Getting Ready

So before you start your research journey and go around gathering information, you need to think about where and how you will store that information. While you can use any tools that you like, I prefer using excel. The main benefits of writing down everything that you look up and storing it in excel:

• You don't waste time looking up something you’ve already looked up before. I can’t count the number of times that I’ve had to re-look up something I’ve already looked up many times before because I don’t remember the information.

• I can easily compare metrics across projects. Many projects, especially projects in the same category, have similar metrics (eg. market capitalization is a metric common across all projects), and comparing these metrics can be helpful in spotting undervaluation or overvaluation.

• I can conduct calculations and quantitative analysis. Sometimes I want to compare ratios or create new metrics, and I can easily do that in excel.

Project Overview

First and foremost, you need to understand what the project is about. Some basic questions you should have an answer to include:

• What problem is the project trying to solve?

• Is it a problem that is a real pain point?

• What solution is the team providing?

• How is their product differentiated from their competitors?

• What is the project roadmap, and have they met their previous roadmap milestones?

The key here is for you to actually understand what you are investing in, that way you will have the conviction to hold through the tough times, and trust me, there will be tough market conditions. I personally don’t invest in anything that I don’t understand. The main sources to find this information include: 1. The project’s official website, 2. CoinMarketCap, 3. Messari.

The Team

Once you have an understanding of what the project is all about, the next thing you need to look at is the team. I would argue that this is perhaps the most important determinant of whether or not the project will succeed. First and foremost, you need to check if the team is public or doxxed. If you can’t find any information on the team or if the team is anonymous, then the risk of the project is higher. An anonymous team can more easily rug-pull or disappear without a trace, though not all do. Assuming that the team is public, these are some things that I focus on:

• Is the entire team public or just a few members?

• Are the profiles comprehensive or very basic?

• Are the profiles linked to external platforms (eg. LinkedIn, Twitter)?

• Does the team have the relevant business, technical, and product skills?

• Do the founders have the necessary industry connections?

• Are the founders active publicly (eg. active on Twitter, interviews on TV)?

Ideally you can find the team info directly on the website. While it’s not a red flag per se, I don’t like it when I can’t find the team info directly on the website. If you can’t find the team info on the website, you can try googling or joining the project’s Telegram or Discord group and asking the admin for the team info.

Project Funding

Another major determinant of success is the funding that the project has been able to secure, both the amount of funding as well as the sources of funding. The importance of having enough funding cannot be overstated. For one, it requires a lot of capital to successful build a product, deliver it to market, and acquire users. If the team’s funding is too low, they might not have enough financial resources to deliver everything that they have laid out in their roadmap. Especially if the market enters a bearish period, you want to be sure that the project can survive until bullish momentum returns. That said, more isn’t always necessarily better, especially if you are considering whether or not to invest in a project in the primary market before the token is listed on an exchange (eg. IDO, IEO, ISPO, etc.). You need to evaluate if the team is raising too much/at an elevated valuation. For example, if the project has only two founders and is still in the idea stage and they want to raise $100M at a $1 Billion valuation (ie. selling 10% of the tokens), then you might want to ask why they need so much money at such an early stage.

The source(s) of funding is also very important; a $1M investment from Elon Musk brings with it a very different set of value propositions compared to a $1M investment from Warren Buffett, each with its own benefits and constraints. Likewise, a heavy VC-funded project can be very different from a community-funded DAO, each with their own risks and rewards. The benefit of seeing a project securing VC funding is that it lends further credibility to the team as VCs can typically conduct more in-depth due diligence on projects (though in a raging bull market many funds might throw a little bit of money at everything to spread out their bets), shows the strength of the team’s networking and fundraising abilities, and brings more connections and thought partners to the project. It is not without cost, however, as VCs often acquire the tokens at substantially discounted prices compared to later retail investors (ie. you and me). This can result in VCs dumping their low cost-basis tokens unto the market and causing a sell-off. It is therefore very important for you to find out the rounds of fundraising the team has conducted, how many tokens were sold during each round, and at what prices.

Similarly, a community-funded project has its upsides and downsides. On the plus-side, you likely don’t have VCs with a lot of cheap tokens (at least fewer compared to a project heavily backed by VCs). However, retail investors might be more prone to selling out of fear when there is fud, so getting community funding doesn’t necessarily prevent large sell-offs. Of course, if the project founders can build a community of die-hard token-holders who believe in the vision of the project, then that’s another story. With regards to the resources and connections that funding brings, here the story can also be two-sided. If the community is very passive, then the funds raised might not bring with it further benefits beyond the money. However, if the community is dedicated to the success of the project and contributes their time and effort to the project, then the benefits of a community-funded project can far outweigh that of a VC-backed one. As with everything, the devil is in the details, so you have to dig deeper to get an edge.

You can find information on funding from the investors section of the website, or from third-party data providers such as Messari and ICOHigh.

Ecosystem Development

While the idea of ecosystem system applies more to layer1 and layer2 blockchains and smart contract platforms, it can also apply to other types of projects as well, so I will cover this briefly. First and foremost, look at how much funding is dedicated to ecosystem development; more funding means more incentive for developers and projects to join and build in the ecosystem. Secondly, you need to look at the sources of the funding; I personally prefer for the funding to come from multiple parties, especially third-party partners and funds. It shows that people outside of the core team are also bullish on the ecosystem and willing to deploy funds and resources to help it succeed. And since each fund also brings with it their own resources, talents, and connections, you get exponential value accrual with more parties supporting ecosystem development.

The third thing I look at is the currency being used for funding ecosystem development (eg. the native token, fiat dollars, stablecoins, BTC, ETH, etc.). Here I want to see a healthy mix, as the native token can bind people to the ecosystem, but too much of it being released can cause price depreciation. This is another reason why I prefer to see outside funds help fund the ecosystem development, because they are typically funding with fiat currency while the project foundation typically provides the native token. Lastly on the funding side, I look at how the funding is provided to teams and projects; what is the mechanism for securing funding? Does the community vote on proposals? Does the foundation decide? Is the funding a grant or is it an investment in exchange for a new project’s tokens? There is no right or wrong model here, just what you believe makes the most sense for the project you are researching.

In addition to funding, there are other factors to consider. One important non-funding factor is user experience, especially when it comes to software development. Does the project provide developer friendly tools and SDKs/APIs? What about hands-on support to help projects launch? I also look at the events that the project hosts in order to encourage people to build on the ecosystem, including educational seminars, online and offline hackathons, conferences to promote existing and new projects in the ecosystem. Then there are the ad hoc value adds such as providing security audits, advising the project teams, conducting co-promotion campaigns, etc. In summary, you want to see a project provide amazing support to founders, both financial and non-financial.

Information on ecosystem funding and support can be a bit harder to find, but following the project’s Twitter can keep you updated as such news is often posted there. Additionally you can ask in the Telegram and Discord channels and do some good old googling.

Tokenomics

Token economics, or tokenomics for short, is about understanding the supply and demand dynamics of the token, including but not limited to the token emission schedule, token utility, and token burning/buyback. The first thing to look at is the current market capitalization and compare that to the fully diluted valuation (i.e. the market capitalization assuming all of the token are released). The rule of thumb is that the closer the current market capitalization is to the FDV the better because it means there are fewer tokens that will be unlocked and dumped onto the market. I prefer to see the current mkt cap / FDV ratio at above 50% and I am very cautious when it is less than 10-20%.

The ratio of the current mkt cap / FDV is just a starting point, however, and you need to take a deeper look at the token emission schedule to see how many tokens and how fast those tokens will be released over time. This is super important because this way you know when there will be large amounts of tokens that will be unlocked, and therefore potentially when there will be large selling pressure. You can also calculate the inflation rate by dividing the amount of newly released tokens by the circulating supply of tokens. A rule of thumb is that the higher the inflation, the higher the risk that the token could face heavy selling pressure. Another thing to keep in mind is the speed of the token release. For example, two projects that both have 50% of tokens already released can have very different inflation rates because project #1 releases the remaining 50% in 1 year (and therefore inflation is 50/50=100%), and project #2 releases the remaining 50% in 10 years (and therefore the inflation is 5/50=10%). All else equal, I prefer project #2.

In addition to the token release schedule, it is important to look at the distribution of the tokens amongst the stakeholders and where the newly released tokens are going. Tokens released to fund ecosystem development is very different than tokens unlocked for early investors who got in at huge discounts. The former will likely increase the overall value of the ecosystem while the latter will likely lead to sell pressure. When looking at the distribution, I also prefer for the team to not hold too large of a percentage of the total number of tokens, ideally less than 10% while >20% is a negative for me. And these tokens should ideally be locked up for a number of years and be released slowly over time.

Another very important consideration is the token utility or how the token will be used. You just might be surprised to find out that the token has no use case and isn’t tied to the project whatsoever. Assuming that the token does have a use case, you need to understand exactly what those use case(s) are (eg. governance, network fees, in-game purchases, etc.) and analyze how strong those demand drivers are for the token. Additionally, you need to take into account measures for reducing token supply, if any. Those can include token burning, as we see with Ethereum being burned with each transaction on the Ethereum network. Projects can also initiate token buybacks, whether manually or through some automatic mechanisms. Lastly, you need to look at value accrual. Simply put, does the value created by the project accrue to the holders of the tokens, whether that’s through fee distribution, or reducing the token supply through token burning/buybacks, or some other way. The best sources of tokenomics are the project website and Messari.

Technical Analysis

Technical analysis, or the study of price charts, is the last thing that I look at after I’ve already conducted fundamental research into a project and believe that it is a quality project that I want to hold long term. I then use technical analysis to find potential entry zones for me to scale or dollar cost average into the project. I don’t buy into projects purely based on technical analysis. Because I only use technical analysis as a supporting factor, I try not to complicate things too much. I look at key horizontal support and resistance zones, the 61.8 Fibonacci retracement, and I mark out percentage drop zones (eg. 50% drop, 67% drop, 75% drop, 80% drop, 90% drop) because they give me an easy understanding of my return potential (eg. a 50% drop means a 2x to return to high, a 67% drop means a 3x to return to high, etc.). I then look at confluence zones where these areas overlap. I also look for RSI and MACD to be in the oversold region for an entry.

Summary

In this post, we went over how to start conducting your research on a cryptocurrency project that you are interested in, particularly when it relates to the project overview, the team, funding, ecosystem development, tokenomics, and technical analysis. As I said in the beginning, this is not a comprehensive guide, but hopefully it can be a good starting point in finding an edge. If you find this post useful, please follow me for future posts.

Twitter: @cryptokevin2011

TLDR

In this post I will lay out an investment framework for investing in this space that goes from the broadest exposure (likely least risk) to the narrowest exposure (likely most risky), explain what each asset type is, and give examples of each asset type.

• Layer1 / Layer2 Blockchains

• Infrastructure Providers

• Gaming Guilds

• Gaming Studios

• Single Games

Layer1 / Layer2 Blockchains

The broadest and most diversified exposure is investing in Layer1 and Layer2 Blockchains. Layer1 (eg. Ethereum) and Layer2 (eg. Polygon) blockchains or Smart Contract Platforms are the operating systems of this world; all metaverses, blockchain games, and NFTs, as well as all other DApps (decentralized applications), run on L1/L2s. Thus L1s/L2s capture value from the entire ecosystem of DApps that run on the chain, and so you are betting on the success of the entire chain, as opposed to a single DApp on that chain.

When it comes to investing in the metaverse/gaming/NFTs, there are two broad categories of L1/L2 blockchains; 1. general purpose blockchains with a large metaverse focus, and 2. metaverse/gaming/NFT-specific blockchains. Some general purpose blockchains with a large metaverse focus include Ethereum (ETH), Solana (SOL), Polygon (MATIC), and recently Avalanche (AVAX) with the release of their sub-nets. Some metaverse/gaming/NFT-specific blockchains include Immutable X (IMX), WAX (WAXP), and Phantasma (SOUL).

Infrastructure Providers

The second category of investments are infrastructure providers. As the name suggests, they provide the infrastructure and tooling for metaverse/gaming/NFT projects. There are many common features that every project needs, so it makes sense that these be standardized and offered as a service to projects. This has two main benefits: 1. it allows for standardization and therefore interoperability (an in-game asset can be used in multiple games as opposed to only living in one game as in the case of traditional games) and 2. it reduces the development workload of projects and therefore reduces their costs and time to market.

One of the largest and oldest infrastructure providers in this space is Enjin (which recently also launched Efinity for the Polkadot ecosystem), the inventor of the ERC-1155 standard, which allows the creation of a collection of the same NFT (eg. a collection of 1000 swords that are the same but different from other swords in the game). In addition to established infrastructure providers such as Enjin (full-suite NFT solutions), Chiliz (fan tokens), Remark (NFTs on Kusama), and Render (decentralized graphics rendering), there are newer players such as BreederDAO, which focuses on NFT breeding (eg. one male cat NFT + one female cate NFT = a new baby cat NFT) and crafting (iron NFT + wood NFT = sword NFT, with the iron and wood NFTs being burned or destroyed). One thing to note is that many of the newer players in this space are organizing as DAOs, or decentralized autonomous organizations, which means that decisions are made by a community, typically made up of those who hold the governance tokens of the DAO.

Gaming Guilds

Next up we have gaming guilds. A guild is an organization that buys assets in a blockchain game, rents out those assets to players (a.k.a. scholars) who use them to play the game and earn tokens, and those tokens are then shared between the player and the guild. The main reason such a model exists is because many blockchain games require you to have a certain asset/NFT in order to play the game, and these assets can be quite expensive. Although most guilds started off focusing on scholarships for Axie Infinity, the first play-to-earn game to gain major popularity, they have started expanding into other games as well. Furthermore, guilds have also began investing in other in-game assets such as land or buildings.

This means that investing in a guild can give you a broad exposure not only across games but also across various in-game assets. Some well-known gaming guilds include Yield Guild Games (YGG), Merit Circle (MC), Good Games Guild (GGG), and AvocadoDAO (AVG). One thing to keep in mind is that most guilds have lots of tokens that will be unlocked, which could cause sell pressure on the token, so it is important to be aware of the token unlock schedule before you invest. This is a topic that will require its own blog post that I will write in the near future, so follow me if you want to read that post hot off the press.

Gaming Studios

Gaming studios are gaming companies that publish multiple games. The benefit of investing in a gaming studio as opposed to a single title is that you are spreading your risk across multiple games, as well as new games that will be built and released. That way if one game doesn’t succeed, there are other games in the portfolio that might be become popular. Two of the most well developed blockchain gaming studios are Gala Games (GALA) and Vulcan Forged (PYR). Both studios have multiples games already released, with many more in the pipeline, in addition to third-party titles that will release on their platforms. Gala Games is building an all-encompassing entertainment ecosystem covering gaming, music, and movies. Vulcan Forged has its own metaverse (called Vulcanverse), its own blockchain with 30+ confirmed partners, and a gaming-specific decentralized exchange (DEX). Both projects have become more than just gaming studios to be more complete ecosystems.

Single Games

Lastly we have single games, which are well…investments into a single game. This is potentially the highest risk highest reward play as you are putting your eggs in a single basket. If the game is a hit, you could 10-20x or even 50-100x your initial investment. Conversely, if the game is a dud, then your investment might go to 0 and you will lose everything.

I typically break current games into 2 main categories, metaverses and P2E games. Metaverses are virtual worlds built by creators with in-game economies that can support various activities such as events, concerts, shopping, etc. P2E games, on the other hand, are more single-dimensional in the sense that there is a set storyline or gameplay. The line between the two can sometimes be blurry. Top metaverse plays include Decentraland (MANA) and The Sandbox (SAND), with newer entrants such as Wilder World (WILD) and Bloktopia (BLOK) also entering the space. Top P2E games include Axie Infinity, Crabada, Defi Kingdoms, Pegaxy, Big Time, Thetan Arena, and many more. As with DAOs, many P2E games have high token inflation, which means potentially high sell pressure. Therefore, it is imperative for you to understand the tokenomics before investing in the tokens. Often the in-game tokens aren’t the best way to invest in the game; the NFTs (eg. Aurorians of Aurory) and assets within the game (eg. land in The Sanbox) might be better plays.

Sample Portfolio

The following is a sample investment portfolio. A few caveats: 1. This is for informational purposes only and not meant as investment advice, 2. As the overall market is in a high risk structure, I would suggest sticking to the blue chips as opposed to newer, small market cap projects, 3. There is a risk that the market continues to fall so make sure you have cash on the side and dollar cost averaging might be a safer approach compared to investing everything at once.

Now with the caveats out of the way, this is a potential sample portfolio:

• Layer1s/Layer2s (ETH, SOL, POLY, WAXP, SOUL, etc.): 40%

• Infrastructure (ENJ, CHZ, RMRK, RNDR, etc.): 20%

• Gaming Guilds (YGG, MC, GGG, etc.): 10%

• Gaming Studios (GALA, PYR, etc.): 20%

• Single Games (SAND, MANA, AXIE, etc.): 10%

Summary

In this post we went over the different investment options available for investing in the metaverse/gaming/NFT space. We started with the broadest exposure of Layer1/Layer2 blockchains and ended with the narrowest exposure of single name titles. At the end, I laid out a sample investment portfolio that provides exposure across a wide range of asset types within the space. If you find this post useful, please follow me for future posts.

Twitter: @cryptokevin2011