sector - The cryptocurrencies are grouped into sectors and subsectors according to their characteristics, and knowing accurately what sector belongs can help better answer the previous questions and locate their competitors. Some of the most important sectors are: intelligent contracts, decentralized finances, P2E, centralized or decentralized exchanges, NFTs, among others.

Competence - Once the sector is identified to which it belongs, it is possible to locate similar projects, the leaders and determine the advantages offered in relation to the rest of the competitors, such as greater speed or scalability, lower commissions per transaction, among other aspects.

Whitepaper - It is a technical document that offers a general perspective of the project. This should define the objectives of the network and contain information related to the technology used, the intended use for the asset, the ROADMAP with the objectives of the short and long term project, and the supply and distribution scheme of the coins. The reading of this document will allow us to form a global idea of ​​the project and its real feasibility.

Equipment - It is essential to know the people responsible for the project, their academic studies, work trajectory, and investigate if they have previously been involved or not in failed or scam projects.

Financial metric analysis - At this point of the fundamental analysis of cryptocurrencies, it is seeking to assess quantitatively some metrics.

Market capitalization It is the main financial metric that we must know. Its value is obtained from multiplying the amount of cryptocurrency in circulation for its price, providing an idea of ​​the economic assessment of the project. Frequently, a project with a low capitalization value will have a greater growth potential, unlike assets with a large volume of capitalization as Ethereum, which have a lower capacity for growth, but show greater robustness and stability.

Liquidity It is an index that tells us the ease with which an asset can be converted into fiduciary money or exchanged by other cryptocurrencies. One way to know the liquidity of an asset is checking its volume of negotiation on websites such as Coinmarketcap, Coingecko and others.

Circulating supply It is the number of cryptocurrencies or tokens that are in circulation and in the hands of the public. This amount may experience variations over time according to the characteristics of the asset and its emission model.

Total supply It is the total number of coins in existence at a certain time, less those that have been burned or withdrawn from the circulation.

Maximum supply It is the total number of units that will exist in the future. In the case of Bitcoin, this maximum amount is 21 million BTC, and we already crossed 19 Million BTC supply recently.

The number of active assets at present, together with the total amount and the maximum amount, allow us to determine the inflation rate of the currency, since if it is very high, the asset will lose value quickly by increasing the amount of units in circulation.

Analysis of metrics on-chain
The On-Chain analysis also known as Blockchain's analysis, allows analyzing a cryptocurrency through all activities carried out in the blockchain.

As this is a public record, it is possible to consult each action that has been recorded throughout history in an asset, facilitating decision making at the time of investing.

Some examples of on-chaain analysis include:

Number of transactions performed.
Number of wallets created
Hash Rate rate.
Blocking volumes in Staking.
Volumes deposited in Exchanges.

There are also some ratios, as is the case of stock-to-flow model, which allow a cryptocurrency value to be predicted at a certain time in relation to its current value. A higher ratio indicates greater scarcity, which in turn indicates a higher value.

Investors applied this model initially to gold and silver, but later it was adapted to apply it to the analysis of cryptocurrencies, mainly to Bitcoin. Like these raw materials, cryptocurrencies are scarce and expensive goods to produce, so their offer and flow are probably the most significant factors of their value.

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