With the ever-growing popularity of the cryptocurrency market, more and more investors are seeking to diversify their portfolios with digital currencies. While cryptocurrencies may seem like a lucrative option, they are different from any other assets in several ways.
No matter your level of experience when it comes to investing, understanding how to evaluate and choose a cryptocurrency is fundamental if you want to avoid losses and get the most out of your investments. If our expectations for future growth turn out to be true, doing your own research on crypto projects just might be one of the most valuable skills you can learn.
But with so many crypto assets out there, how do you know which one to choose? Evaluating cryptocurrency requires a comprehensive and thorough approach – one that looks beyond the market cap. In this article, we’ll take a look at some key tips and strategies for selecting wisely in the vibrant yet volatile world of cryptocurrency.
Evaluating Crypto Project Fundamentals
The following factors should be considered regardless of where we are in the current market cycle. Identifying a good crypto project is always valuable, even if the current market conditions will not favour an immediate buy. You can put it on your watchlist and wait for a good time to enter a position. Conversely, a bad project should be avoided, even if it seems like a great time to invest in the crypto space in general.
The Purpose of the Cryptocurrency
When you start researching, the first step is to understand why the currency was created and what its intended real-world use case is. Is it designed to be used as a payment system? A store of value? Or something else entirely? The team should have a clear vision for their crypto asset and its place in the broader crypto ecosystem.
Does it look like the stated goals of the project are realistic? Are there several other cryptos competing in the same arena or is this project attempting to fill a market gap? Do the goals of the project align with your own investment objectives? What is the potential for mass adoption of the token? Considering and answering all these questions will help you identify potential projects that may be worth investing in.
The Team, the Partners and Their Experience
A team with experienced and knowledgeable leaders is more likely to succeed than one led by novices, so it’s important to look into the backgrounds of each founding member, not just those occupying positions at the top of the hierarchy. There are many enthusiastic amateurs jumping on the crypto bandwagon – especially during a bull market when it’s easy to get funding.
It’s also a good idea to check the list of partners associated with a given project; how renowned and established these businesses are can give you an idea about how legitimate and capable the cryptocurrency is, beyond its face value. LinkedIn profiles for key individuals on both sides can provide useful insight into their career history and qualifications.
As a general rule, it’s best to avoid projects where key people have only recently gotten involved – this could mean they are jumping on a bandwagon or trying to cash in on current trends without possessing any real authority in their field. On the other hand, teams with relevant experience and successful projects under their belt are significant assets to any project.
The White Paper
One of the most important documents to study is the project’s white paper. This document articulates the project’s objectives and road map and explains the technical details of how it functions.
When analyzing a crypto white paper, take time to understand all the processes laid out in it. Make sure that all of what is written makes sense and can be verified by research such as historical or market data. Be cautious of obscure or non-verifiable concepts that don’t have extensive research to back up their claims – this could mean a potential sign of fraudulent activity.
One crucial element of the white paper is the tokenomics section. This details the economics and the token supply of the project, including how many tokens will be released and what role they play in the functioning of the platform. Take note of both the token allocation among the different stakeholders and the token release schedule, which can give you a good idea of the inflation rate as the tokens hit the market.
This can be dense work for the average investor but it’s well worth taking the time to do properly since its full evaluation can give you valuable insights into the quality of the project itself. As you research more projects, evaluating a cryptocurrency white paper will go faster and easier and you will get better at noticing both solid plans and potential red flags.
Technology
If you are new to crypto, evaluating a project’s technology can be quite challenging, as you need to have specialized knowledge in order to effectively evaluate the underlying technology behind any project.
The first step is to take time to learn more about blockchain technology in general, and to get familiar with smart contracts, the leading protocols, and their strengths and weaknesses. Armed with this knowledge, you can now look at the project in question.
Does it have solid security protocols in place? Is it built on top of established blockchain platforms such as Ethereum or Cardano? Cryptocurrency technology needs to be robust and reliable if it is going to succeed in the long term.
Another thing to watch out for is not just using buzzwords such as ‘de-centralized’ or ‘trustless’ but also looking at how these terms are actually utilized in practice through clever algorithms and encryption methods.
Lastly, it is essential that there are developers actively working on maintaining and refining the codebase – monitoring commits and feedback from developer communities is essential for learning about areas where a project might fail with respect to its legitimacy or security. Taking all these things into account will give you a better idea of whether or not a given crypto project has staying power.
Community and Social Media Channels
One factor that should not be overlooked when assessing a cryptocurrency is how active and influential its community and social media channels are. A project with vibrant and active communities of supporters who discuss news developments and upcoming events on Discord forums or Telegram groups can be an indicator of strong investor sentiment.
Pay attention to the total number of followers, message engagement and post frequency on the various platforms associated with a token to understand which projects have more engaged user bases. Look out for any kind of manipulation on these channels as well, if certain users appear to be trying to sway opinion in one particular direction, it may not be a realistic reflection of what investors actually think about a specific coin.
Feel free to ask questions about coins in their chat rooms; other community members will likely provide helpful insights that you may have missed during your research. If most of these channels discuss “when moon?” or “HODL!” without any evidence or discussion of technical developments related to the currency, this can be a warning sign.
Keeping up with updates from mainstream sources like Discord, Twitter (follow official accounts!), and Telegram can help cast an objective lens on developments within a project; often times you can find news about updates here before finding it anywhere else.
Evaluating Market Metrics
In the previous sections, we looked at factors independent of current market conditions. If, however, a crypto project passed your fundamental analysis, you still need to make a call on whether now is a good time to buy or if it might be a better idea to wait.
Current Market Cap and Fully Diluted Valuation
When looking at the current price of a token you need to be aware of the ratio between the current supply and the max supply. The lower the available supply of a token the higher the chance of large price fluctuations based on news. It is also more prone to market manipulation since the low supply makes it easier to push the price in a certain direction.
You should also look at the market capitalisation of a token, which is calculated by multiplying the market price by the current circulating supply. Now compare this with the fully diluted market cap and try to judge how realistic this valuation is.
Many projects with a low circulating supply can reach exorbitant fully diluted valuations – especially during a bull market or as a reaction to positive news. This should serve as an indicator that the price is much more likely to fall from the current level as the supply increases, having a significant impact on the profitability of your potential crypto investment.
Token Release Schedule
Token allocations to seed and early-stage investors as well as team members are usually locked up for a certain period of time. This is because, in the past, lots of new tokens suddenly entering the circulating supply have caused prices to decline drastically.
It is therefore important to assess when these tokens are due to become freely traded. This will give you an indication of how much downward price pressure may be felt in the future from new coins hitting the market.
The more steeply the token release schedule is structured, the more pressure it may put on prices in the short term. On the contrary, when a project has a flat token distribution structure with fewer tokens being released at once, it indicates that there will be less of an impact from these new coins entering circulation.
Another metric to consider is the return on investment for early backers. If the cryptocurrency has enjoyed a big runup in price and investors have multiplied their money several times over they are more likely to sell and take profits once their tokens are released, pushing the price down.
Trading Volume
Every project you consider investing in should have a certain level of trading activity as an indication of genuine interest from the crypto community. The higher the trading volume, the more liquid a token is, meaning you can easily sell your coins for cash or buy more without significantly affecting the market price. Coins with higher market capitalization tend to be more liquid.
Consistently low trading volume can be a warning sign, but you should also take into account that many projects artificially inflate their trading volumes with bots and wash trades, so make sure to do your due diligence before investing. In this context, it is often worth looking at the order books of exchanges to get an indication of real demand.
Market Sentiment
Market sentiment refers to the collective opinion of investors and traders on a particular asset. Traders use this information to determine the likelihood of an asset’s value increasing or decreasing over time. By understanding market sentiment, traders can more accurately predict price movements and make better trading decisions.
In order to assess market sentiment, traders can look at several factors including news coverage of the asset, social media conversations about the asset, and data from research firms that track investor sentiment. All of these sources can provide valuable insight into how traders view an asset and whether it is likely to rise or fall in value in the future.
Analyzing market sentiment also involves looking at the price history to identify patterns and trends that may help predict future price movements. By studying past performance and taking into account current events related to the asset, you can pick your entry point for maximum profit potential.
Regulatory Risks
Understanding the various regulations surrounding a cryptocurrency, as well as any potential changes, can be vital for assessing its long-term value. This includes both domestic and international regulations since some countries have different laws governing cryptocurrencies and related activities.
First, investors should research the legal framework in their own country. Depending on the jurisdiction, there may be restrictions or even prohibitions on trading certain virtual currencies or participating in certain activities related to them.
Additionally, investors should consider any potential changes that could affect their ability to buy or sell cryptocurrency in the future. Regulation is notoriously behind and can be difficult to predict but if you are aware of a potential bill that is being introduced in the near future that can have an effect on the crypto you are considering buying, it might be a good idea to hold off your investment until the rules are clear.
