Learn how to properly analyze a coin’s potential and increase your chances of success while trading or investing in cryptocurrencies.
Why to evaluate crypto before investing?
The cryptocurrency industry is wide and does not revolve just around Bitcoin and blockchain. According to crypto market capitalization aggregators, there are over 4,000 cryptocurrencies on the market right now, with more being released every day, making it difficult for investors to determine which to invest in. There are a lot of those out there that aren’t genuine. Scammers have seen the potential for profit in the cryptocurrency arena, and they’ve created certain tokens to steal people’s money. Whether you’re a novice wanting to enter the crypto market or a seasoned investor, the tools listed here can help you analyze any coin.
What is Whitepaper and why is it important?
Every coin has a “whitepaper” that contains all of the information about it. A whitepaper explains two key parts of a crypto project: its goal and the technology that drives it. It offers information on cryptocurrency’s past performance as well as other information. A whitepaper can also help a currency stand out from the crowd. A whitepaper gives a crypto project respectability and a professional appearance in addition to providing information. A well-written whitepaper is attractive, whereas a poorly-written one is a repellent.
Bitcoin’s whitepaper is one of the most well-written. Satoshi Nakamoto, an anonymous person or persons credited with developing Bitcoin, published the article in 2008. He explained his motivation for creating Bitcoin, the first cryptocurrency, which was launched in January 2009.
Six ways to analyze cryptocurrencies
I) Vision – This is usually not a problem. The majority of initiatives claim to be developing a revolutionary blockchain system that will change humanity’s future. This is fantastic, but you must apply your own sense of reality and common sense to determine whether or not what the team is attempting is realistic or even essential. The issue with several coins that were hyped at first but then faded away is that they end up being answers to problems that don’t exist. Other coins have said that they aspire to outperform Bitcoin, which could be a red flag for potential investors. The coin must have a defined purpose and have a functional intrinsic value. If the user has no compelling reason to buy it, the price is held up only on speculation, resulting in a high-risk investment.
II) Team & Reputation – A crypto project and its connected team members may have reputable CVs on occasion. That does not, however, guarantee that this crypto will be successful. The purpose of this evaluation is to ensure that you’re investing in a coin that’s backed by people who know what they’re doing. Consider this a fundamental examination that can help you avoid investing in a firm that is solely interested in making money.
III) Tokenomics – Tokenomics is the study of the economics of crypto tokens or cryptocurrencies. It includes analyzing the factors that influence the demand and supply of tokens. Quality, distribution, and creation of crypto tokens are all issues to consider. There is a framework within which the future of a token can be decided in order to properly introduce a currency into the market. The reason for the cryptocurrency’s creation and how it was done determines whether or not its tokenomics are good. To put it another way, tokenomics identifies how well a cryptocurrency or token has been built and predicts its future performance. To make things simple, a well-designed cryptocurrency must be able to withstand inflationary pressure, provide utility within its ecosystem, be fungible, and store value.
IV) Market capitalization – the price of the cryptocurrency can be found by dividing the Market capitalization by the Circulating supply. Price of an asset = Market Cap ÷ Circulating supply. When all other elements are held constant, a cryptocurrency’s potential can be discovered in the quantity of its circulating supply and market capitalization. The lesser the Circulating supply, the easier it will be to see the work of the coin’s team, and the faster the price will rise. Because Bitcoin has a circulating quantity of only 17 million units, its price is rising faster. In this situation, the higher the market capitalization, the faster the price climbs.
V) Trading Volume – This gives you a decent idea of how many cryptocurrencies are changing hands in a given time period. Take the trading volume into consideration when evaluating a digital asset’s investing potential. It’s worth mentioning that different exchanges offer varying volumes based on the total number of transactions that occurred within a given time frame, which is usually 24 hours. It is critical to check their volume on several exchange platforms in this regard. When more people in the market exchange larger amounts of crypto, that cryptocurrency is in a good position.
VI) Legality issue – So you’ve found a great token’s ICO to invest in, but owing to your country, you’re not allowed to participate. If you still invest, you’d be breaking the law. However, you must ensure that your country’s regulators have not imposed any restrictions on participation in such offers. ICO’s (Initial Coin Offering) are still uncontrolled in a lot of jurisdictions, however, regulators in some are working on more user-friendly regulations.
How to avoid crypto scams?
Cryptocurrency is a volatile market, with changing prices it also comes with coin-based frauds, and misinformation from influencers, so be cautious. According to the Federal Trade Commission (FTC), cryptocurrency scams cost US consumers more than $80 million in the six months between October and March 2020. The heists continue; just this month, the creators of the Squid Game cryptocurrency made off $3.38 million. Here are some of the cautions to remember before investing.
- Don’t believe everything you’re told. Investigate any investment claims, especially if they appear to be too good to be true or promise instant profits.
- Do not trust anyone who contacts you personally, whether it is a government official, a public personality, or a stranger, and asks for bitcoin payments or offers you an “investment opportunity.”
- Never give out your private key or seed phrase for your cryptocurrency wallet to anyone, and keep it somewhere safe.
- Whenever possible, enable two-factor authentication on your cryptocurrency wallet and exchange.
- Any offer that requires an upfront cost, regardless of the amount, should be rejected, especially if the price must be paid in cryptocurrencies.
To summarise, examining the relationship between available supply, market cap, and price should be an important part of determining a coin’s price potential. It is also a good idea to look at the ICO’s management and past. Although the majority of cryptocurrencies are speculative, some of them provide genuine value in addition to their speculative nature. These should be taken into consideration when evaluating a coin.