How to Choose a Cryptocurrency to Invest in
11 Jul, 2022
Cryptocurrency to Invest in
Picking a cryptocurrency to invest in is not difficult, because the market is full of interesting and profitable projects. At the beginning of 2022, there were over 15,000 registered crypto coins. However, before investing your money, you should also invest some time and do some research. Here is what you should check when choosing a cryptocurrency:
Total number of coins
Project documentation (white paper, use cases)
The team behind the project
When you finish the check, you'll be able to make an informed decision about whether you want to invest in this cryptocurrency or not. You can choose one coin or assemble a portfolio of the selected coins, but always evaluate the balance of risks and potential profit.
One of the more reasonable options is a combined portfolio of more and less conservative coins. The conservative coins with high market capitalization pose relatively low risks and cannot bring huge profits. On the other hand, the coins with high potential are risky, the chance to lose your money is high, but the potential gain is greater.
We’ll discuss in detail the most important factors that can impact your decision.
Market capitalization, or market cap, is the market value of a publicly-traded cryptocurrency. It calculates simply the number of coins in the turnover multiplied by the price. You do not need to use a calculator: numerous online services calculate the market cap for any coin and create a graph.
Depending on the market cap, currencies are divided into three groups: high-caps, mid-caps, and low-caps. High-cap currencies are considered relatively conservative investment assets and low-caps with aggressive growth potential pose higher risks. Choose the appropriate risk level when choosing a cryptocurrency to invest in.
While the price of any cryptocurrency constantly changes, market capitalization is valid only at a certain date. So, check the dynamics of market cap changes, too. If the market cap decreases for some time, especially when this trend goes against the market, it means the coin price goes down, and it is likely not the best time to invest in this currency.
As of June 2022, the largest cryptocurrencies by market capitalization are:
Total Coins to Be Mined and Current Supply
When choosing a cryptocurrency to invest in, check if there is a limited coin supply. For example, Bitcoin will only offer 21 million coins. At the moment of publishing, over 19 million Bitcoins are already in circulation. That is why the price of Bitcoin tends to grow despite the temporary decrease.
The simplest law of supply and demand balance works for cryptocurrencies: the lower the supply, the higher the price. The demand for Bitcoin is constantly growing and the supply is shrinking, so it will restore its position soon.
On the flip side, an unlimited supply can kill a coin. The recent downfall of the LUNA coin can prove this. Trying to protect the token from collapse, the owners decided to increase the basic pool from $50,000 to $100,000 and issue a volume of new tokens correspondingly. As a result, the price of LUNA dropped down and the project collapsed.
So, the possibility of the unlimited token issue increases the risks for the chosen cryptocurrency. It does not mean you should dismiss this currency at once, but keep this detail in mind.
White Paper for Cryptocurrency
A White Paper is the main document of any crypto project. Sometimes it is called non-advertising marketing material, but its functions are wider than simply marketing. A white paper can include all the details about a project. Some of the possible chapters in a white paper are:
Main idea: which problem can be solved with this project
Project philosophy: mission, vision, main values, and so on
Development roadmap: main stages, milestones, and interim deadlines
Research results: if the project is based on research, the white paper is the right document to share the results with future investors
Technical details that can be disclosed
Upper-level financial details.
There is no single standard of a good white paper. Usually, it is a long document with many graphs, tables, and images, similar to an e-Book.
The central part of the white paper is the project idea. Check it: does it sound realistic? Will it be in demand?
Sometimes the technical concept behind a crypto project is too complex and cannot be easily explained. In this case, a good white paper provides a brief and simple abstract to explain the idea of a project.
Formatting is rather an important part of the white paper. The document should be well-structured, with headers and subheaders, and easy navigation in the document. All parts of the white paper should focus on the same topic. The text should be easily-readable and proofread.
Thus, a good white paper should be an informative, readable, and well-illustrated document. But how does it help to choose a cryptocurrency?
When choosing a cryptocurrency to invest in, an investor should avoid scams and underage projects. Usually, scammers do not invest in a good white paper. Their documents are short and primitive; descriptions are limited to common phrases without technical details, research results, or graphs.
However, real projects may also have a poor whitepaper. It is also a sign for an investor. If the project owners cannot explain their idea in one document, how will they earn money and return the investments? This project is not mature enough and can collapse at any moment.
So, if you see a poor-quality white paper of the project behind some cryptocurrency, it is a marker of higher risk and a reason to move this currency lower in your list.
If the white paper presents the general vision of the project, the use cases demonstrate the results of its practical implementation. A use case is a description of a problem and solution, and its further impact. The use cases help an investor to understand the fundamentals of the chosen coin and its future potential.
One of the most popular use cases is the ERC-20 token by Ethereum. Ethereum developed and launched the universal standard for crypto tokens and made it open-source. ERC-20 is simple enough for easy use. Besides, the source code is compatible with the most popular programming languages. So, many crypto developers used it to create tokens for their projects.
As a result, the Ethereum network attracted hundreds of large and small decentralized apps. Moreover, it popularized the idea of crypto businesses and smart contracts. Many other crypto ecosystems like Cosmos started their development. Smart contracts also became popular, and now we use smart contracts for many deals and purchases. So, the universal standard of a token pushed forward the development of the crypto community.
Another successful use case is digitalized metals. Asset-based tokens work as contracts, granting the ownership of gold and silver to the traders. The token is easy to use and impossible to change after the signing of a contract, so many investors prefer metal tokens to standard contracts.
So, a reliable cryptocurrency that is worth investing in should have use cases that demonstrate how it works. The absence of use cases is not a great problem – sometimes a team has not had enough time to publish them. However, the use case should be considered one of the factors that impact your decision to invest in a coin.
Check Whether the Team Is Credible
Imagine you are hiring a key employee for your business. It seems natural to check their background, education, previous experience, references, and recommendations. An investor should spend some time and check the team of a chosen crypto project.
If a team does not reveal their names, it is a very bad sign. It can mean the project is fake, the team is non-professional, or there are some infamous names. What would you say if you saw Elizabeth Holmes among the team members?
The crypto market, actually, is rather small, so prominent people get known very quickly. Checking a team for names is necessary - and then check them all separately, their profiles on different sites, and relevant information about them.
The Team Are Those Who Move the Project Forward
If you have the names of a team or the largest investors of the project, do a check. Here is a brief list of possible questions:
Do you know these people? Have you heard about this team or its members before?
Can you Google them? What is the result?
Do key team members have a relevant background? Can they do the job they promise to do for this project?
Do they have a track record of success?
Do they look ambitious enough to finish the project and not step back with the first obstacle?
Do you trust and believe them?
Spending enough time looking for the answers to these questions is, probably, the most important stage of the decision-making process. The team is key to project success – or failure. It is key to the return on your investments.
Sometimes the people behind the project are more important than all other factors put together. Take the meme crypto coin Dogeсoin as an example. This coin could have remained just a joke. However, the involvement of Elon Musk attracted attention to this coin and it skyrocketed. The experts do not believe in its longevity, but before its collapse, many short-term investors will have earned a good profit on trading it.
An investor should remember that any cryptocurrency is a high-risk asset due to crypto market volatility. All statements in this article are recommendations and not guidelines. We do not take responsibility for any investment results. Please invest thoughtfully and do not risk money you cannot afford to lose.