The world of cryptocurrency has evolved rapidly, presenting investors with a myriad of options. With thousands of cryptocurrencies available, choosing the right one for investment can be a daunting task. This comprehensive guide aims to provide you with the essential factors to consider when selecting a cryptocurrency to invest in.
Understanding these key aspects will help you make informed decisions and navigate the complex landscape of digital assets.
So, How to choose a cryptocurrency to invest?
Just like you learn about fundamental analysis when trading stocks or other financial products, you need a plan to figure out what to look at. Cryptocurrencies are a new area, and there isn’t a super solid framework taught in schools. However, people still use and follow frameworks to make smart investment decisions. I have used them, and others have too, to decide what to buy and what to avoid, and they work quite well.
Fundamental analysis for cryptocurrency
How do we go about doing fundamental analysis for cryptocurrencies? It’s pretty straightforward for other financial products; there are models, books, and you can attend classes in school about security analysis. There’s a proven process that leads to successful investing.
However, with cryptocurrencies, it’s not the same because many of these coins aren’t proven. They lack revenue, and there isn’t a set way or an expert saying how one works and how to value it. So, you can’t really have a model that predicts the exact value like you can with stocks.
With stocks, you can use a dividend discount model, calculating the present value of future dividends or cash flows to determine a company’s worth. You can also do benchmarking, comparing different ratios for companies within the same sector to see which one is likely to outperform the others. But can you apply these methods to crypto?
No, because they aren’t really generating anything at the moment. It’s all about future expectations – more like investing in tech companies that haven’t proven anything yet, haven’t seen anything like them before, and we don’t even know what they’ll be doing in the future, with no present company resembling them. So, it’s very challenging.
Despite these difficulties, there are frameworks and methods for evaluating crypto projects that have proven successful in the past, both for me and for other companies investing in cryptos. However, it’s still not as complete as the frameworks available for other financial markets.
So, when we check out cryptocurrencies, these are the things we consider to feel good about an investment. The first thing is the project, followed by the team. Then, we look at the roadmap and whitepaper, the community’s public interest and adoption, the security, and the potential earnings of the crypto. There’s no specific order; these are the six main points.
Now, if any of these elements is missing, the entire project might not be worth it, depending on what’s lacking.
Let’s dive into them one by one.
What is this Project about?
Is the project interesting? What is it exactly? Is there a genuine need for this project, or are they just doing it because it’s possible? Is it practical? Is there a reason why we would need this app or currency, whatever this project is, in a decentralized way, or is a company already doing it? If a company is already handling something and someone wants to create a decentralized way of doing the same thing, does it solve a problem? Do we need it, or does nobody care that it’s decentralized? Is it addressing a problem?
That’s what it comes down to—does it solve something? It would be meaningful if we genuinely need it instead of having a company handle that particular thing. Will people use it? How does the industry view this type of project? Are there others doing the same thing, and if there are, how well are they doing? Who is the competition? Is there a demo or app you can test to get a feel for it? Many of these cryptos allow you to test out the application or a demo, or even use an actual platform.
Is the transaction speed fast enough for the coin’s intended use? Depending on what this coin aims to be used for, if it’s for microtransactions, does it take minutes to send? If so, that’s not good. So, the first thing to look at is really, “What is the project that I’m going to be investing in? What are they doing? Is it appealing? Do I think it’s going to have value? Do people need it? Is it solving an issue?”
All of these things are similar to how you look at a company, but without diving into the numbers, just by examining the idea itself. In this situation, you don’t focus on the numbers but on the protocol to ensure it’s worthwhile for that project.
The team behind this project
The second aspect is the team. You want to know who the team is. When you’re looking at a team, it’s best to check their profiles on platforms like LinkedIn and GitHub. See what they have said in the past and where they have worked. You want to find out if they have past experience in the blockchain space. For example, if the CEO or the person who started the coin has been in the blockchain and cryptocurrency space for a long time and has a background as a developer, that’s great.
However, I’ve researched some coins where, upon checking the founder’s background, I found them posting about cryptocurrencies in 2017 as if they just discovered them for the first time. They would say something like, “I have a great idea for a crypto, looking for developers.” Is this really someone who is a great founder of a company, or is it someone who saw everything going up and thought, “I have an idea for a coin, let me find somebody who can do it and start a coin”? These projects are likely to fail 100%.
You need somebody who is really in the industry and has been working on an idea for a long time, not just somebody who happened to see crypto and decided to launch their coin.
So, you have to make sure that the team is strong. Consider the size of the team – can they handle the project they are working on? Many of these projects require strong and sizable teams, not just a few individuals. Look at the track record of the team. What have they done in the past? Have they successfully brought projects to completion? Do they have qualified developers on their team who have worked on other projects?
Consider the laws regarding cryptocurrencies in the location where the founder is located. I know some people who started their coin, got it funded, and within a few weeks, regulators shut everything down. It’s not legal in every location, so you need to consider if it’s legal there and if they might face any legal issues.
Back in 2017, some coins had team members hiding their faces on the team page, using pseudonyms. Never invest in a coin where the team doesn’t show their faces. They might claim it’s not legal where they are, and it’s not safe to reveal their identity – never fall for these claims. There are too many scams in the crypto world. If you don’t see the team, don’t invest in it.
The last thing to consider is how the team reacts to adverse events. When something bad happens, how do they act? I’ve seen teams act very poorly, causing the coin to tumble down. On the other hand, I’ve seen teams handle adverse events well, and because of that, the coin keeps going up. We know that these kinds of situations always happen, so understanding how the team responds is crucial.
Whitepaper / Roadmap of this project
For every coin you’re considering to invest in, you should go through the whitepaper. The whitepaper is what they release when they launch the coin to explain who they are, what they aim to do, and the specifics of the coin – what it will be doing. It talks about the team, coin distribution, how they raised capital, how the coin works, whether there are utilities, and the roadmap – what they plan to achieve and when. You want to ensure everything is well-planned.
In the whitepaper, check if they foresee potential issues and explain how they plan to resolve them. This is crucial because some roadmaps pretend there are no issues, which isn’t true. Evaluate the feasibility of their timeline. Some timelines are extremely short, and teams struggle to complete tasks within them. If a roadmap isn’t followed, people lose confidence in the coin. If they claim to release something in 2019 and it doesn’t happen, trust in their ability to fulfill future promises diminishes. So, is the timeline feasible?
Some cryptos have roadmaps spanning 10 years, suggesting they don’t plan on achieving anything immediately. You need to decide if you’re comfortable waiting that long for them to reach their goals. Check if the timeline is being respected. If they say they’re releasing things on time, ensure they actually do. Trust is crucial, and their ability to stick to a schedule is a good indicator.
Assess how active the coin’s GitHub activity is. Cryptocurrencies with applications often have their code on GitHub. Each time they update their code, they commit new changes, visible on their official GitHub page. If a project is working on an application and there’s been no GitHub activity in the last six months, that’s a red flag. On the other hand, if there’s a lot of recent activity, it indicates ongoing work. However, be cautious, as high activity doesn’t always mean they’re doing well – sometimes it’s just superficial. It’s important to understand what the activity truly represents.
Community / Public interest / Adoption for this project
Now, let’s take a look at the community. Does this coin have a community? You can find out by going online – check Twitter, Telegram, Discord, and Reddit. Are there people supporting it? What is the community like? Are they all talking about going to the moon, meaning how much money they’ll make when it skyrockets? Or are they genuinely interested in the project, willing to support it when its value drops to buy more? Or are they just looking to pump and dump the coin?
Consider how many exchanges it’s listed on. Can you buy it on major platforms like Binance, Coinbase, or Bittrex, or is it not available on any exchange? Having a coin on multiple exchanges is good because it means there are more people to support it, and they can buy and sell it easily. However, it’s not necessarily a bad thing if it’s not on all exchanges because getting listed on new exchanges can increase its price due to higher demand.
Is this coin backed by institutions and venture capitalists (VCs)? Is there strong support for this coin, and who is backing it? If you see big names in the crypto industry backing it, that’s a positive sign. Check if it has partners – are other projects starting to work with them? Many successful coins have numerous partners, providing various benefits.
Does someone control a large supply of the coin? It’s important to ensure that a coin isn’t held by just a few people because they could potentially manipulate the price. Keep an eye out for that. Look at the volume – how many people are buying it? Is the volume increasing? You want to invest in something that’s gaining interest, and increasing volume indicates growing interest.
Will more people use this coin in the future? Is there a reason for them to use it? Is there potential for adoption? Why would people use it, and what is the potential for growth? This helps you understand what the community is like – is it strong, with a growing interest and high potential for adoption in the future?
Security protocols of the project
Now, let’s focus on security. How strong is the security of the blockchain being used? Is it a token utilizing the ERC-20 protocol, residing on the Ethereum blockchain, known for its substantial security? Or is it operating on its own, potentially smaller blockchain that could be vulnerable to attacks?
Consider the level of centralization within the system, whether among miners or holders. If there’s a concentration of power among a few significant miners, it poses a security risk, potentially leading to issues like double spending. Double spending problems involve creating two chains simultaneously, which demands an immense amount of processing power. For instance, with Bitcoin, the vastness of the blockchain prevents such attacks.
Evaluate the potential for mining pool attacks. If a large number of miners collaborate to launch an attack, it raises concerns about the system’s resilience. Additionally, look into the risk of Distributed Denial of Service (DDoS) attacks, where excessive messages flood the network, causing a denial of service. This is especially relevant for currencies with no fees, as spammers might overwhelm the network. Does the protocol have safeguards to prevent this?
If the cryptocurrency involves smart contracts, consider their security. Smart contracts have been exploited in the past due to small bugs, leading to substantial financial losses. Many coins or tokens now offer bounties to individuals who can identify and address potential errors in their smart contracts, ensuring code integrity. Has this process been implemented? Is the smart contract robust and free from issues, and has it been in use for a considerable time without incidents? Security is a critical aspect that cannot be overlooked.
Earnings
Lastly, let’s consider earnings. This part can be tricky because there isn’t a clear model to predict how much money you’d make by owning a coin. However, you can still examine and estimate its size compared to other projects to understand how others view it. What portion of the earnings or project do you get? In other words, when you acquire some coins, are you obtaining a security linked to an application or platform, or are you simply holding a currency? Is the application generating funds and distributing them to current coin holders?
Consider whether people using the application need to use the coin, leading to increased demand and a higher coin price. If so, how many coins are available? What is the initial and maximum supply, and how much can the coin be diluted? Can the project release additional coins, or is there a maximum supply limit that is adhered to?
Evaluate the project’s earnings growth and its potential compared to other centralized entities. This allows you to estimate the demand for something like this. If a project is successful, why would someone buy this coin? Is there utility in buying it for a specific purpose? And how would the coin’s value be affected by adoption? The goal is to understand whether massive adoption of the coin and widespread use will lead to an appreciation in its price. Ideally, you want the value of your coin to be connected to the extent of its adoption, creating a correlation between adoption and price.
Framework Conclusion
So, this is the framework that I use, and most people in the crypto industry use it too. It’s not just for helping us invest in specific cryptos but is also useful in avoiding investments in other cryptos. When we come across a coin with a weak team, it doesn’t matter how promising the project may seem or the other key points; it probably won’t succeed because there’s too much competition, and there’s likely another project doing better.
Similarly, even if the team is strong but the security is weak, I don’t want to invest in that coin due to the high risk involved. If the project itself is not promising, even with a very strong team, I won’t invest in it. The goal is to have everything as good as possible.
By using this framework, you can filter out a lot of subpar cryptocurrencies, which make up about 70% of bad coins and scams. This leaves you with more robust options. If you make informed decisions on projects you genuinely like and choose the right ones, there’s significant potential for substantial growth.
Resources for cryptocurrency analysis
Cryptocurrency analysis is a dynamic field that demands a multifaceted approach. Traders, investors, and enthusiasts rely on a variety of resources to gain insights into market trends, project developments, and community sentiment. Now, we’ll explore some of the most influential cryptocurrency analysis research resources.
1. Bitcoin Talk: The Birthplace of Crypto Discourse
Bitcoin Talk stands as the pioneer and one of the oldest forums in the cryptocurrency space. Launched by Satoshi Nakamoto himself, this platform is the birthplace of crypto discourse, hosting discussions on various cryptocurrencies, ICOs, and project announcements.
Bitcoin Talk served as the initial platform for Satoshi Nakamoto to announce and discuss the groundbreaking concept of Bitcoin in 2009.
2. CoinDesk: Unraveling News and Deep Insights
CoinDesk is a leading cryptocurrency news outlet that provides real-time news, analysis, and in-depth insights into the crypto market. Covering a broad spectrum of topics, including regulatory developments, market trends, and project updates, CoinDesk is a go-to source for staying informed.
CoinDesk’s coverage of regulatory decisions, such as those from the SEC, significantly influences market sentiments and individual coin valuations.
3. CoinTelegraph: Bridging News and Market Analysis
CoinTelegraph, similar to CoinDesk, is a widely read cryptocurrency news outlet. It not only covers breaking news but also delves into comprehensive market analyses, offering readers a deep understanding of the crypto landscape.
Investigative pieces by CoinTelegraph on fraudulent ICOs have played a crucial role in helping investors avoid potential scams.
4. CoinMarketCap: The Hub of Market Data
CoinMarketCap is an indispensable resource for cryptocurrency market data. It provides information on market capitalization, trading volumes, circulating supplies, and price charts for thousands of cryptocurrencies.
CoinMarketCap popularized metrics like market capitalization, offering users a quick snapshot of a cryptocurrency’s relative size in the market.
5. OnChainFX: In-Depth Crypto Asset Metrics
OnChainFX is a platform that provides comprehensive metrics and analyses for various cryptocurrencies. Covering fundamental indicators like developer activity, liquidity, and community engagement, OnChainFX is an invaluable tool for researchers.
OnChainFX’s comparison tools enable users to evaluate different cryptocurrencies based on a range of metrics, facilitating informed decision-making.
6. BitInfoCharts: Exploring Blockchain Metrics
BitInfoCharts offers a plethora of metrics related to blockchain networks. Users can explore data on transaction fees, block sizes, active addresses, and more, providing a nuanced view of blockchain activity.
Analyzing transaction fee trends on BitInfoCharts can provide insights into network congestion and user demand.
7. Telegram: Real-Time Community Engagement
Telegram is a widely used messaging platform within the crypto community. Many cryptocurrency projects and communities host Telegram channels for real-time discussions, announcements, and updates.
Joining a project’s Telegram group allows users to interact directly with the team, ask questions, and stay informed about the latest developments.
8. Reddit: The Front Page of Crypto Community
Reddit hosts numerous cryptocurrency-related subreddits where users discuss projects, news, and market trends. Subreddits like r/Bitcoin and r/CryptoCurrency are vibrant hubs for community engagement.
Reddit discussions played a pivotal role in highlighting the potential of Ethereum during its early days.
9. Twitter/X: Real-Time Updates from Influencers
Twitter/X is a microblogging platform where prominent figures in the crypto space share insights, news, and updates. Following key influencers provides a constant stream of real-time information.
Example: Elon Musk’s tweets have been known to influence the prices of cryptocurrencies like Bitcoin and Dogecoin.
10. Steemit: Decentralized Social Media for Crypto Enthusiasts
Steemit is a blockchain-based social media platform where users can earn cryptocurrency rewards for creating and curating content. It fosters a decentralized approach to content creation and curation.
11. CryptoMiso: Tracking GitHub Activity
CryptoMiso tracks the GitHub activity of various blockchain projects, offering insights into the development efforts behind a project. It provides details such as the number of commits and contributors.
Analyzing GitHub activity on CryptoMiso can help investors gauge the ongoing development efforts and community involvement behind a project.
12. Messari: Unveiling Crypto Insights
Messari is a comprehensive platform offering insights into various cryptocurrencies. It provides data on market metrics, on-chain data, and research reports, making it a valuable resource for in-depth analysis.
Messari’s research reports on specific projects can offer investors nuanced perspectives, aiding in informed decision-making.
Conclusion
In conclusion, choosing a cryptocurrency for investment requires a thoughtful and strategic approach that considers various factors. The volatile and rapidly evolving nature of the cryptocurrency market demands careful consideration of both fundamental and external elements. As we’ve explored throughout this article, a systematic framework can guide investors in making informed decisions.