Much as cryptocurrencies are a great opportunity for investment, you need to tread carefully. Fluctuations in the cryptocurrency market are a given. Taking the right call during downsizing is not easy. If you want to make profit consistently, you will have to do more than just picking coins that have been found to be profitable in the past.
Choosing the right coins, however, is not an easy task. You might book a loss if you take a wrong step. The right way to go about making the right investment is by asking the right questions. Follow the below guidelines and find out how to evaluate a coin to invest.
What does the project do?
Blockchain projects are a result of team effort. Sure, a lot of hard work will have gone into a particular project; but it doesn’t mean it should become a success and make you profit. You should understand that every team behind a blockchain project is trying to solve a problem. Buying coins blindly won’t do you any good. When you buy a coin, you are buying the idea it supports and the work ethic of the team behind it. Ask questions. Is it just a good idea without a cause? Is it practical? What does it contribute? Ask questions and see if it’s a right fit for you to invest.
What problem is it trying to solve?
Know and understand what problem the coin is trying to solve. Every blockchain project solves a particular problem. Bitcoin, for example, stores value on an unyielding ledger so that your money is safe. Ethereum eases digital agreement processes in a simple way and takes out the intermediary from the picture. And Monero creates an anonymous, peer-to-peer asset transfer in a secure and safe way.
This is one of the most important questions you should ask before choosing a particular coin to invest. Research, ask questions, go through the website properly, ask questions to teams if you have to, but do whatever it takes to understand what problem a particular coin solves. Once you know the ins and outs of the coin, you can decide whether to invest in it or not. If it sounds like hard work, it is. But rest assured, it will be worth it in the end.
Has it been listed on any prominent exchanges?
One of the easiest ways to know whether a particular coin is trustworthy is by checking to see if it’s listed on any reputed exchanges, say Coinmarketcap. Of course, this isn’t always right. But this is where you should start from. If it’s listed on any trusted exchange, it’s fine. If it’s not, then you might have to dig deeper.
Has it been done before?
If the underlying idea of a coin has already been executed in some other project, then picking up a coin that demonstrates the same idea may seem like a bad choice, unless you’re sure it’s only a better version of the idea. But when you are trying to evaluate a coin’s value, it’s good. There are a lot of advantages to being on a blockchain. Security of data and party accountability can add tremendous value to an already existing list of ideas. Ripple, for instance, uses its token, XRP, to make easy transfers between financial institutions. This isn’t a new idea, sure; but money transfers have always been an integral part of financial institutions. And any coin that promises safety is worth exploring.
A trusted third party, however, makes the transactions for banks and demands a significant percentage for completing the transactions. Ripple, on the other hand, gets rid of the intermediary and subsequently reduces the percentage to a fraction. In the end, a fraction of a multi-billion dollar industry is not too bad, isn’t it?
Who’s building it?
It goes without saying that a coin is as good as the team behind it. A lot of teams come up with new and technically challenging concepts, but if you are buying them, you’d better know who’s behind them. Many offer the same promises (security, safety, etc.), but a little bit of research on the team that’s building the coin you are trying to evaluate will always be helpful.
New blockchain projects should be transparent and they should be easily accessible through their team pages on their websites. Run a background check on them and ensure they know what they are doing and why. Just because the whole team is comprised of MIT engineers doesn’t mean it’s great. Understand who’s working the technical aspect of the project and who’s promoting it and how well they are promoting it, and the like.
Another important thing to know is that not all projects have teams. Some of them have entire communities. Cryptocurrency, as we learnt in Chapter 1, is decentralized. A lot of groups building blockchain projects are decentralized, too. Take a peek at their Reddit, Twitter, or Telegram channels and check who are supporting the project. Check if people are reacting to the project positively or negatively or if there are any prominent backers.
A major indicator of a project’s strength is who’s backing it. NEO, for example, is working with the Chinese government. If the government of the largest and strongest emerging economy in the world believes in a particular project, then you should pay attention to it.
What Does the Coin Do?
Every coin serves a different purpose. If some coins provide liquidity, some provide security, and some others can be used to redeem for other services.
Bitcoin and Dash, for instance, have broad use cases: they are practically aiming to become the gold and cash of cryptocurrencies. NEO’s GAS and Ether are different forms of payment in their own DApp ecosystems. Golem lets users rent unutilized computer space. EOS is the 6th in market cap currently. It is a DApp platform, which has a token. According to their official website, however, “The EOS tokens don’t have any rights, attributes, uses, purpose, features or functionalities on the EOS platform.” You need to consider all these while evaluating a coin.
Another example is Ripple’s XRP. As already explained, it provides liquidity to bank transfers through its Ripple network. But what is its purpose if not for a large financial institution? You may not find many. Then again, if you think about it, if all banks adopt the Ripple token, then XRP’s demand and thereby its price will skyrocket. So buying low now and selling it later at a higher price, to state the obvious, will be insanely profitable for you.
The coin you are planning to invest in might be created by some of the best minds of the world and their product might even be outstanding, but if the coin can’t be used for anything, then what good is it, anyway? You should think hard before investing in it.
Take a look at the coin’s 24 Hour volume before investing in it. A coin’s 24h volume shows how much value has been traded in its 24h period. It’s expressed in USC and BTC. Simply put, higher the 24h volume the more well-established the coin is with a solid foundation. Check out some legitimate exchanges to determine the coins’ 24h volume.
It’s usually safer to select a coin with at least 8,00,000 INR trading volume. It means that the coin has already been in circulation and has been traded well over the time. More importantly, a significant percentage of the network believes in the coin. There are people who bought a coin for less than 1,000 INR, with an extremely low trading volume and then went on to make lakhs. These are rare scenarios. Don’t be misled by them. Stick to your research and strategies instead of chasing miracles.
Also, keep an eye on the pump and dump schemes. These are usually set up by developers of the coins who buy them in large quantities. And when the prices go up, they sell them, thereby causing a major price drop.
These things are mostly reflected in the trading history of the coin. Keep observing the price graphs and steep curves. If you spot a pattern, continue to keep an eye on them for a few weeks. These schemes don’t last long.
The coin liquidity is evaluated in both the BTC volume and the volume percentage. If come coins have small BTC volume, it means even a purchase of a few hundred could be to your disadvantage. In order to avoid that, don’t invest in coins with low BTC volume.
Be wary of wash trading. This can happen to both low and high volume coins. Some exchanges can influence the trading volume and make it appear more appealing. If you are looking for a coin with higher liquidity, then you might get attracted to it. Do not fall prey to this. Get familiar with the exchange history and look for an increase in volume that doesn’t tally with an increase in price.
Exchanges do this if the market doesn’t move as per their expectations. They will do their best to make you interested in the coin. The exchange might not be functioning well financially and they succumb to this play. Whatever their reasons might be, make sure you don’t fall prey to this. Keep a close eye on the exchange history and evaluate a coin’s true worth properly.
Market Capitalisation and Current Price
Market capitalization is evaluated by the number of coins available multiplied by the current market price. This, however, works only with those coins, which have already been mined and not the future supply.
Developers issue a lot of coins at the beginning. This can make you feel that the coin’s value is higher than it is in reality. You should understand that the current price of a coin is just an indicator of perceived value and nothing else. Don’t decide on a particular coin based on its current price.
If you are a new investor, you might get attracted to the low price of a coin. Don’t make a decision entirely on the low price.
Be wary of a coin with low daily volume but high market capitalization. This could be a simple manipulation of the coin’s price.
Are people investing in it?
Become a part of cryptocurrency communities and discuss with people. Ask them what they are investing in and why. The more you interact the more you will come to know about different types of coins and why people are investing in them (or why they aren’t). Telegram is a great platform to get in touch with people and talk about everything crypto.
Also, don’t be so naive that you go ahead and invest in a particular coin just because a lot of people are investing in it. To each his own. What works for others may not work for you. So hear them out, but do your own research.
To wrap up
Evaluating a coin is highly subjective in nature. You can research hundreds of factors and it can still turn out to be wrong. But asking the right questions and researching based on them will certainly help you get on the right track. So the next time you are trying to buy a coin, you will know what to buy and why. Understanding the reason behind the coin’s creation and the team will provide you with all the information needed to make an informed decision.