“Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not synonymous with risk…”
Pursuant to paragraph 6.2(h) and Appendix 1 of the Code of Conduct for Persons Licensed or Registered with the Securities and Futures Commission, licensed institutions are required to remind their clients:
“Security prices fluctuate, sometimes dramatically. The price of a security can go up or down and lose all value…”
In reality, most of these warnings are nothing more than white noise to the listener and do little to mitigate investment risk. This is why proper research and understanding of products is crucial.
Do your own research | Common cryptanalysis
When it comes to knowing how to make money [crypto] investment, many factors are important and are responsible for its results. There are three (3) common types of analysis commonly used in the crypto ecosystem. While many traders think that only one type matters (and therefore prevails over the others), the reality is that they all matter to some degree.
Common Analysis 1: Technical Analysis
A technical analysis is the analysis of the past price action of an asset. This usually takes the form of analyzing price charts to find discernible patterns (often derived from investor psychology). It should be emphasized that:
- you can’t expect to make good investment decisions just by looking at charts; and
- the results may be wrong.
Common Analytics 2: Sentiment Analysis (aka Sentiment and Core Metrics)
Sentiment analysis is the study of how the general population “feels” about a certain stock or crypto. Market sentiment studies often refer to the general attitude of investors towards a particular security or financial market.
As such, the foundation of the analysis is the sentiment or tone of a market (crowd psychology). Data can be extracted through the activity and price movement of securities traded in this market. In broader terms, while rising prices will indicate bullish market sentiment, falling prices, on the other hand, will indicate bearish market sentiment.
Although sensations cannot be measured per se, recent breakthroughs in big data and artificial intelligence technology allow the use of various tools to assess Internet activities and formulate a sentiment score.
As effective as the tool may seem, common shortcomings of sentiment analysis include:
- The data is easily manipulated;
- Data not reflecting the long-term trend of nature (decrease in value over time); and
- Difficult to analyze and interpret.
Common Analytics 3: Fundamental Analysis
A fundamental analysis is the actual study of the makeup of a particular crypto project. Such an analysis includes the study of the following information (usually found in a project’s white paper):-
- professional experience;
- and the specific objectives of the project.
The Default Tone | Always play devil’s advocate
It is always important to keep in mind that every action should have a goal in mind. Searching for a crypto is no exception.
“A healthy skepticism is the basis of all accurate observations”
-Arthur Conan Doyle
One of the biggest problems facing crypto investors is “fear of missing out” (“FOMO”). To combat this phenomenon, the goal of all crypto research should be to play the role of devil’s advocate because while it is easy to deem an investment investable, it will often take a lot more effort to do the wrong thing. seem like an investment. As such, one should always look for the downsides. When a product still arouses interest after having identified all the disadvantages, it can be invested.
Tokenomics is the study of the economics of a virtual asset. Tokenomics data for specific projects can usually be found on the project’s website or whitepaper. The first thing to know about a token is whether it is an inflationary or deflationary asset.
- Inflationary assets are assets that can be created in perpetuity (eg USD or RMB where central banks can simply print indefinitely). Inflationary assets lose value over time in the absence of growing demand.
- Deflationary assets are assets that will shrink over time (e.g., get burned while in use). The example includes trading cards.
Many crypto assets are a mixed class. For example, Bitcoin is currently inflationary because more can be mined BUT will eventually be depleted (at which point it will become deflationary). Farm tokens are another form of highly inflationary assets.
Another set of data to look at is pre-sale data. Tokens are often pre-sold via (i) private investors, (ii) early adopters (via airdrops), and (iii) miners. Depending on a project’s vision, this can influence the price of the asset over time. The common issuance method includes initial coin offerings, premine, presale, and algorithmic issuance.
Composition of the project
It’s no understatement that the people behind a token are critical to the future of the token. When a team includes crypto veterans, the likelihood of success for a new project increases due to the strategic experience they bring to the table. On the contrary, lesser-known developers may associate a higher risk (for example, because veterans have reputational risks to worry about).
Final factor | Vision
Finally, a project will only have value if it has a problem to solve. For example, Bitcoin is considered valuable because it strives to solve the problem of inflation. Ethereum, on the other hand, aims to solve the problems with expensive and slow banks. Polkadot aims to become the blockchain internet.
Ultimately, the goal of any symbolic research should be to assess where an asset deserves to be. Therefore, always remember, before investing, to do technical analysis and read white papers.
This article first appeared in the Hong Kong Lawyer, the official journal of the Law Society of Hong Kong.
This article is co-authored by Ohoon Kwon by Cha & Kwon.