When choosing crypto projects (tokens), many people tend to regard market cap as the key or even the only reference standard. Just two days ago, a friend left a message and raised an interesting question: After seeing the news that Trump was shot, I wanted to buy some TRUMP, but found that its token market value has reached 350 million US dollars. If the price is to double, does it require an injection of 350 million US dollars? This seems difficult to achieve.
This problem seems simple and straightforward, just like what this guy calculated. However, he may have overlooked an extremely critical factor here - market liquidity.
When selecting a project, market capitalization is certainly an important reference, but if it is separated from the underlying logic of liquidity, it may sometimes lead to a one-sided view.
So how should we understand market liquidity?
According to Wikipedia's definition, market liquidity is a characteristic of a market that means that individuals or companies can quickly buy and sell an asset without causing large fluctuations in the asset's price. Liquidity involves a trade-off between the price at which an asset can be sold and how quickly it can be sold. In illiquid markets, people can sell assets quickly without having to accept significantly lower prices; in illiquid markets, assets must be discounted to sell quickly.
In the crypto market, market liquidity refers to the ability to quickly trade cryptocurrencies at current market prices without causing significant loss of value.
This is not difficult to understand. For friends who like to play MemeCoin, they may often encounter Dogecoin, whose market value seems considerable but whose liquidity is almost zero.
Therefore, while paying attention to the market value data, you must also pay attention to the liquidity data of the corresponding pool. For example, as shown in the figure below. In short, sufficient liquidity is crucial, and the number of tokens traded cannot exceed the range allowed by the available liquidity.
For currencies in DEX, different pools (trading pairs) pages will provide data like Liquidity. For currencies in CEX, we can focus on three indicators: 24-hour trading volume, order depth, and bid-ask spread (the difference between the selling price and the buying price). Of course, due to factors such as limit stop orders and iceberg orders, the order book of the exchange cannot fully represent the accurate price of the corresponding currency, but these indicators still have certain reference value.
Taking the MAGA (TRUMP) token shown in the above picture as an example, its price is $8.11, the TRUMP-WETH liquidity pool in Uniswap is $9.1 million, and the market value is $354 million.
In other words, the market only needs to inject $4.55 million into the liquidity pool to buy TRUMP, and its price may double, instead of $354 million.
This involves the economic relationship between liquidity and asset pricing. Simply put, when the supply of an asset is fixed, demand becomes the key to determining the price. When the supply is elastic and demand increases, the price remains unchanged but the demand increases; when the supply is inelastic (i.e. the supply is fixed) and demand increases, the price will rise and reach a new equilibrium. Corresponding to the above figure, when S (supply) is stable, the demand increases from DD to D1D1, and the price will reach E1 from E.
Similarly, the total market value of the crypto market (excluding USDT and USDC) is currently $2 trillion. Many people expect the Fed's interest rate cut to bring a lot of liquidity to the market, but it does not require $2 trillion in new funds to double the market value. In fact, a certain amount of new liquidity plus a new round of demand speculation can push up the overall market value of cryptocurrencies.
In short, when choosing a project, don’t just focus on the market value, but consider it comprehensively. If time and energy are limited, you can simplify the project research work appropriately, such as:
Step 1: Choose a Narrative
Take the data classification of the Dropstab platform as an example. At present, the crypto field can be divided into at least hundreds of narratives. As shown in the figure below.
Since everyone has limited time and energy, it is impossible to study all narratives at the same time. Just select 1-3 most promising ones for in-depth research.
Step 2: Filter Projects
With the help of the Dropstab tool, you can use its filters to filter from different dimensions and come up with a list of projects that you want to learn more about or research.
Step 3: Check the project
Focus on several aspects of the project:
Project financing
If the project has received investment from some VC institutions, the project risk is relatively low, at least the risk of the project party running away is smaller.
If you don’t know the VC situation in the crypto field, you can use the DeFiLlama tool to help you understand it.
Community situation of the project
A well-developed project cannot be separated from a strong community drive. Join the community to get to know it better. If the project developers can communicate well with the community users, actively synchronize the project development plan, and the number of community users continues to increase, this is a good sign.
The project community includes the project's Twitter (X), Telegram or Discord, etc., and the entrance can usually be found at the top or bottom of the official website.
Project chart data
In addition to basic information, it is essential to pay attention to the K-line chart of the project token.
The project’s token economy
In the crypto space, token economics is extremely important. If you trade without understanding the economic design of a token, you are trading blindly and could face heavy losses.
Token economics includes several aspects, such as the market cap, FDV (Fully Diluted Value), circulating supply, and total supply of tokens, which in turn lead to issues such as the distribution ratio of tokens and token unlocking. Mastering these indicators helps to evaluate the potential of tokens, understand how the project operates, and the possible impact on token prices.
After the three simple steps above, you should have a list of potential alternative projects. The next step is to "buy on dips" based on the strategy. I will not go into details on this aspect. For details, see the figure below.
For professional traders, they can quickly evaluate projects, analyze tokens, and determine profitability. But for newcomers or beginners, it is not very reliable to spend 10 minutes to study a project. However, we try to sort out some methods for you:
Step 1: Check the basic situation of the project
Check the project introduction and basic information on platforms such as ROOTDATA or CoinMarketCap. Taking ROOTDATA as an example, enter the project (or token) name to search and enter the details page, where you can intuitively see the project team, founding time, financing status, etc.
This will allow you to quickly get a general understanding of the project, just like a basic introduction of the other party during a blind date.
ROOTDATA is a comprehensive data tool. If you are interested in DeFi projects, you can view TVL data in DeFiLlama. If you are interested in GameFi projects, you can view UAW (number of active wallets) or DAU (daily active users) data in FootPrint.
Step 2: Check the chart trend of the project
View project charts on platforms such as Dex Screener or DEXTools. Taking Dex Screener as an example, enter the token name or contract address (CA) to search and enter the details page. It is recommended to search by contract address to avoid buying the wrong token.
Then, you can view the price trends at different times, buy/sell volume, token holder status (avoid projects where individual wallets hold a large proportion of tokens), and K-line patterns (if you don’t understand K-line patterns, you can Google to learn).
Step 3: Analyze the social trends of your project
Continuing with the blind date analogy, the first two steps are equivalent to you understanding the other person's situation, and the other person also saying that he or she has potential, but they are all just talking to themselves.
It is not good if you say it is good, it is really good if everyone says it is good. So for a project, you need to understand its social trends (i.e. community building), which include official website, Twitter, Discord, Telegram (some projects may only have official website and Twitter).
You can judge the quality of an official website visually. Usually, few people are proficient in both code development and graphic design. If you see a website with many bugs or a simple design, be careful.
Join Discord/Telegram to check the activity. The activity here is not just the number of messages sent. There may be robots that increase the number of messages. It mainly depends on whether the project staff can effectively interact with users.
If you don’t have time to check the official website/Discord/Telegram, at least check Twitter.
Twitter can show the number of followers, activity, and number of topics. But be aware that the blue V on a Twitter account represents authenticity (because a credit or debit card is required to open it, the developer's identity may be revealed), but don't be superstitious, it may be faked through special means or false identity authentication. Moreover, the number of followers, reading volume, and comment volume of a Twitter account can be faked. For example, developers can spend money to buy followers and comments. So don't just look at the number of people following the community, but compare it with the real activity. For example, sometimes you will see a post with more than 1,000 comments and likes, but the number of visits is less than 10,000. Is this reasonable? You will know by comparing the official Twitter data of well-known projects.
Finally, be patient and execute according to the plan (take profit/stop loss). Once again, if you are not a professional trader, try to do as little swing trading as possible. It is normal to hold projects (tokens) with potential and value for half a year or even a year.
