5 Tips For Proper Analysis of Cryptocurrency Investments
Over the past weeks I have been bombarded with questions along the lines of Should I invest in X? What do you think of project Y? The market over the past few weeks has been irrational, giving rise to projects that do not bring any “real” value. When the impending crash comes (what happened during the past few days was merely a necessary correction), only coins with solid foundations will survive. So before heading off investing your hard-earned cash, here are 5 tips to help you out—some may be common sense but common sense is not so common.
What Problem Does It Solve?
The first thing to ask yourself is — What problem does the project try to solve? What are they trying to achieve and is there truly a need for a Blockchain or Directed Acyclic Graph (DAG)?
Let’s take Bitcoin (BTC) for example. It is the big boy and was the first project that brought a real use-case for the blockchain. Bitcoin was presented to the world as a cryptocurrency with minimal fees, a degree of anonymity, near-instant transaction times with a decentralized, immutable ledger. Things have changed since, but what Bitcoin set out to become had a real use-case for a blockchain.
BTC can be purchased on various exchanges with FIAT including Coinbase, Bitstamp, Gemini and Kraken.
Token Value
By definition, investing “is the act of committing money or capital to an endeavor (a business, project, real estate, etc.), with the expectation of obtaining an additional income or profit”. When investing in a particular digital currency, you need to think — where does the value for XYZ come from? What makes XYZ’s price increase?
Let’s take two real examples:
Dogecoin (DOGE) was created as a “parody” coin back in 2013. The value is purely derived from supply & demand and people’s perception of its price. The coin serves no particular purpose, brings no technological advancements and solves no real-world problem (no offense DOGE owners!). It has not been updated in over 2 years but still has a market cap (more on this later) of nearly $1B.
On the other hand, Ethereum (ETH) has clear value. In addition, from its price being derived from people’s perception (i.e. those who buy and sell it), ETH is also used to pay for implementing & executing smart contracts on the Ethereum network. Therefore, we can imply that ETH is “backed” by the value that these smart contracts provide.
I am not arguing whether you should invest in coins like DOGE, as they can bring a significant return on investment (ROI) in the short-term, but are definitely riskier investments and more prone to disappear once the impeding crash comes.
DOGE and ETH can be purchased on Coinbase, Bitstamp, Gemini, Kraken, Bittrex, Gate.io and many more.
Coin Supply & Market Capitalization (Market Cap)
Before continuing, I would like to get some definitions out of the way (courtesy of CoinMarketCap):
Circulating Supply is the best approximation of the number of coins that are circulating in the market and in the general public’s hands.
Total Supply is the total amount of coins in existence right now (minus any coins that have been verifiably burned).
Max Supply is the best approximation of the maximum amount of coins that will ever exist in the lifetime of the cryptocurrency.
Market Capitalization is one way to rank the relative size of a cryptocurrency. It’s calculated by multiplying the Price by the Circulating Supply. Therefore, Market Cap = Price * Circulating Supply.
A huge mistake I see many people make, is investing in a coin because the “price per coin” is cheap(er) — something completely incorrect. For example, we have Project A and Project X. Project A has a supply of 1000 coins worth $1 each. Project X has a supply of 10 coins worth $100 each. The value of both projects is exactly the same, as they both have the same market cap, however, many people are under the false impression that investing in Project A is a better choice. To make it as simple as possible — the more coins there are, the less valuable they are.
Consider the following:
What is the circulating, total and max supply? Pay close attention to the difference between the 3 and always research to understand the economics of the coin, why there’s a difference and how it will be “bridged”. An excellent resource for finding the supplies is CoinMarketCap.
There are 3 types of coins; inflationary coins which increase their supply over time, deflationary coins which decrease their supply over time and coins that are neither — their supply always remains constant. Ignoring external factors, inflationary coins drop in value when new coins are added to circulation (as they are now more abundant) and deflationary coins increase in value when coins are removed from circulation (as they are now scarcer). BTC is an example of an inflationary coin (until the 21 million max supply is reached), Iconomi (ICN) is an example of a deflationary coin and IOTA is an example of a coin which is neither. You should always question what type of coin are you investing in and the reasons behind it.
What percentage do the coin founders hold? Always research how many coins do the founders hold, and if this is a significant percentage (let’s say over 25–30%) question why. Do they have a valid reason for holding such amount? What are they planning to do with it?
The aforementioned coins can be purchased on Coinbase, Binance, Kraken and others.
Team & Transparency
A very important factor to take into consideration when investing in a project is the team behind it. Some questions to think about are:
Does the team have any prior experience in the industry the project is tackling? It’s not essential, but it definitely helps if it has expertise and knowledge in the industry. A perfect example is the Enjin (ENJ) team. They have been in the gaming industry for a while and have the necessary understanding to launch a cryptocurrency project in this space.
Why is the team anonymous for a project that doesn’t require them to be? For example, it’s understandable if they are developing a privacy coin but not if they are developing a coin focused on eSports.
Is the team engaged with the community and provide timely updates? Are they on track to deliver their roadmap? district0x (DNT) is a perfect example on how a team should communicate. You can see what I mean by taking a quick look at their blog here.
Thankfully, we live in a digital age where you can browse through the web to find more information about the individuals working behind the project.
The coins mentioned in this section can be bought on Binance, COSS, and Bittrex.
Investors & Partnerships
Something I find extremely positive when deciding what to invest in, are current project investors and partnerships. The reason should be self-explanatory, but having the backing of well-established entities gives the project further legitimacy. A few examples with eye-catching investors and partnerships are:
Request Network (REQ) — Backed by Y Combinator.
VeChain (VEN) — Partnerships include PricewaterhouseCoopers (PWC), DNV GL, KUEHNE+NAGEL and many more.
IOTA — Received investment from Robert Bosch Venture Capital GmbH (RBVC), the corporate venture capital company of the Bosch Group. Partnerships include Ruuvi, Volkswagen and others.
Stellar (XLM) — Partnership with IBM.
The coins discussed in this section can be purchased on Binance, COSS, Gate.io, Bitfinex and Bittrex.
Conclusion
The tips above are only a subset of the research I do when determining which project, I should invest in. I cannot emphasize how important it is to know what you are investing in. Jumping on the “hottest” coin could bring you short-term gains, but if you are looking for a serious, long-term investment, proper analysis has to be performed.
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