Aside from what indicators I use to trade bitcoin (article here), another topic I frequently get asked about is how I find token such as YFI or YFDAI so early. The answer is simple: mostly luck.
However, I do think that I can add some useful perspective to the discussion in terms of what CAN make a really strong token and I am happy to share my criteria.
As always, none of what I write here is financial advice or any other kind of advice. It is my purely personal opinion and I could be entirely wrong with anything I say.
Criteria for token selection
- Initial Distribution
I like it best when token are distributed in a fair way. That can be a presale open to anyone with a limit of ETH contributed per address so that whales have a hard time getting a lot of token at the start. It could also be a distribution based on participation in a community.
Most importantly: NO pre-presales to “backers”, no crypto funds involved, not “backed” by any large instution, no huge team allocation (15–20% is okay), team tokens always locked and no allocation to a crypto fund/other large backer during launch either.
This is probably one of the key things. Yes, if you have “large backers” you are likely to see a lot of marketing, but it also means that you are being dumped on from day one. I absolutely detest that kind of launch and will not look at the token twice. It is totally okay to have large backers who are participating in EQUITY of your company, but it is not okay to give those backers a nice little “gimme” on top by letting them dump on your community.
2. Total Token Cap/Supply
I tend to not go into token with a huge token cap/supply (like 100,000,000 token or more) unless there is a clear reason directly infered from the usecase (such as using token to register assets and having to be able to assign new token to these assets) and most importantly, an increasing cap is always suspect. It means one thing: dilution. The reason for that dilution has to be extremely compelling and as 99% of all token will never have anyone use their product, that reason is hard to come by. Dilution is the enemy of return.
So I usually look at token with a FIXED, reasonably low total token supply that cannot be increased (ie no mint function or a clear explanation as to why it won’t be used or can’t be used). I note that it is borderline okay if there are two token in a project, but a project that throws around ever new airdrops of new token that play a role in their “ecosystem” are doing the same as increasing their token cap. They are diluting you and their brand further and further.
The biggest issue, in my experience, is if the token cap is “flexible” or rather there are constantly new token created to reward staking / liquidity provision. This can be solved quite nicely WITHOUT conceiving new token all the time and I like those approaches much better.
3. Use Case
Whether you like it or not, DeFi Yield Farming is “a” use case. It is not necessarily one that will still be around in 10 years, but it is certainly being used at the moment.
On the other hand offering “a new blockchain that uses bootstrapping, sharding, delegated byzantine clepatomanic berserker mining-stake technology to be really scalable” is not a use case (note: anyone who uses the word “bootstrapping” is a scammer 90% of the time). Face it — currently NOBODY uses decentralized blockchains for anything but for trading. MAYBE the one project out of 1000 that you are looking at will find its way into mainstream use. But it s a long-long shot. So I tend not to care about such projects.
Equity token are great in the sense that they give you true ownership, but they still need a project that has any kind of future and you need to be sure they take care of AML & KYC.
In summary: I’d like to understand why what the token offers could be interesting to use (for myself).
In my mind, projects that survive a very early first pump and dump are those that offer something to keep the crypto community engaged. This can be a lot of influencer marketing, but it is best if there is actually something in their roadmap or initial offering that you see which is truly unique and strikes you as a good idea.
For example, when I looked at YFDAI and saw that they were planning not only a “launchpad” (a way for other projects to use their community to launch, while having to adhere to strict standards) but also something they called “safeswap” (a uniswap clone that only lists projects with locked liquidity etc), I really thought that would be something unique / new and useful. I had just been rug pulled a few times, so this was definitely a useful idea. Another example is YFI, which is probably the most innovative project in crypto. A project that offered automated yield farming strategies, aside from doing one of the first truly fair launches, seemed like a good bet. Of course, Andre has been so much more innovative since then, so in retrospect this one was simple. Nexus mutual is another example — insurance products for yield farming was a clear need and the fact that their token are full equity stakes in the company makes it more interesting.
If the project is not an innovator it is a copy cat. Copy cats can work, but they typically do not go much further than 1–2 pumps and dumps. I usually exit quickly.
5. Hygiene criteria
Crypto is full of scammers. So I try to make sure as well as I can that I don’t invest in their projects. Some hygiene criteria that have helped me are:
- locked liquidity if it is trading on uniswap for at least 6 months
- audited contracts, ideally by a public counterparty or just reading the contract yourself/asking a friend to do it
- no initial listing on large exchanges (these are full of insider trading in my opinion and when the “Coinbase pump” or “binance pump” already happened — why would you still invest?)
- A non-anonymous team is a nice to have, a full corporate structure that is registered is better
- Liquidity on Uniswap needs to have a realistic road to $100,000+ as it is hard for less liquid token to take off
When I go into something as risky as a token (ie could be a scam, even if not it might never go up), I want to see potential. I have a hard time seeing that in a token that starts with a valuation of more than $50m fully diluted market cap. I always look at fully diluted (ie I assume every token in the total cap has been distributed) as opposed to circulating supply as I don’t want to be the person Ripple dumps on.
To be honest, $50m is already quite high. Yes, a $300m project can probably still 3–5x IF you have found the next YFI, COMP, AAVE, SNX, but if you haven’t (and the chances are high that you haven’t), then the road is likely flat to down. My background is in stocks, so I cannot entertain the thought of Ripple’s XRP scam token being worth more than Apple ever (or even GM for that matter).
I like fair launches with fully diluted market caps below $5m.
This is a double-edged sword. Too much marketing implies too many “backers” that got a deal to dump on you. But no marketing funds implies a project that will only take off if your dev is as brilliant as Andre so that there are enough “OGs” who do your marketing for free. And let’s face it — he or she likely is not.
I have gone into a few really great token with good uses that check all the boxes (like Trendering for example), that do not have any marketing and therefore do not go anywhere.
So I am happy if the team has a time-locked allocation of token to be used for influencer marketing.
Idea sourcing is easily the most difficult part of this. There are many ways you can go about it. A structural way would be to analyze any new listing and build bots to scan twitter for pre sales etc. That is one level too work intensive for me.
I have noticed in this area more than in any other that there are enormous network effects in crypto. Being active on Twitter (follow me if you like, by the way: https://twitter.com/dkcrypto13) is much more than just a way to pass time. If you build a network of good, smart people, they will see interesting projects themselves and they will tell you, just like you are going to tell them if you see something you find interesting. That is the way I found most of my best trades. It is a filter that helps ensuring you do not have to look at 10,000 new projects every week, but can instead just look at 5–6. For what it’s worth, I do not go into more than 1 token every 2–3 weeks from all those I look at, unless it is a purely technical trade.
I may go back to this article and refine my criteria a little bit, as I literally just “spat them out” here, but I think this covers it.
I want to stress again — all of the above is personal opinion. None of it is financial or any other type of advice.
Thank you for reading. If you enjoyed this, please clap and have a look if you’d like to follow me on twitter. My other works can be found here:
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Lastly, the all important disclaimer: this is my personal opinion, not my professional advice. Most of all this is not investment advice in any way. Crypto assets can fluctuate widely in value and all of your capital can be lost. I have a 50/50 chance of being right. Any negative views expressed, if any, are solely aimed at the token in question, never at the development teams behind them for which I have utmost respect (if they are sincere).