Fundamental analysis is crucial when determining long-term investments. Therefore, it is essential to find strengths, weaknesses, opportunities, and threats of the analyzed project. That process is called SWOT analysis. Hence, in this article, we are going to explain what is SWOT analysis and how to use it to separate potential gems from projects without major potential.
What is SWOT Analysis?
In a nutshell, SWOT analysis is a technique used to determine a project’s competitive position. It is a crucial step in determining if a cryptocurrency is worth investing in and if it can bring long-term gains, which is something all investors strive to find. It is also very effective to determine the long-term risks involved with investing in a certain crypto project.
However, SWOT analysis is a process. The simplest way to explain it is to divide it into four separate stages – Strengths, Weaknesses, Opportunities, and Threats.
Strengths are, basically, distinctive characteristics of the project that separate it from the competition and make it visible in the market. For example, being the first mover in some of the crypto niches is a major strength. Also, successfully implementing the project’s technology with some of the major financial institutions can also be considered a significant strength.
Another strength that our analysts are actively looking for in a potential investment is a strong brand. Projects with strong brands tend to gain a greater community following. Analogically, they can become the first investment option for other investors.
A strong team is also a strength a few projects in the cryptocurrency market possess. The crypto market is still, more or less, in the infancy phase and developers with a proven track record are few and their services are expensive to acquire. Therefore, when a project manages to attract such talent is a formidable upside.
Weaknesses are the current shortcomings of a crypto project. These aspects are what’s holding the project from reaching its potential.
For example, an unknown or underwhelming development team is a weakness that might be a major setback for a crypto start-up. Also, tokenomics that are not well-devised is something that can become a long-term problem for a project. Insufficient, misplaced, or even non-existent marketing might be a big weakness of even the most advanced technological crypto venture.
Occasionally, our analysts find such or similar issues with the cryptocurrency project. In such cases, we choose not to invest immediately. Instead, we hold with the investing to see if the team is willing to improve before considering the investment again. If the team is determined to improve, we might even offer our advice or marketing experts to assist with the project’s development.
Also, some weaknesses might not be visible initially. Instead, they may appear subsequently as a byproduct of wrong initial decisions. One such example is when a product technically falls apart under the sheer number of transactions happening on the blockchain. That problem might not be obvious from the very beginning. Yet, it can appear as a consequence of the project’s success and make the competition able to take a larger market share.
Opportunities are yet unexplored possibilities that a crypto project can utilize for its benefit to take a larger market share. One opportunity might be related to the last weakness we mentioned in the paragraph above. If the direct and dominant competitor is struggling with scalability, the place opens up for the next project solving the same problem.
Another example is one that can easily happen in such a young market as are cryptocurrencies. The project that develops the platform which opens up a new niche in the market has a great opportunity to become the first mover. For example, the performance of the most known DeFi pioneers during the last year was phenomenal and above all expectations. Therefore, those investors who realized the opportunity that these projects possess had multiplied their initial investments.
Threats are potentially harmful occurrences for the project because of which a cryptocurrency can lose value.
For example, emerging technically advanced competitor is a threat for a first mover. Another threat might be a crucial part of the development team leaving the project. However, lately, in the crypto market, the biggest threat is the government’s regulatory interference. Such an event can even put a complete stop to the project’s development.
All these kinds of hypothetical events might lead to the devaluation of the investment.
SWOT Analysis Example
As the most prominent example to analyze, we will be taking Ethereum (ETH) as a long-standing leader among smart contract platforms.
Of course, Ethereum has notable strengths. It has the benefit of the first mover in the niche. Additionally, it has a huge following and the majority of DeFi projects are still being developed on its blockchain. Vitalik Buterin is, naturally, one of the all-star players in the market with a huge development team working on the platform.
However, the last two bull runs revealed some notable weaknesses in Ethereum’s core infrastructure. The huge spike in the number of transactions going through the ETH blockchain leads to network congestion. In turn, the average transaction fee surges towards completely unacceptable prices, sometimes even over $40 per transaction.
On the other hand, if the Ethereum development team manages to launch its 2.0 product in a foreseeable future, it will be a great opportunity for ETH to prove beyond any doubt who is the market leader.
Nevertheless, Binance Smart Chain (BSC) launched on September 1, 2020. Coming from such a trading giant as Binance, there is a realistic threat for Ethereum’s top spot among smart contract platforms.
Usually, there is enough space for more than one successful project in the same niche. Yet, investing is about choosing a winner and profiting from the investment as much as possible. Therefore, it is upon every investor to weigh on the facts derived from the SWOT analysis to reach the investment decision.