A good place to start with Fundamental Analysis of a cryptocurrency is asking the simple question – what problem is it trying to solve?
This may sound obvious, but it is very easy to be seduced by complex language and ambition, without thinking about what a cryptocurrency does and what real world problem it solves.
If it doesn’t solve a real world problem, it is unlikely to provide long term value. Hype can sustain interest during a bull market, but as with the dotcom bubble, businesses that lack a clear use case will eventually fail.
We saw this during the ICO boom of 2017/18 when projects generated astronomical investment and unrealistic expectations of future value on basis of flimsy concepts, often no more than ideas.
Dragon Coin is a good example. It raised $320million from an ICO and traded at an all-time-high of $2.40 in March 2018, but three years later, with its development abandoned, price is down 99.74%. The most obvious reason being it had no clear purpose.
Its website is poorly put together, which would be an immediate red flag, and it describes itself as the ‘Entertainment Token’ but text attempting to explain what that means reads like word soup.
Any crypto project should be able to articulate the problem being solved in a single sentence and you’d expect to find it prominently on the project website and on page 1 of something called a Whitepaper.
Here’s what the first paragraph of Bitcoin’s whitepaper says:
This very succinctly explains what Bitcoin is and the problem it is solving. The remainder of the document then goes on to explain how Bitcoin solves the double-spend problem, in just nine pages. A good white paper should therefore cover:
- What the project does
- Why it is exists – details of the specific problem it solves
- How it intends to solve the problem
- The team behind the project
You can understand a lot about a project simply from a Whitepaper, such as the quality of the content, how succinctly it covers the what, why and how, along with the reputations of the people directly involved or supporting the project.
Many early crypto Whitepapers were lazy rip-offs, copying text directly from the internet. Obviously the Bitcoin Whitepaper contains no details of the person behind it; it succeeded purely on the strength of the idea and clear understanding of the problem it was trying to solve.
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