How to conduct token due diligence with Nansen
Nansen operates as a blockchain analytics platform that transforms raw cryptocurrency data into actionable investment intelligence. The platform has catalogued and labeled over 300 million wallet addresses across more than 12 blockchain networks, converting what would otherwise appear as meaningless alphanumeric strings into identifiable market participants with trackable behavior patterns.
At its core, Nansen's infrastructure applies machine learning algorithms to categorize wallet behavior across multiple blockchains. The platform's most valuable feature involves identifying over 10,000 "Smart Money" wallets—addresses belonging to investment funds, experienced traders, and other sophisticated market participants who have demonstrated consistent profitability and early adoption of successful projects. This labeling system enables real-time tracking of institutional-grade investment flows that would otherwise remain invisible to individual investors.
Following Smart Money movements
The foundation of effective token analysis begins with understanding Smart Money behavior patterns. Nansen categorizes these sophisticated wallets into specific groups: Smart LP (liquidity providers), Flash Boys (high-frequency traders), Whales (large holders), Funds (institutional investors), and various specialized labels for different market sectors.
When evaluating a potential investment, examine the Smart Money holdings dashboard for accumulation or distribution signals. If 67 Smart Money addresses accumulate a specific token over a seven-day period, this indicates potential institutional interest before public awareness develops. Conversely, consistent selling by these same sophisticated wallets often signals underlying concerns about project fundamentals that may not yet be apparent to retail investors.
Consider a scenario where a new decentralized finance (DeFi) token launches with minimal fanfare. Through Nansen's tracking capabilities, an investor might observe several labeled institutional wallets beginning to accumulate positions within days of launch, before any major announcements or marketing campaigns. This early institutional interest suggests these sophisticated investors have conducted private due diligence and identified value that the broader market has not yet recognized.
Analyzing token distribution patterns
Healthy token distribution prevents concentration risk—the danger that a small number of holders could manipulate price or dump large quantities onto the market. Nansen's Token God Mode feature provides detailed analysis of holder concentration and distribution patterns across different wallet types.
Examine the composition of top holders to understand who controls significant portions of the token supply. If the top 10 holders control 80% of circulating tokens and many appear as "Unknown" rather than recognizable institutions or protocol contracts, this presents a significant red flag. Optimal distribution typically shows tokens spread among labeled exchanges, staking contracts, known institutional wallets, and thousands of individual holders.
For example, a well-distributed governance token might allocate 30% to the protocol treasury, 25% across various exchanges, 20% locked in governance staking contracts, and the remaining 25% distributed among thousands of individual holders including Smart Money wallets. This structure indicates genuine decentralization and reduces the risk of market manipulation.
Understanding on-chain activity metrics
Transaction volume, unique active wallets, and trading patterns distinguish genuine adoption from purely speculative interest. Nansen's dashboards display these metrics with granular detail, enabling investors to identify organic growth patterns versus artificial activity.
Monitor the number of unique addresses interacting with a token over time. Consistent growth in unique holders, particularly during market downturns, indicates strong fundamental interest rather than momentum-driven speculation. Additionally, analyze transaction patterns to identify wash trading—artificial volume created by trading between related accounts to simulate demand.
Legitimate projects typically demonstrate diverse transaction sizes and consistent daily active users. A genuine DeFi token might show 10,000 unique daily users with transaction sizes ranging from $100 to $100,000, while a speculative token might display high volume concentrated among 50 wallets with suspiciously uniform transaction amounts.
Valuation and comparative analysis
Compare the token's market capitalization and fully diluted valuation against similar projects within the same sector. Nansen provides real-time pricing data that can be analyzed alongside fundamental metrics such as Total Value Locked (TVL) for DeFi protocols or daily active users for application tokens.
Calculate key ratios to identify relative value opportunities. For DeFi protocols, examine Market Cap to TVL ratios. For application tokens, consider Market Cap to Daily Active Users. These comparative metrics help identify potentially undervalued opportunities or overextended valuations.
If Protocol A maintains a $500 million market cap with $2 billion TVL (0.25 ratio) while similar Protocol B has a $300 million market cap with $1.5 billion TVL (0.2 ratio), Protocol B may present better relative value despite lower absolute metrics. However, these ratios must be considered alongside qualitative factors such as protocol innovation, team quality, and competitive positioning.
Liquidity and market structure assessment
Liquidity analysis examines where tokens trade and the depth of available liquidity across different venues. Nansen tracks token flows between centralized and decentralized exchanges, providing insight into market structure and potential liquidity risks.
Monitor trading volume distribution across exchanges. Tokens trading primarily on lower-tier exchanges or with limited liquidity present higher risks, particularly for larger investment positions. Additionally, examine token flows between exchanges and wallets to identify potential selling pressure from unlocked token supplies or early investor distributions.
A well-distributed token might show 40% of volume on major centralized exchanges, 35% on established decentralized exchanges like Uniswap, and 25% across smaller venues, with consistent liquidity depth across all platforms. This distribution ensures that investors can enter and exit positions without significant price impact.
Smart Money positioning as market sentiment
Smart Money stablecoin holdings serve as a sophisticated market sentiment indicator. When these wallets increase stablecoin allocations, it often signals risk-off positioning in anticipation of market volatility. Conversely, deploying stablecoins into new positions may indicate identified opportunities.
The Smart Money Stablecoin Dashboard reveals broader market positioning patterns. If Smart Money collectively holds 60% of portfolios in stablecoins during market uncertainty, this suggests cautious positioning. However, if this percentage decreases while a specific token sees Smart Money accumulation, it indicates selective optimism about that particular asset despite broader market concerns.
Token utility and value creation mechanisms
Evaluate how the token creates value for holders through utility within its ecosystem. Strong tokens provide tangible benefits such as governance rights, fee sharing, staking rewards, or exclusive access to platform features. Tokens serving multiple functions typically demonstrate stronger holding patterns and price stability.
Analyze whether the token functions as a medium of exchange, store of value, or governance mechanism. Additionally, examine deflationary mechanisms such as token burns or buyback programs that may support long-term value accrual.
A comprehensive DeFi governance token might offer holders voting rights on protocol upgrades, a portion of protocol fees, staking rewards, and participation in exclusive token sales. These multiple utility functions create compelling reasons for long-term holding beyond price speculation.
Automated monitoring and alert systems
Nansen's Smart Alerts enable automated monitoring of specific conditions related to tokens under consideration. Configure alerts to track Smart Money flows, large transactions, or unusual trading patterns that might indicate significant developments.
Set up notifications for specific wallet categories purchasing or selling the token, unusual volume spikes, or significant movements between exchanges and wallets. These automated systems ensure continuous monitoring without manual oversight.
Create alerts that trigger when Fund-labeled wallets purchase more than $1 million worth of a specific token, or when the token experiences volume increases exceeding 50% compared to the previous seven-day average. Such signals often precede significant price movements or fundamental developments.
Risk assessment framework
Develop a systematic risk assessment incorporating multiple Nansen metrics. High-risk indicators include concentrated holder distribution, limited exchange availability, minimal Smart Money interest, and concerning transaction patterns.
Create a weighted scoring system aligned with investment objectives. Growth-oriented strategies might prioritize Smart Money accumulation and increasing unique holder counts, while value-focused approaches might emphasize market cap ratios and fundamental metrics.
A comprehensive framework might incorporate holder concentration (20% weight), Smart Money sentiment (25% weight), liquidity metrics (20% weight), fundamental valuation (20% weight), and technical indicators (15% weight). This systematic approach reduces emotional decision-making and ensures consistent evaluation criteria.
Ongoing portfolio monitoring
Token analysis extends beyond initial due diligence to continuous monitoring of key metrics and developments. Establish regular review processes to track changes in holder composition, Smart Money positioning, and fundamental project metrics.
Create customized dashboards aggregating the most relevant metrics for each position, enabling efficient portfolio oversight. Regular reassessment ensures investment theses remain valid and provides early warning signals for potential position adjustments.
Monthly reviews should examine changes in Smart Money holdings, new exchange listings, partnership announcements reflected in on-chain activity, and shifts in token utility or governance structures. This ongoing analysis helps maintain investment discipline and capitalize on evolving opportunities.
Nansen's analytical infrastructure transforms the complex world of cryptocurrency investing by providing institutional-grade insights into market participant behavior. The platform's strength lies in converting anonymous blockchain data into identifiable patterns through extensive wallet labeling and behavioral analysis.
Successful token analysis requires systematic evaluation combining Smart Money behavior tracking, distribution pattern analysis, liquidity assessment, and utility evaluation. By following the movements of sophisticated market participants and understanding their positioning, investors can make more informed decisions based on actual market behavior rather than speculation or marketing claims.
The cryptocurrency market's transparency, while initially overwhelming, becomes a significant advantage when properly analyzed through platforms like Nansen. This data-driven approach to investment decision-making represents a fundamental shift from traditional financial markets, where such detailed participant tracking remains impossible.
Frequently asked questions
How can I conduct proper due diligence for cryptocurrency tokens?
Effective crypto due diligence requires a systematic approach analyzing multiple key factors. Start by examining Smart Money behavior - track wallets belonging to funds, experienced traders, and institutional investors to see if they're accumulating or distributing the token. Analyze token distribution to ensure it's not overly concentrated among unknown holders, as healthy distribution should span exchanges, staking contracts, and institutional wallets. Evaluate on-chain activity metrics including transaction volume, unique active wallets, and trading patterns to distinguish genuine adoption from speculative trading. Compare market capitalization against similar projects using ratios like Market Cap to TVL for DeFi protocols. Assess liquidity across exchanges and monitor stablecoin flows from sophisticated investors as a sentiment indicator. Finally, evaluate the token's utility mechanisms and value accrual properties, ensuring it provides tangible benefits like governance rights, fee sharing, or staking rewards.
What due diligence capabilities does Crypto.com have for token listings?
Crypto.com maintains strict listing standards and conducts comprehensive due diligence before adding new tokens to their platform. Their process typically includes legal and regulatory compliance reviews, technical security audits of smart contracts, evaluation of project fundamentals and team backgrounds, assessment of market demand and liquidity, and ongoing monitoring of listed assets. They examine tokenomics, use cases, and community adoption metrics. The exchange also considers factors like trading volume, market capitalization, and whether the token trades on other reputable exchanges. However, investors should still conduct their own independent research as exchange listings don't guarantee investment success, and Crypto.com's specific criteria and processes may evolve over time.
How does Coinbase approach due diligence for cryptocurrency listings?
Coinbase employs one of the most rigorous due diligence processes in the crypto industry through their Digital Asset Framework. Their evaluation covers legal and regulatory compliance, ensuring tokens don't classify as securities under current regulations. They conduct thorough technical reviews including smart contract security audits, blockchain stability assessments, and integration feasibility studies. The team evaluates economic factors like market capitalization, trading volume, and liquidity across multiple venues. They also assess the project's team, roadmap, community adoption, and use case viability. Coinbase maintains ongoing monitoring of listed assets and may suspend trading if issues arise. Their process often takes months and includes collaboration with legal, compliance, engineering, and business teams. However, inclusion on Coinbase shouldn't replace individual due diligence, as market conditions and project fundamentals can change after listing.
