Cryptocurrencies have been a central topic in finance and currency discussions for over a decade. But Bitcoin and Ethereum, the first two cryptos, are no longer the only topics of discussion in this area. To date, there are over 18,000 different cryptocurrencies to choose from, including both established coins and newer altcoins.
Because of that, the cryptocurrency market has ballooned, leaving some investors unsure of how to value individual tokens. Investors need to do their research before adding crypto assets to their portfolios, just like they would with any other new investment. Being cautious before investing money in a cryptocurrency is the key to making sure you make the right choice.
Successful investment in the new and rapidly developing cryptocurrency space requires the ability to recognize promising new projects when they emerge. However, when there are thousands of crypto assets to choose from, it can be challenging to determine which ones are worth investing in.
In this guide, we’ll be looking at different factors to consider in evaluating the potential of a cryptocurrency.
Importance Of Evaluating A Crypto’s Potential
As a cryptocurrency investor, you undoubtedly care about which currencies will increase in value the most. While it’s true that no one has a crystal ball that can reveal the future of any given coin, there are some methods we can use to gauge how successful a cryptocurrency might be.
Knowing if a certain currency has good potential to grow would help you decide where to put your money for your short-term and long-term goals.
Getting Started
When doing research, your approach and mindset are very important. It’s easy to qualify a project, but a better (and more contrarian) approach would be to look at potential investments with the goal of getting rid of them.
If the crypto project checks all the right boxes and you find it hard to rule it out, it’s likely that you’ve found a good one.
Keeping this in mind, let’s look at how to evaluate a cryptocurrency project step by step.
1. The Value And Use-Case
The first thing to be done is to ask yourself: Why is this cryptocurrency being used? Does it actually solve a real problem or make a big improvement on something that’s already out there? Don’t bother if the answer isn’t a resounding “YES.”
How likely a project is to be successful depends on whether or not its technology or use case is something that people want or need. Look into “tokenomics,” which is basically the economy that revolves around tokens. The token should have enough use within the ecosystem to create enough long-term demand.
Let’s look at the example of Bitcoin. Bitcoin was the first digital currency that could be used without going through a bank. It lets people store and send money on their own, without going through a bank or other financial institution.
This spoke directly to the fact that people want to depend less on banks and other financial institutions. Bitcoin met a real need, which is why, despite short-term fluctuations, the price of Bitcoin has been going up year after year.
2. The Community
No community, no success. If a cryptocurrency is real, it will probably serve a group of people and have a strong community built around it. The community, which is made up of miners, developers, supporters, and potential users, adds value to a coin by using it and making it more popular and legitimate overall.
A cryptocurrency’s success depends significantly on how many people support it and how excited they are about it. This usually shows how well people understand the ideas and functions behind the cryptocurrency and how far it can spread.
Keep an eye out for cryptocurrencies with solid and active communities. This is a good sign that people really care about and believe in the currency. Reddit is an excellent place to start learning about the community and discussion around the coin, but fan bases on Twitter, Facebook, or Telegram can also be helpful. A strong group of true believers who know what they are talking about is an excellent sign.
3. The Team (Developers, Advisors, And Partners)
It’s crucial that the team behind a project is trustworthy and has a lot of experience. Given that many projects don’t have much financial data or history, judging the core leadership team, developers, partners, investors, and advisors will be a big part of your decision to invest.
Some well-known names will be on the bigger, more serious cryptocurrencies team, but be careful. Fake cryptocurrencies often list celebrities and other well-known people in the crypto space as their team members, even though they have nothing to do with it. Look into things and don’t believe everything you hear.
Not every crypto project starts out on the same level. If your local barista launched a cryptocurrency tomorrow and Google did the same, it’s likely that Google would get more interest and be more stable. Before you invest, look for a proposal whose team is trustworthy and has a real proven record in the industry.
4. Market Cap
Market cap, or market capitalization, is a great way to determine how stable and how much a cryptocurrency could grow. It is computed by multiplying the current price of a coin by the total number of coins in circulation. In general, an investment is safer if the market cap is higher than that of other coins.
Whether you’re a specialist or just starting out, the market cap is one of the best ways to get a quick sense of how a cryptocurrency is doing. A good tip for beginners is to look at a coin’s market cap instead of its price. This gives a more accurate picture of what a cryptocurrency is really worth (price alone is actually a pretty useless metric).
Your investment portfolio should have a mix of coins with various market caps (large-cap, mid-cap, and small-cap), with most of your money going to large-cap investments that are more stable. It is also referred to as diversifying your portfolio. It can help lower your overall risk and give you the perfect combination: stability and a high chance of short-term growth.
5. White Paper And Website
The official website for a project should never be taken lightly if you want to determine the potential of a cryptocurrency. The website should not only be well put together and easy to use, but it should also be honest about who is behind the project. Bad websites with spelling mistakes and a lack of information about the team are all signs of a bad investment or a pump-and-dump scheme.
Also, a coin’s “white paper” will tell you everything you need to know about the project. White papers can be complicated for the average investor to understand, which is how they should be if they are legit. However, their main purpose is to show how the coin can be used, what its future prospects are, and what technology it is based on. All good projects will do this in detail.
6. The Competition
If there is already a similar project that is stronger or more developed, there isn’t much chance that your cryptocurrency idea will work. Even if several projects do the same thing, they can all be successful. However, there are usually only a few industry leaders for each utility, solution, or sector in the ecosystem.
While there are many projects with good technology, being first to market is a big advantage. You should look at a crypto’s team, track record, and history because many talks about a big game but don’t have a real product. Before investing in a project, you should think about how it fits into the ecosystem and if there’s a real demand for it. You should also think about whether it has what it takes to beat its competitors.
7. The Plans And Goals
If you’re not a swing or day trader, you would want to make sure a cryptocurrency will be around for a while. A successful project would have a clear vision and a well-defined strategic plan. If the project doesn’t have a clear vision, mission, and plan for the future, it might not be able to compete with similar projects. Even though short-term gains can be appealing, the best investments will be there for a long time and add to your portfolio as they grow and expand.
Things to watch out for when looking at a coin’s road map are:
- There should be clear timelines for how the coin will be made. If there isn’t a clear time frame, it could mean that the team working on the project isn’t committed.
- When do they plan to put out significant changes? Are there any announcements planned for the near future?
- How many coins will ever be made in the world? How many are out there right now? How will that affect the price of one coin?
8. Volume And Liquidity Of Trading
You would only look at these numbers after all the other things on the list have been checked. They are essential, but if you’re investing in one of the more popular and well-known cryptocurrencies, you don’t need to go into them too much.
- Liquidity is a way to measure how easy it is to buy or sell something. This is important if you want to be able to buy at a reasonable price or use your money whenever you need to.
- Trading volume can help you identify how much a cryptocurrency is traded and the market’s liquidity (the more volume, the better).
- While market cap is an excellent way to measure a coin’s popularity over time, trading volume is the metric to use if you want to analyze a coin in the short term.
- By examining a cryptocurrency’s total 24-hour trading volume, you can determine whether there is something significant behind a recent dip or pump.
For example, a price drop with a lot of 24hr volume behind it could mean that a coin will be in the dumps for a long time. If a lot of volume doesn’t back big price changes, it means that only a few people support the current price trend, which may not last long. Big jumps in prices when the number of trades is low can signify that people with a lot of money are trying to change the prices.
When a coin’s market capitalization is good, but its trading volume is low, trading volume is also helpful. This low trading volume could signify a dead project, no real-world use, a lack of liquidity, or a lack of active supporters.
Key Takeaway
If you’ve considered all of the points in this article and the project checks all of the boxes, you could be looking at a very profitable investment. You get bonus points for arriving early to the party!
Don’t be scared to look at what popular cryptocurrency YouTubers, Twitter accounts, and reputable people are saying about a specific project. Ask questions in community forums and talk to friends, other investors, and anyone else who will listen. Having some knowledgeable people to speak with is extremely valuable, and the more points of view you get about an upcoming project, the better.
