When selecting projects, don't just look at market value: 3 steps to quickly identify potential projects

Many people consider market cap as an important (or even the only) reference indicator when selecting projects (tokens). A few days ago, a friend asked an interesting question: after seeing the news about Trump being shot, they wanted to buy some TRUMP, but found that the market cap of this token is currently 350 million dollars. If they want the price of TRUMP to double, wouldn't that require another 350 million dollars in funding? This seems very difficult to achieve, right?

How to say this? From a simple mathematical calculation perspective, it seems as this friend mentioned. However, they may have overlooked a crucial factor: market liquidity.

When selecting projects, market cap is indeed one of the important reference indicators, but if we look at the issue without considering the underlying logic of liquidity, it may lead to some one-sidedness.

So how should we understand market liquidity?

According to Wikipedia, market liquidity is a characteristic of a market where individuals or companies can quickly buy or sell an asset without causing a significant change in the asset's price. Liquidity involves a trade-off between the price at which an asset can be sold and the speed of sale. In a relatively liquid market, people can sell quickly without having to accept a significantly lower price; in a relatively illiquid market, an asset must be discounted to sell quickly.

In the context of the crypto market, we can summarize it in one sentence: market liquidity refers to the ability to quickly exchange (trade) cryptocurrencies at current market prices without causing significant value loss.

This is not hard to understand. For those who enjoy playing with MemeCoins, they often encounter tokens that have a seemingly large market cap but almost zero liquidity.

Therefore, while paying attention to market cap data, we also need to consider the corresponding liquidity data of the pools. As shown in the figure below. In short, sufficient liquidity is crucial, and the amount of tokens you trade should not exceed the amount allowed by its available liquidity.

For tokens in DEX, different pool (trading pair) pages will provide data such as Liquidity. For tokens in CEX, we can focus on three indicators: 24-hour trading volume, order depth, and the bid-ask spread (the difference between the selling price and the buying price). Of course, due to factors like limit stop-loss orders and iceberg orders, the order book in exchanges may not represent the most accurate price of the corresponding token, but these indicators still have certain reference value.

Taking the MAGA (TRUMP) token shown in the figure above as an example, as of the writing of this article, the price of this token is 8.11 dollars, and the TRUMP --- WETH liquidity pool in Uniswap is 9.1 million dollars, with a market cap of 354 million dollars. As shown in the figure below.

This means that as long as the market continues to inject 4.55 million dollars into this liquidity pool to buy TRUMP, it should be able to double the price of TRUMP without needing to inject 354 million dollars.

This involves the economic relationship between liquidity and asset pricing. Simply put, when the supply of an asset is fixed, demand becomes the decisive factor for price. When supply is elastic and demand increases, the price remains unchanged, but the demand quantity increases; when supply is inelastic (i.e., fixed supply) and demand increases, it leads to price increases, further bringing the price to a new equilibrium point. Corresponding to the figure above, when S (supply) remains stable, if demand increases from DD to D1D1, the price will reach a new equilibrium point, from E to E1.

Similarly, the total market cap of the crypto market (excluding USDT and USDC) is currently 2 trillion dollars, as shown in the figure below. Many people are currently hoping that the Federal Reserve's interest rate cuts will bring a lot of liquidity to this market, but it does not mean that we need another 2 trillion dollars in new funding to double the market cap of the crypto market. In fact, as long as there is a certain new liquidity base, combined with a new round of demand speculation, it can completely push up the overall market cap of cryptocurrencies.

In summary, when selecting projects, do not just focus on market cap as a single indicator, but should look at it comprehensively. If you have enough time and energy, it is still recommended to use the "Project Research Template" provided by Huali Huawai for assistance.

If you do not have enough time and energy, you can also simplify the project research work appropriately, such as:

Step 1: Select Narratives

Looking at the data classification from the Dropstab platform, the crypto field can currently be divided into hundreds of narratives. As shown in the figure below.

In the previous article by Huali Huawai (July 14), we also mentioned: because everyone's time and energy are limited, you cannot conduct investment research on all narratives in the current crypto field at the same time. You only need to select 1-3 narratives that you believe in the most for in-depth research.

Step 2: Filter Projects

Here we can continue to use the Dropstab tool. You can use the tool's filters to filter by different dimensions and then select the list of projects you wish to further understand or research. As shown in the figure below.

Step 3: Check Projects

Here we will continue to focus on several aspects of the corresponding projects, including:

1) The project's financing situation

If it has already received investment from some VC institutions, then this project will be relatively lower in risk, at least in terms of the risk of the project team rug-pulling.

If you are not aware of the current CV situation in the crypto field, you can use the DeFiLlama tool for assistance. As shown in the figure below.

2) The project's community situation

A project that can develop well certainly needs to be driven by a strong community. You can join them and learn more about them. If the project's DEV (developers) can have good discussions and communication with community users and actively synchronize some development plans of the project, and the community users (fans) are also continuously growing, then this may be a good sign.

The project community includes the project's corresponding Twitter (X), Telegram, or Discord, etc. You can directly find these entrances through the project's official site (usually displayed at the top or bottom of the official website).

3) The project's chart data

In addition to basic information, paying attention to the K-line chart of the project token is also essential. Regarding some basic knowledge about K-lines, it has already been sorted out in a previous article by Huali Huawai (July 3) titled "Some Technical Analysis Basics You Need to Understand Before Making Money," so I won't elaborate on it here.

4) The project's tokenomics

In the crypto field, tokenomics is a very important concept. If you trade without understanding the economic design of the corresponding token, it is equivalent to trading blindly, which may lead to serious losses.

Tokenomics mainly includes several aspects, including market cap, FDV (Fully Diluted Value), circulating supply, and total supply, which will further derive issues such as token distribution ratios and token unlocks. Mastering these indicators will help us assess the potential of the token and understand the project's corresponding operation methods and their possible impact on token prices.

After the above three simple steps, we should have a list of some potential candidate projects. The next thing to do is to conduct "buying on dips" based on a certain strategy. Regarding the topic of buying on dips, it has also been sorted out in previous articles by Huali Huawai, so I won't elaborate on it here. As shown in the figure below.

Finally, it is patience and executing according to the plan (take profit/stop loss). Of course, it is worth reminding again that if you do not consider yourself a professional trader, it is advisable to minimize swing trading. For projects (tokens) with potential and value, sometimes holding for half a year or even a year is quite normal.