Tama Churchouse on how to analyse Crypto assets

This is how I analyse crypto assets

Cryptocurrencies are often referred to a “Wild West” for investors.

You see, equity markets are regulated. Not only is the buying and selling of securities highly controlled, but companies themselves are required by law to share information with investors and potential investors.

Auditors examine the books. Stock market regulators require strict criteria be adhered to in order to access public markets… like annual reports, quarterly earnings reports and other updates.

Companies have shareholder meetings, boards, meeting minutes and a relatively high degree of transparency.

There are tens of thousands of high-paid equity analysts and institutional investors covering stocks and quizzing company management. The media constantly probes and asks questions.

Practically NONE of this exists in the cryptocurrency space.

Not only is the general mainstream media coverage of cryptos very poor (I’ve seen articles from the Wall Street Journal carrying basic factual inaccuracies for example), but the crypto media space is also generally not great.

People who write about cryptos often have their own agendas. They may own tokens in a competitor they are writing an article about, and hence be extremely negative. Or, more likely, vice versa.

There are a huge number of trolls, pumpers and dumpers, liars and cheats.

So if you’re going to invest in cryptos, you need to make sure you’re investing in the right ones.

Here are a few key attributes to look for…

1. Problem solving

The first thing to ask yourself is: What is the problem that this project is solving? Is this technology leveraging blockchain to solve a difficult problem that can’t be solved without blockchain?

I’m dismissive of companies that are just jumping on the crypto bandwagon by trying to transfer an existing business to the blockchain. I’m looking for something that truly benefits from decentralization… a crypto asset that solves a problem that can’t be solved without blockchain.

2. The addressable market should be global

At this early stage in the development of the blockchain ecosystem, everything is a land grab. We want to maximize our bang for our buck. We want a company that has the capacity to go global. We want a crypto asset that can potentially be used by everyone on Earth, not just a narrow market.

3. Launch horizon proximity

The way a lot of Initial Coin Offerings (ICOs) work is: the company produces a white paper that outlines the technology they plan to build, and then funds it by issuing some tokens in return for capital (in the form of bitcoin and/or other cryptos).

The key phrase here is “plan to build”. There’s an ocean of difference between putting an idea down on a whitepaper and building and executing a successful launch. This is one of the main reasons why I very rarely advocate participating in ICOs.

4. The team

I want to see a team comprised of developers who have a track record of building and deploying blockchain technology.

Now, they don’t necessarily need to have been successful in prior ventures. Microsoft CEO Bill Gates and late Apple CEO Steve Jobs failed in some of their early ventures.

A CEO doesn’t need to be a computer scientist, but the team needs to have a strong understanding of how its project will address the points I just mentioned.

5. The community

You have to ask, “Does this project have a large community of followers and early adopters who will actually use whatever is being built?” A crypto asset is no good if nobody is using it and the token isn’t widely distributed.

Blockchain protocols like Ethereum are valuable because a huge number of users are behind it. If nobody is building on it or using the application, it doesn’t have much value.

6. The token economics

Crypto tokens all have varying characteristics, but scarcity is an important one. Would you buy into a token that had 1 billion tokens currently issued if you knew that in three months, it would issue another 2 billion? Probably not.

All cryptos have completely different token economics underpinning them. Bitcoin, for example, has around 16.5 million in circulation at the moment. New bitcoins are mined every day, but the total supply will only ever be about 21 million. Other tokens are created in a single launch with a permanent fixed supply. And some specify an annual “inflation” to be distributed every year according to a predefined mechanism. Token supply has infinite permutations, so you need to analyse them accordingly.

These are just a few high-level things I look for before I make crypto recommendations.

Tama Churchouse

About Tama Churchouse

Tama Churchouse spent nearly a decade creating and selling financial derivatives for a global investment bank in Hong Kong. As Lead Analyst he brings technical expertise across the entire asset class spectrum, from equities and index products, to interest rates and credit..