Soundwise Founder: Break Free from "Expert" Dependence, 5 Steps to Select Quality Investment Projects

Original Author: Natasha Che, Founder of Soundwise
Original Compilation: 0x137, Rhythm

In today's crypto market, simply holding BTC and ETH may not bring you substantial returns; high-reward investments often come from betting on less conspicuous projects. It must be acknowledged that finding these high-return investments is challenging, but even so, crypto remains more egalitarian than tradFi. Therefore, with reliable methods, you can outperform most participants.

Here are the 5-step framework I use to select quality projects, which may help you break free from reliance on KOLs and some "experts."

Please note, if you have PTSD from previous crypto cycles and believe all altcoins will go to zero, you need to immediately address this emotional burden to prevent it from causing you greater harm. Compared to four years ago, the adoption rate of crypto technology in real-world use cases has increased by more than an order of magnitude, and there is no sign of it stopping; if you can't keep up, you will be eliminated.

Nonetheless, crypto is still an immature and highly risky market. High returns come from taking risks like early VCs, so you need to embrace a VC mindset: most investments may not yield returns, but if you make choices based on reasonable principles, some will bring you 10x or even 100x returns.

Below, I will use my recent investment in Octopus Network (OCT) as a case study to demonstrate and illustrate my screening steps, which does not constitute investment advice.

Step 1: Scout

First, we need a set of "high-potential" investment logics to serve as the basis for our watchlist. So how do we find these logics? Two ways: top-down or bottom-up.

Top-Down:

Identify the next potential high-growth areas and look for projects within those areas.

For example, earlier this year, I mentioned three growth themes:

1. L1 and L2, as there is a huge demand from the general public for low-cost, high-speed public chains.

2. GameFi, as it is the next frontier in the crypto space that will engage the masses.

3. Interoperability, as the demand for cross-chain communication will surge with various public chains.

Once the growth themes are identified, we just need to find "potential stocks" that fit these themes. This is how I found OCT—while researching NEAR, OCT was listed on the homepage of the NEAR website.

This caught my attention, as this project allows applications to easily and cheaply deploy their own blockchains and communicate with other chains. In my view, it aligns with both the first and third growth themes and has a clear value proposition. If the team can realize their vision, the market demand for OCT will be enormous.

Another "top-down" method is to check the "Ecosystem" or "Projects" page on L1 websites and find projects that fit high-growth themes. Analysis websites like DefiLlama and DappRadar also list projects by chain, where you can obtain data on their growth track records, which may come in handy later.

Bottom-Up:

This may be the simplest scouting method ever: when the market is down, find those projects that are still performing strongly and investigate why. If they fit your growth themes, you can add them to your watchlist.

If your assets are below $10 million, you don't actually have to limit yourself to projects in the top 300 by market cap. Because even for low-market-cap tokens with weaker liquidity, your bidding impact is relatively small, which is the retail advantage.

Twitter is another "bottom-up" scouting method: by reading replies under big accounts, you'll find that everyone loves to promote the projects they hold. For example, after I mention three projects in a "Daily Notes" tweet, the replies I receive usually involve ten unrelated tokens. If you see a new name among them, you can quickly browse it.

Step 2: Investigate

After refining your watchlist, you can proceed to further evidence gathering: read project websites, documentation, blogs; search for them on YouTube, podcasts, Reddit; join their Discord, and if it's a consumer project, experience it yourself.

All this information is to help you answer the following five key questions:

1. Is the problem the project is solving significant?

2. What is the token used for?

3. How much appeal can it generate?

4. Does it have a moat mechanism?

5. Can the team deliver on its promises?

For OCT, the relevant information was not very rich, so I found the project's YouTube channel and watched all their videos. Their founder clearly has deep insights into the industry, is down-to-earth, and very humble.

After a round of information gathering on OCT, here are my initial answers to the five questions:

1. Is the problem the project is solving significant?

Very significant; it attempts to address two major bottlenecks in blockchain growth: scalability and interoperability.

2. What is the token used for?

It is used for validating node staking to secure all application chains built on OCT. The more application chains built, the higher the demand for OCT tokens.

3. How much appeal can it generate?

Not much. At the time of my initial research, there was only one application chain deployed on OCT. However, the team's roadmap indicates they plan to launch 17 more application chains in the third quarter of this year, though it's uncertain if this will succeed.

4. Does it have a moat mechanism?

OCT has clear strategic importance to the NEAR ecosystem; once application chains are launched, the switching costs for users are high. The more application chains there are, the greater the network effects and economies of scale. Additionally, its proposition is similar to Cosmos & Polkadot for developers and users, but cheaper. Therefore, if executed well, OCT will have a strong moat.

5. Can the team deliver on its promises?

OCT has already launched one application chain and an application incubator, and they have performed well in executing their roadmap.

Step 3: Calculate

You have answered the five key questions about the project; now you need to do some math to determine if the current entry cost for the project is appropriate. We can accomplish this by looking at the project's market cap ceiling, fully diluted market cap ceiling, token issuance plan, and distribution, and comparing them with competitors.

When I looked at OCT, it had a fully allocated market cap ceiling of $300 million and a circulating market cap ceiling of less than $100 million. This is very small compared to competitors solving the same problems (DOT at $30 billion, ATOM at $10 billion).

Admittedly, OCT is still new, so its appeal is much lower. But even considering this, it seems relatively cheap compared to the large growth potential (one reason could be that the project team is not based in the U.S. and has done little marketing).

Step 4: Refute

Now that you have found a potential and cheap project, it's time to play the devil's advocate. Think about the scenarios in which your investment logic could go wrong and what the main risks are.

For me, the biggest risk of using OCT is that its growth is closely tied to the performance of application chains. While the application chains launched this year can still be considered new projects by definition, the late stage of a bull market is not the best time to launch new projects. If market conditions worsen this year and application chains fail to gain sufficient appeal, OCT's momentum could fade.

The second risk is related to NEAR. Compared to other L1s, the actual usage of this chain is still very low. Whether NEAR can reach the heights of top public chains remains an open question. If it continues to be a tier-2 public chain in the future, it would clearly not benefit OCT, as it indirectly bets on NEAR.

Of course, there are countless other risks, but one thing I've noticed is that as the project develops, all the risks I can think of will become more relevant, but they seem less important compared to OCT's $100 million market cap ceiling.

Clearly, how much weight you give to each risk factor is a matter of judgment, and good judgment is an art that requires practice and long-term accumulation.

Step 5: Comprehensive Consideration

Assuming you believe the project is worth investing in after reviewing its fundamentals, valuation, risks, and integrating all information, you now 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 versus risk. A general rule of thumb for small early-stage projects like OCT is that they should only account for 1-5% of your portfolio; if successful, their upside potential is significant; if not, it won't be the end of the world.

By the way, this is also why early small-cap stocks are a true advantage for retail investors. These projects have low liquidity, and if you are an institution with billions in capital, it is nearly impossible to allocate 1-5% of your funds to a project like OCT. Thus, the crypto market is a rare place where retail can outpace large participants.

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

For OCT, I quickly identified its short-term catalysts: NEAR had a strong price trend in the previous month and just launched a large incentive fund for ecosystem projects, which will benefit OCT and its application chains in the short term since OCT is an important project for NEAR.

TL;DR: 5 Steps to Find Crypto Winners:

1. Scout candidate projects (top-down and bottom-up)
2. Investigate fundamentals (5 key questions)
3. Calculate valuation (relative to appeal and competitiveness)
4. Refute logic (main risks)
5. Make comprehensive decisions (scale and timing)