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Who’s ready for the next crypto bull run? 🚀
We've mentioned before that we believe we are in the early stages of the next cycle. We're here to ensure you're prepared to capitalize on the opportunity. 🌊
As a follow-up to our “A Framework To Successfully Invest In Web3” report we shared last month, today we're digging deeper into the risk curve, sharing insights on how to invest in application tokens. These are essentially all other fungible tokens in the space!
While I wouldn't recommend going all-in on any of these tokens at this moment, now is the perfect time to educate yourself 🧑🎓 and begin determining which tokens to invest in for the upcoming cycle.
Those who put in the work now will reap the most benefits. 😀
Those who wait until the hype cycle is upon us may miss the boat. 😕
As usual, at Web3 Academy, we want you to be at the forefront and stay ahead of the curve. So today, we’re exploring how to successfully invest in application tokens.
By reading this, you'll gain a deeper understanding of:
What application tokens are,
The flow of capital in crypto,
A token’s function,
What to analyze before looking at tokenomics,
How to ensure that a token captures the business' growth.
Also FYI, this is an excerpt (1 module out of 6 🤯) from an entire investing course that Web3 Academy will be launching in the next 30 days!
We believe this is going to be the greatest investment course in web3 and crypto.
As you’re a PRO DOer, we wanted to give you a HEFTY discount and early access to this course, because, well, you’re amazing.
All you need do to get the discount + early access, is hit us with a GM by replying to this email. 🚀
What Are Application Tokens? 🤔
Application tokens represent use cases built on top of blockchains. They're not native tokens acting as currencies for a blockchain (like $BTC, $ETH, $SOL), but they symbolize applications, protocols, communities, and even DAOs or social tokens.
You might liken them to stocks, given the range of sectors these tokens represent—gaming, staking, metaverse, social, etc. However, they're programmable and can offer more functions than just equity and governance, unlike traditional stocks. 📈
Imagine owning shares in your favorite website or app, but those shares do more than just fluctuate in value. That's what application tokens are all about. 🌐
Think about buying Amazon ($AMZN) or Netflix ($NFLX) shares to invest in these businesses. Similarly, you can purchase tokens such as $UNI for Uniswap or $RPL for RocketPool.
These tokens represent your slice of the pie in these blockchain-based applications. 🥧
As these applications grow and prosper, so does the value of your tokens. (Note, this isn't the case for all tokens, but we'll delve into that later in this report).
But here's the fun part: these tokens can do so much more than just gather dust in your wallet.
Since they're digital and powered by blockchain technology, they can be programmed to offer you unique benefits like VIP access to certain products, memberships in communities, and more. The possibilities are endless! 🚀
Simply put, application tokens are like shares in a company but supercharged with extra benefits. 🎉
Before we dive into the nitty-gritty of investing in these tokens, let's take a step back to discuss when the best time is to capitalize on the opportunity of investing in application tokens.
We'll start by examining how money flows in the crypto world. 💰
The Flow Of Capital In Crypto 🔄
The cyclical nature of the crypto market can be broken down into a repeating pattern of money flow, largely dictated by the risk appetite of investors.
You can see the pattern in this image, but I’ll explain further below.
The Fiat Phase: Investors, especially new ones, hold fiat currency waiting for the right time to enter the market. They're typically looking for a risk-on environment in terms of macroeconomics and positive momentum in reputable cryptocurrencies like Bitcoin and Ethereum.
Large Cap Phase: Once the market begins to swing upward, fiat is transferred into major cryptos like Bitcoin and Ethereum. These coins often serve as a gateway for newcomers due to their well-established reputation and perceived safety. It’s also generally institutions moving capital into this space first, who tend to stick to the more established crypto investments, rather than investing into the weeds.
Application Tokens’ Phase: As the bull market gathers momentum, crypto natives tend to move a portion of their $BTC and $ETH holdings into more speculative application tokens. These tokens offer potentially higher rewards but come with increased risk. Retail investors FOMOing into crypto when markets take off also often go straight to the more risky assets, rather than invest in the established ones like $BTC and $ETH.
NFTs Phase: After banking satisfactory profits from application tokens, investors typically venture further into the risk spectrum, especially as the hype cycle reaches its mania phase. In the last cycle, NFTs were the farthest on the risk curve. I’m not confident this trend will continue, but it’s a potential new addition to the flow of capital in web3.
Capital Preservation Phase: When the market shows signs of turning bearish, investors start converting their assets back into Bitcoin, Ethereum or even stablecoins or fiat, to safeguard their earnings from the market downturn.
These phases are often influenced by trending narratives. When "the next big thing" is trending on Crypto Twitter, you know it's narrative time. 🤦
For instance, during 2021's DeFi summer, Bitcoin and ETH conversions surged into DeFi tokens.
Likewise, in 2022, Facebook's rebranding to Meta fueled the metaverse narrative, triggering a run toward metaverse and gaming coins.
If you're riding these narratives, timing is of the essence. Be strategic about entering and exiting these trends to avoid holding empty bags. ⏰
So which stage are we at currently?
I believe we're on the cusp of a bull market. We're in the large cap phase, as evidenced by Bitcoin and ETH outperforming nearly every other asset in the space, and boasting over 60% YTD growth.
It’s still the early stages of this cycle, with most investors holding FIAT. 💲
However, we're already witnessing some movement from FIAT to the large caps, as shown in the chart below:
Who knows how long it takes to move into the application token phase, however I believe we still have a lot more room to run in the current large cap phase based on historical trends.
Therefore, I’d say that allocating money in these riskier asset classes today isn’t necessarily the best idea.
Though it could make sense to invest small amounts now for initial allocation, with more capital to be deployed when we shift from one phase to the next (don't worry, we'll keep you informed!)
But that doesn't mean you should sit idle. Now is the BEST time to research potential investments, focusing on understanding token functionality and how to analyze tokens for potential profitability.
Let's dive into how it's done! 🤓🔎
Understanding a Token’s Functionality 🧩
Investing in application tokens comes with a unique set of considerations. Unlike stocks, where a company's success is generally reflected in the share price, application tokens follow a different dynamic.
The first thing to understand is that a token’s success does not always correlate with the success of the underlying protocol or application.
A protocol can be doing exceptionally well, but this doesn't necessarily mean its token will follow suit.
Let’s take Uniswap as an example. Here’s the fees that Uniswap (the application) has generated. This paints a picture of the application’s great success.
However, if we look at the $UNI token price, we see a very different picture:
If I were to evaluate Uniswap’s performance on the price of the $UNI token, I would probably say that this project isn’t that awesome. But that would be wrong because Uniswap is indeed very successful.
On the other hand, a token can skyrocket even if the protocol isn't performing remarkably. From that perspective, it’s all down to tokenomics.
So, remember, the token and the protocol it represents are not fundamentally correlated in terms of success. (But you can still analyze if a token is a good investment. More on that in the next section of this report).
Another point to keep in mind is that investing in application tokens is similar to investing in stocks in the early stage, only much much earlier.
These tokens are not regulated like traditional securities (stocks), and many are yet to discover their product-market fit.
It’s like you’re investing in your friend’s ‘brilliant idea’, which promises to make you a billionaire next year. Probably not a good idea to put your life savings into this. 😬
Here’s a chart of how a startup’s financing goes:
As you can see, crypto tokens are at the very beginning. That’s because anyone, regardless of their credibility or intent, can launch a token and investors can buy them on day one of trading.
With stocks, we are only able to invest in them once they reach the IPO stage, which generally means they are a large company, valued in the 100s of millions or more, and have had rigorous audits and analysis from regulators and financial analysts… The same can not be said for our beloved crypto tokens.
This not only suggests that more of these tokens are likely to fail as the business hasn't yet reached product-market-fit, but also opens up possibilities for rug pulls, code bugs, or outright scams. 🚧
With this in mind, it’s extremely important that before you even look at the tokenomics of an application token, you first look into the business and the application itself.
Never invest in a token of an application if you know nothing about the application, that’s pure degen gambling and will likely lead to you getting rekt! 😨
Here are the 5 steps you need to follow before investing money in an early-stage project.
Analyze The Business Before The Token 🕵️♂️
The cardinal rule of investing, be it in crypto or traditional assets, is to avoid making investment decisions based solely on others' opinions.
While influencers can provide valuable perspectives and insights, remember that they may have incentives to promote certain tokens. 🙃
Therefore, step zero in our process is: don't rely on influencers; instead, commit to doing your own research.
So, how should you go about assessing potential investments? Here's a simple five-step process, so you avoid looking like this…
Step 1: Evaluate the Business Viability. 👔 Is the application a viable business? Does it offer a product or service that has or could have a product-market fit?
You must believe in the core concept and its potential to succeed in the market.
Step 2: Use the Application. 📱 Engage with the platform and the services it provides.
Are there competitors offering the same services? Test them out too.
Your personal experience can provide valuable insights into the usability and competitiveness of the platform.
Step 3: Analyze the Tech. 🔍 Depending on your technical expertise, read the code of the application (if it’s open source, then it's usually available in Github) and/or the whitepapers to understand the nuts and bolts of the protocol.
Is it offering a unique service, or is it just a rehashed version of an existing protocol? Is the code legit?
If the technical aspects are beyond your grasp, seek out knowledgeable opinions. There are plenty of experts sharing insights. Just ensure that they don't have vested interests that could skew their analyses.
Step 4: Investigate the Team. 🧑💻 Knowing who is behind a project can offer significant insight. For instance, if someone like Sam Altman, the CEO of OpenAI, is involved, it signals a level of credibility.
Conversely, if you come across a project led by someone who has previously mishandled significant projects (like Do Kwon), it might be wise to pass.
Step 5: Study the Community. 🌐 A strong and active community often speaks volumes about a project. Go join their Discord and interact with the team, support, and community. It’s free and easy to do this.
Are they transparent in their operations? Are they responsive? Is their community engaged in valuable discussions, or is it mainly spam?
An active social media presence that seeks to educate can also be a positive sign. Don’t just look at Twitter followers or how many people are in their Discord. Look at the engagement and make sure it's there and it's real. It’s extremely easy to buy followers and engagement these days, and unfortunately, many projects are doing this.
If you find that you lack the time to perform thorough due diligence, it might be best to stick to established tokens that have a solid track record. Avoid exposing yourself to unnecessary risks that come with less vetted projects.
Before wrapping up, let’s talk about tokenomics…
Ensure The Token Captures The Business’ Growth
The success of a business does not always translate into the success of its token.
To ensure your investment aligns with the growth of the business, it's essential to understand tokenomics.
Firstly, let’s remember from our PRO report on Ethereum’s tokenomics that the key factor in the price of any token is the number of sellers vs the number of buyers. It’s all about supply and demand.
When analyzing tokenomics, your goal, in the end, is to figure out who and how many are buying and selling.
Below are a few important factors to consider:
1. Circulating Supply vs Total Supply: 🔁 Understand how many tokens are already in circulation and how many are yet to be released to fill the total supply.
Websites like CoinMarketCap and CoinGecko provide this information.
A large discrepancy between circulating and total supply could potentially dilute the token's value in the future.
Generally, tokens that are yet to be released will be unlocked to investors, team members, etc., and generally, these holders are likely to sell, which if done in large enough amounts, can drive down the price or hold back a token’s potential for growth.
2. Token Unlocks: 📅 As mentioned above, token unlocks can significantly impact a token's price, often causing a lot of selling pressure.
Token Unlocks can be a useful resource to track when these unlocks occur, helping you anticipate potential market fluctuations.
3. Issuance Plan: 📑 Many tokens suffer from inflation due to token unlocks and constant issuance of new tokens, which dilute the value for current holders.
A good example is StepN, which releases free tokens to users who go for a run. This can be unsustainable in the long run.
For context, this is Bitcoin’s issuance plan, which shows that every 4-years the amount of issued Bitcoins is cut in half. At some point, there’ll be next to 0 new Bitcoins put on the market daily, which would make Bitcoin even more scarce than it is today.
You should look for tokens with a sound issuance plan. If you discover tokens that lack a good plan, find out if the policy might change.
It’s also important to remember, Ethereum took seven years to become deflationary and achieve sound tokenomics.
Monetary policies can evolve and it’s on you to research (ie. read whitepapers, chat in the community, etc.) to find those tokens which may have future improvements and are currently undervalued as a result.
4. Demand: 🧲 Ideally, there should be compelling reasons, beyond pure speculation, to own the token. The more reasons, the better!
Consider the potential market for the token: if the main market is a niche group, the token might have a limited appeal.
However, if the token offers value to a broader market—like $ETH does to the mainstream world—that’s a strong positive indicator.
Demand can also come from utilities like dividends, rev shares, access, perks, and so much more. The more reasons for someone to buy a token (yield) and not sell it (staking), the better chance of the token succeeding, so long as it checks off the boxes above too.
Investing in tokens isn't just about assessing the underlying business. The tokenomics of each project play a crucial role in determining whether the token will benefit from the business's success.
By understanding these aspects, you can make more informed investment decisions that help you create generational wealth. 💰
Wrapping Up 🎁
To re-emphasize, I believe now is not the right time to heavily invest in application tokens.
We’re still very early on in this cycle and I think there is plenty of room for BTC and ETH to run first.
Especially if we get a Bitcoin Spot ETF approval. If we combine that with all the security lawsuits of application tokens, there’s a lot of uncertainty currently, and markets don’t like uncertainty. 😕
Your goal right now should be to research and find the best projects with the best tokenomics or potential tokenomics.
Think about what will happen in the next cycle. What are people going to do? What applications will we use or need to use? What will be the narratives?
If you’re thinking about these things now, doing the research and building a plan, then you will set yourself up for life changing wealth throughout this coming cycle.
The most successful investors in this space are working their asses off right now to identify the best tokens to invest in, and they stand to make millions.
Meanwhile, most people are barely paying attention to this space, waiting for the hype cycle to return. By that time, they'll be too late and will invest in assets that have already surged 2x, 5x, 10x or more! They will miss the massive upside and more than likely get rekt.
If you’re researching tokens, please share your thoughts and ask questions inside the #pro-discussions channel in the Web3 Academy Discord. Let’s explore and learn together!
That’s it for today, friends! I truly hope that this report gave you a decent base for you to use to successfully invest in the world of application tokens.
Reminder: This is report is a preview from our upcoming Investing Course, which we believe will be the best investment course in web3 and crypto.
To put things in context: This report was based on 1 module from our course (and we didn’t even go into the entire module). The full course has 6 modules in total. 😏
That should give you a good perspective of how huge and valuable this course will be. 🔥
As a PRO, you’re entitled to a BIG discount and early access. All I need you to do is reply to this email with a ‘GM’.
See you later ✌️💜
ABOUT THE AUTHOR
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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Disclaimer: This article is for informational purposes only and not financial advice. Conduct your own research and consult a financial advisor before making investment decisions or taking any action based on the content.
