Investment logic | Soundwise founder shared: “5 steps” to screen out high-quality crypto projects

Investment logic | Soundwise founder shared: “5 steps” to screen out high-quality crypto projects

Simply holding BTC and ETH may not bring you considerable returns. High-return investments often come from betting on lesser-known projects. This article sorts out the investment views of Soundwise founder Natasha Che on his personal social media platform, and summarizes it as: 5 steps to find high-quality crypto investments, compiled and organized by BlockBeats. (Recap:The bear market has 3 stages, we just entered “stage 2: forced surrender” The rebound will be a dead cat jump) (background supplement:Ark Investment Analyst: Bitcoin is approaching a “generation bottom”, and the outlook is still severely affected by macro conditions)

existIn today’s cryptocurrency market, simply holding BTC and ETH may not bring you considerable returns. High-return investments often come from betting on lesser-known projects. It must be admitted that finding these high-return investments is difficult, but even then, crypto is more equal than tradFi. So with reliable methods, you can beat most players.

Here’s my 5-step framework for picking quality projects that might help you get rid of KOLs and some “experts”.


Note that if you had PTSD from a previous crypto cycle thinking that all altcoins are going to zero, you need to get rid of this emotional baggage right away before it hurts you more. Compared to 4 years ago, crypto adoption in real-world use cases has increased by more than an order of magnitude, and there is no inclination to stop, if you can’t keep up with it, you’ll be out.

Still, crypto is an immature and extremely risky market. High returns come from investments that take the risk curve like an early stage VC, so you want to embrace the VC mentality: most investments may not pay off, but if you make your choices based on sound principles, some of them will. 10x or even 100x return.

Below I will use my recent investment in Octopus Network (OCT) as an example to demonstrate and illustrate my screening steps, which of course do not constitute investment advice.

Step 1: Scouting

First of all, we need a series of “high-potential” investment logic as the basis for screening the watch list. So how to find these logics? Two ways: top-down or bottom-up.

From top to bottom:

Identify the next likely high-growth area and look for projects in that area.

For example, I mentioned 3 growth themes earlier this year: (Founder of Soundwise: 2022 Crypto Macro Development Logic)

1. L1 and L2, because ordinary people have a huge demand for low-cost, high-speed public chains.

2. GameFi, as it is the next frontier in crypto to reach the masses.

3. Interoperability, because there are various public chains, the demand for cross-chain communication will surge.

Once growth themes have been identified, we just need to find “potential stocks” that fit those themes. This is how I found the OCT – when I was researching NEAR, the OCT was listed on the home page of the NEAR website.

This caught my attention, this project allows applications to easily and cheaply deploy their own blockchain and communicate with other chains. In my opinion, it fits both the 1st and 3rd growth themes with a very clear value proposition. If the team can realize their vision, the market demand for OCT will be huge.

Another “top-down” approach is to look at the Ecosystem or Projects page on the L1 website and find projects that fit high-growth topics. Analytics sites like DefiLlama and DappRadar also list projects by chain, where you can get data about their growth track record, which is likely to come in handy later.

bottom up:

This is probably the easiest scouting method ever: When the market is down, find those projects that are still doing strong, and investigate why. If they fit your growth theme, you can add them to your watchlist.

If your assets are under $10 million, you don’t actually have to be limited to the top 300 projects by market capitalization. Because even for low-market-cap Tokens with weak liquidity, the impact of your bid is relatively small, which is the retail advantage.

Twitter is another “bottom-up” scouting method: by reading the replies below the big V, you will find that everyone likes to promote their own positions, for example, when I mentioned in the “Daily Note” tweet 3 After a project, the responses received usually involve 10 unrelated tokens. If you see a new name in it, give it a quick glance.

Step 2: Survey

Once you’ve rounded out your watchlist, it’s time for further forensics: read the project website, documentation, blog posts; search for them on youtube, podcast, reddit; join their Discord, if this is a consumer project, You can experience it yourself.

All of this information is designed to help you answer the following 5 main questions:

Is the project addressing an important problem? What is its Token used for? How attractive can it be? Does it have a moat mechanism? Can the team deliver on its promises?

In the case of OCT, there isn’t a lot of information about it, so I found the project’s YouTube channel and watched all their videos. Their founder was obviously a nerd and had an awkward speech, but at least you could tell he was insightful, down-to-earth, and humble about the industry.

After a round of information gathering on OCT, here are my first answers to the 5 questions above:

1. Does the project address an important problem?

Very important, it attempts to address the two main bottlenecks of blockchain growth: scalability and interoperability.

2. What is its Token used for?

It is used to verify node pledge to protect all application chains built on OCT. The more application chains are built, the higher the demand for OCT Token.

3. How attractive is it?

not much. At the time of my initial research, only 1 Lisk was deployed on OCT. But the team’s roadmap says they plan to launch 17 more Lisks in the third quarter of this year, although it’s not known if that will be successful.

4. Does it have a moat mechanism?

OCT has obvious strategic importance to the NEAR ecosystem. Once the application chain is launched, the user’s conversion cost will be very high. And the more application chains, the greater the network effects and economies of scale. Also, for developers and users, its proposition is similar to Cosmos & Polkadot, but cheaper. So, if executed well enough, OCT will have a strong moat.

5. Can the team deliver on its promises?

OCT has now launched an application chain and an application incubator, and has also done a good job in executing the roadmap.

Step 3: Calculate

You’ve answered the 5 main questions about the program, now you need to do some math to determine if the current cost of admission for the program is appropriate. We can do this by finding the project’s market cap, fully diluted market cap, and token issuance schedule and distribution, and comparing them to competitors.

When I looked at the OCT, it was fully allocated with a cap of $300 million in market cap and a cap of under $100 million in float. This is very small compared to competitors solving the same problem (DOT $30 billion, ATOM $10 billion).

Granted, OCT is still fairly new, so it’s much less appealing. But even taking that into account, it seems cheap compared to the large room for growth (one reason could be that the project team is not in the US and there’s not much marketing).

Step 4: Rebuttal

Now that you’ve found a promising and cheap project, it’s time to play the devil’s advocate. Think about when your investment logic can go wrong and what are the main risks?

For me, the biggest risk of using OCT is that its growth is life-or-death to Lisk’s performance. While Lisks launched this year can still be considered new projects by definition, the post-bull market is not the best time to launch new projects. If market conditions deteriorate this year and Lisk fails to gain enough traction, OCT’s momentum could die.

The second risk is related to NEAR. The actual usage of this chain is still very small compared to other L1s. Whether NEAR can reach the height of the top public chain is still an open question. If it is still a 2-tier public chain in the future, it is obviously good for OCT because it indirectly bets on NEAR.

There are of course countless other risks, but one thing I’ve noticed is: as the project grows, all the risks I can think of will become more relevant, but compared to the OCT’s $100 million market cap cap, it seems It’s that important.

Obviously, how much weight you give each risk factor is a matter of judgment, and good judgment is a practiced art that takes time to build.

Step 5: Putting it all together

Let’s say you think the project is worth investing in after looking at the project’s fundamentals, valuation, risks, and putting together all the data. Now you need to decide two things: how much to buy? and when to buy?

The first question depends on your assessment of the pros and cons of opportunity and risk. A general rule of thumb for small, early-stage projects like OCT is: they can only be 1-5% of a portfolio, and if successful, they have a lot of room to appreciate; if not, it’s not the end of the world.

By the way, that’s why early-stage small-cap stocks are a real plus for retail investors. The liquidity of these projects is very low, and if you are an institution with billions of dollars in capital, it is almost impossible to allocate 1-5% of funds to a project like OCT. So the crypto market is one of the rare places where retail investors can lead the big players.

As for when to buy, we need to consider if there are any short-term catalysts, or if we can wait a little longer, as any investment has an opportunity cost. If you know technical analysis, it can obviously help too.

For OCT, I quickly identified its short-term catalysts: NEAR had a strong price movement in the previous month, and just launched a large incentive fund for ecosystem projects, which will make OCT and NEAR an important project in the short term. Its application chain benefits.

TL;DR: 5 steps to finding crypto winners:

Scouting Candidates (Top-Down & Bottom-Up) Investigating Fundamentals (5 Key Questions) Calculating Valuation (vs. Attractiveness & Competitiveness) Rebuttal Logic (Key Risks) Synthesizing Decisions (Scale & Timing) 📍Relevant report 📍

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