The cryptocurrency market is very popular and attention-grabbing nowadays. There is a wide range of cryptocurrencies, from the well known, like Bitcoin or Ethereum, to less famous new ones. More than 2100 kinds of those exist on the virtual market, and each of them has its own purpose and niche. Many people, including experienced experts, are sure that the financial future lies in cryptocurrencies.
But as attractive as they seem, they are also very volatile and have many pitfalls. The newcomer in this field has to be very cautious, and before making any investment should thoroughly analyze all coins by certain criteria, as misunderstanding of the assets you want to buy may lead to the loss of the invested funds. As Warren Buffet, a well-known American businessman and investor said, “never invest in what you don’t understand.”
White Paper Is the First Step to Success
The first and one of the most important steps, along with tokens, is reading and learning the official informational document, called white paper. It gives the full technological information about a specific cryptocurrency, tells you how the token will be used, reveals its economic model, and other details which can help you understand if it is something unique that is worth investing in. In the white paper you can also find which kind of a problem the designers try to solve, the coin’s aim, and if the real coin is needed or the platform itself is sufficient.
If the researched cryptocurrency has a roadmap, you can see the timeline of the project and estimate its implementation period. The longer it is, the more stable the price of the currency will be in the short term. Many stages in a short amount of time lead to changes in the price. That’s why if you read that the company plans many deadlines in the near future, this is a good moment to buy the coins. Learning the roadmap also provides other useful knowledge — if the developers are seriously working on their project and fulfill all their plans and promises.
Never ignore token economics. It’s the most important thing to do along with white paper studying. Before buying the coin, you should learn how and in what way it will be used, where it comes from, and why it is valuable. In some cases, blockchain startups do not really need any tokens. They use them only to attract initial investors, claiming that with the growth of the project, the price of these assets will increase.
However, the developers can have a great revolutionary idea, but if there is no real use for their tokens, it will have no future. When you invest money in such a project, the team will certainly get its funds, but you may end up getting nothing. Make sure that your investments really can generate income!
Learn if the token is already a working product and study its history. Find out when the coin was created, study the proclaimed purpose of the cryptocurrency and what it is used for in reality. Determine if the token is widely used by people and companies, learn from their experience, and study the experts’ opinion.
You should also clearly understand how the company sees its future, and the future of its currency, if it has a financial forecast for its growth and profits. Compare the current volume of assets traded on the market and how it has been changing over the past months, learn the coin’s volatility, see if the emission and inflation are under control. Here are some aspects you should have a clear idea of before making any decisions:
- check the distribution of coins between the community and the founders. If the founders hold the major part of the funds, it’s not a good sign;
- find out how tokens are being, or going to be, released. Trace how many coins are locked up and for how long, whether they will all be unlocked at a particular time, or if this process will be gradual;
- study how a token gets its value. If the cost of coins is artificially increased by burning the part of them, it is not a good sign for me. The cryptos can be used to cover the costs of blockchain maintenance as fees. Or, the clients will have to buy them in order to use the company’s product. Maybe, it is profitable to simply hold them in a wallet, or they are a good trading instrument. The more sources of value the cryptocurrency has, the better it is for investing;
- see whether the company had the ICO (initial coin offering), how many investors they attracted, and how much money they gathered;
- learn the monetary policy of the cryptocurrency you want to invest in. The deflationary model, like in Bitcoin or Litecoin, means that the quantity of coins is limited, and the supply either slows down gradually, or is stopped completely. It leads to the escalation of the asset price, with one condition — only if the demand grows. This model makes people hold the money waiting for the new price soars. As for the inflationary model, like in Peercoin or Dogecoin, it motivates users to spend cryptos, for example, to buy and sell goods and services;
- it is good to learn the scalability of the currency, and how many operations per second the platform can perform;
- you should know if the cryptocurrency can be mined.
Remember that all cryptocurrencies are constantly evolving. Thus, some information should be tracked continuously, like the price charts, total market cap, trading volumes, etc.
Know More About The Team
Knowing people behind the cryptocurrency project is extremely important. The company’s website usually contains info about how many experts contribute to this business and what is their experience and level of expertise. Pay attention to the following:
- if the company data is transparent, and has all contact info;
- are the company and its leaders represented in social media, like Facebook, LinkedIn, Twitter, etc.;
- the education of the team members and their previous jobs. I always check if the founders and employees of the new blockchain business have the experience of working in the IT and financial spheres;
- are there enough people in the team to fulfill all plans? Does the company have an expert employee for each goal it sets? Try to get into details before investing.
See if the developers work in the office or remotely, how they are paid, if they have any bounty programs, what languages they know — the more you know, the better for you.
Investors and Business Partners
The blockchain industry is still rather small and in the early stages of development. Not all the new companies can have highly experienced staff. However, the project can be supervised by advisors who are not on the team. This support from experienced CEOs as well as the presence of some famous sponsors is good for startups. Reputable venture capital firms and big investment organizations can provide them with a good future outlook.
If you see large companies in the list of partners of the projects you want to invest in, you understand that the coin is in demand in real life. It shows how and where it can be used. Cooperation with the government is one more great feature that shows the legitimacy of the project. Governmental support is not that common in the crypto sphere, but there are some projects that are supported by the governments of Australia, China, and Thailand.
Do not let anyone mislead you with the long list of famous companies partnered with the blockchain firm. Remember that there is always a chance that this is simply an affiliate of another large business, or the partnership is nominal and gives no advantages to the users. Make sure that this cooperation results in real outcomes, like increased acceptability, usability, etc.
Any worthy project cannot exist without the community it is built around. As a rule, if a cryptocurrency is credible, there is a wide circle of people around it, who study and watch the project. Surf the internet, estimate the number of those who follow the company on Twitter or FB, see how many people discuss its products on Reddit, etc. Not only the quantity of the followers, but its growth is important, too, as well as the traffic of the website, which you can find on Google Trends.
The online community will help you find the answers to many of your questions. When users are actively and eagerly involved in the life of the project, it makes it more friendly and easy to use for newcomers. It’s always great to be a part of the fellowship, get the right advice and share your thoughts. Sometimes a random person can say something unique and thought provoking.
It is a good sign when online users are optimistic about the cryptocurrency, when you see that people are enthusiastic to buy, hold, and trade it. The community sentiment, I am sure, is the first source of the market sentiment. If you keep this in mind, you will be able to make the right decision when making investments.
Marketing and News
Before joining any project, it is very important to find out how the team speaks of their cryptocurrency, and what the major news sources say about it. Watch how often the team shares their thoughts about the development of the company. Marketing is very important, because even if you know all about the chosen crypto and you are sure it’s stable, useful, and profitable, others may not be as informed as you are.
This is why it is good when the company shares their goals on all possible platforms, what decisions they make, and what problems their products solve. Do some research, and see:
- if they are active on the external resources, participate in discussions on others’ threads;
- whether there are many trustworthy negative reviews about the company and currency;
- if the coin was rebranded, check how many times and how often it happened. Sometimes rebranding can show a change in strategy, but sometimes frequent changes can point to hidden information and can be a bad sign;
- the major websites related to the crypto world — what they say about your assets. If there are positive reviews there, it’s good. It’s also great if you find news about the project in well-known publications like Forbes, The Wall Street Journal, or Bloomberg. Even if you see their interest in the company you invest in, you can be more confident you’re on the right track.
Research your crypto regularly – you’ll need to stay up to date if you don’t want to miss changes in the market and lose your funds.
Compare with Other Cryptocurrencies
The last step of your research will be the comparison of the chosen cryptocurrency with others that can be of interest to you. You should clearly understand the benefits of the currency under your analysis and the peculiarities which will allow it to become more valuable.
Obviously, each cryptocurrency competes with all others, the market is overfilled with various altcoins, and new projects are born every day. You have to understand why you choose this one or another crypto, and what you want from it. First of all, the cryptocurrency can be used as a medium of exchange, or simply money, to buy goods and services, send to other users, or exchange it for other tokens. At the same time, cryptos are investment and trading tools, which you may purchase with the purpose of raising money.
If you compare two cryptos as money, you will look at:
- speed and cost of transactions. The cheaper and faster they are, the better;
- liquidity, which means that the assets are actively traded, and the supply and demand are enough. You don’t want to invest in something you won’t be able to buy and sell quickly, right? You can easily check this data on the websites with charts and basic market information. I would not recommend investing in tokens with a daily trading volume of less than 5-10 million USD;
- stability of the currency gives you confidence and saves you time watching the charts. Use it when you need to and do not worry about sudden slumps;
- acceptance. Give preference to the currency that is widely adopted all over the world in many companies;
- usability. This term has two meanings for me — the first one is the ease of use, which means that the best cryptocurrencies are the ones that are user-friendly and have all necessary applications and tools, like wallets, gadgets, widgets, etc. The second meaning is the usefulness, or utility of the tokens. This means that the cryptocurrency has practical use.
Comparing the cryptocurrencies as an investment tool, when you buy the coins as an asset that can become more valuable with time, pay attention to:
- value proposition. It is hard to determine how the value of the cryptocurrency will grow, but the first step before investing is to study what the company promises to its clients to attract and stimulate them. If there is a really attractive offer behind the asset, it is a guarantee that it will be on demand;
- the price movements and trends of the cryptocurrency – you should look through them and learn how to predict where the price will go based on this information;
- team and reputation of the asset. Avoid scams, pump and dump schemes, do not let anyone take your money and disappear. The key factors are, as I’ve mentioned before, the transparency, positive user experiences, and proper activity of the team on the net;
- safety. Comparing the currencies, make sure that there are working instruments to hold your tokens in a secured walled far from cyber thefts.
There are projects, however, where cryptocurrencies are used for other purposes, like IOTA for machine-to-machine microtransaction, or those that serve only as fuel for blockchain business. They may be worth investing in, too.
Following this guide, you will be able to learn how to research cryptocurrency, and understand if it is worth investing in. Stay cautious, show healthy skepticism, investigate and study as much as you can, don’t be shy to ask questions. Do not be afraid to seem inexperienced and even silly, as your honestly-earned money is at stake. With time, you will develop your own evaluation criteria, which will help you choose the right cryptocurrency projects for you.
Leave no room for emotions, only knowledge and real-life experience. The best time to make investments for me is when I feel that I will not wake up in fear that my cryptos have collapsed, when I know how the situation will develop, and why. I will not buy because of the so-called “fear of missing out,” and will not give up because everyone is panicky selling out. I hope, this review can help you act reasonably, too.