by Robby Black - December 6, 2018

The Anatomy of a Profitable Altcoin: What to Look for Before Investing

There are thousands of tokens in existence, with new ones launching each and every week. So, how do you keep up? Our team at Hilo.io has come together to create a checklist of things we look for before taking action.

Let’s delve right into the anatomy of a profitable altcoin.

Strong Team with Diverse Competencies

First and foremost, a strong technical team with good working chemistry is critical to the success of a token project. Ideally, you want to look for a founding team and early contributors who have a variety of experiences, from strong technical ability, a track record of growing products and services, and prior experience managing teams that are diverse in discipline.

In the Blockchain space it’s common to find teams that can be biased in a particular way (very technical) or the other (partnership and marketing focused). Not many teams achieve a perfect balance. But try to understand the team composition and their particular strengths, and weaknesses relative to their particular project. For instance if project is technologically intensive it’s absolutely critical to have a rockstar team of engineers with reputable research backgrounds. However there are projects that intentionally target very specific enterprise segments. These projects live and die on their adoption within their market and their technological challenges can be less intense. These can be simpler implementations of blockchain technology dedicated to acute but nonetheless high-profit needs within specific enterprises.

Ideally, the team has already demonstrated an ability to execute — if there’s no functional product yet this may be harder to gauge. Good indications are market research, a proof of concept, or traction with users or customers. It’s important to know who’s behind a project, their experience in a particular space, and the connections they can leverage to make the long-term vision for their protocol a reality.

Large Market

When evaluating token projects, filter out projects that are focused on small markets. You want both (1) a large market and (2) a large market opportunity. We’ll define these terms below.

A large market is a national or global market that’s large enough for a company to thrive in. Companies are never guaranteed to become monopolies, so you want markets that are measured in the billions of dollars so that even a 10–20% market penetration leads to a large, sustainable business. Additionally it’s important to be cognizant of market cap and weigh the long-term growth potential of a token relative to its current market cap. Think about the overall market share in a project’s space in reference to their current market cap, is it realistic for this project to continually grow? If so, how much?

Furthermore, there needs to be a feasible opportunity within that market for the company to enter and expand. A market opportunity could be a product or service that is cheaper, better, or faster than what currently existing. Let’s make this a bit more tangible. Many blockchain projects target market opportunities taken by conventional “centralized” businesses. They leverage blockchain technology to improve efficiency in products and services typically by removing middle-men or antiquated processes.

10x Solution

In most of our lives, we are surrounded by incremental product enhancements. A new car is 5% more fuel efficient than an outgoing model or a cleaning solution offers us 10% more for the same price. But these types of incremental changes do not make for good bets.

For newly minted cryptos, you want to look for a step-change from what came before. In other words, you’re looking for a 10x solution. A 10x solution is something that offers a 10x improvement in one direction — for example, it’s 10x cheaper than what came before, or 10x faster, or 10x easier to use.

Could I buy a cell phone, digital camera, calculator, and flashlight? Yes. But it’s a compounded 10x more convenient to have all of that functionality — and much more — in a single smartphone.

In crypto, look for people offering something that (1) is truly better than what came before it or (2) was not possible without a blockchain system.

Aligned Incentives

Cryptocurrencies offer a unique opportunity to align the incentives of everyone participating in a project — from the founders, early developers, token holders, and community members. The most direct way to participate is to purchase the token and vote.

That said, there are also opportunities for token projects to encourage members without them explicitly purchasing anything. For instance, Steemitis a social media platform that allows you to earn Steem Media Tokens (SMT) for posting valuable content to their community. Storj, another blockchain project, allows you rent idle storage capacity on your computer to earn crypto. You can think of it as a decentralized Dropbox.

At Hilo, we’re building a social platform that allows users to track influencers, manager their portfolios, discover new coins, and converse about all things crypto. Hilo provides opportunity to earn HILO tokens for actions related to being a helpful, active community member.

It’s recommend to look for projects where everyone’s economic incentives are aligned around making the project successful for years to come.

Long-Term Vision

Continuing off of the previous point, successful projects make progress today but build towards an ambitious, long-term vision that will truly revolutionize their target market. The team should focus on execution (they should have a “bias towards action”) but their overall vision should extend well beyond an ICO and the next 12 months.

A company needs to continually innovate and over deliver in execution. How do the users, research, and revenue from today allow them to do something novel in the future? A long-term vision is contagious, and will attract other developers, investors, and members. It is also relatively straightforward to copy a list of features — but near impossible to copy a project’s culture, vision, and motivation.

Conclusion

When looking for your next prospect, be sure to vet them across the following categories: team, market, solution, incentives, and vision.

Depending on what stage you invest in, companies should have different milestones completed and price should reflect progress. If the company has a completed product that isn’t doing well, 42% of startup founders built a product and company only to discover they built something nobody wants. The checklist above provides a great starting point for evaluating new projects; but do your own research and never act upon a recommendation from a single source.

To learn more about Hilo, or cryptos in general, please visit the resources below: