How To Evaluate A Cryptocurrency Before Investing
- By Martin Nganga
- Updated on September 6, 2023
Cryptocurrencies are one of the fastest-maturing asset classes. Yes, it is an asset class and not a speculative instrument. The fact that several of the largest investment banks globally have sizable investments and are actively pursuing crypto ETF applications is a testament to this fact. Now, all investments require proper due diligence. Let’s consider equities, an asset class that started trading officially in 1611 at the Amsterdam Stock Exchange but still requires proper evaluation and consideration before investing.
With several cryptocurrencies being created daily, it is necessary that one properly evaluate any cryptocurrency project before investing.
Whether you’re a seasoned investor or just starting out, a well-defined framework to assess the projects you invest in will help you make informed decisions. This article will guide you through a step-by-step evaluation process to ensure your investments are well-informed and strategic.
Why Evaluation Matters
Investors are not immune to the allure of quick profits. The hope of investing in the next big thing often leads investors to make impulsive decisions, which do not always end favorably. The inherent volatility of the crypto market needs a more structured approach. You can begin by defining your financial goals and risk tolerance to make smart investments. By dissecting key aspects of a cryptocurrency project, you can mitigate the risk of impulsive decisions driven by emotions and maximize the potential for rewarding investments.
Follow this 7-step guide for evaluating cryptocurrencies for investment:
Step 1: Explore the Project’s Website
A reputable cryptocurrency project should possess an engaging, user-friendly website. The website should be easy to understand and navigate. It should give visitors a glimpse of the team’s vision and offerings. A lack of a dedicated website or an incomplete, poorly made website for a cryptocurrency is a definite red flag. Some other elements you could check on the website are:
Frequent updates regarding the project’s ongoing or recent developments in the industry
- Look for social shares or comments from the project’s community on the website.
- The content on the page needs to be free of grammatical or typographical errors.
- Ideally, it should have information about the team members and founders.
- It should have mentioned significant partnerships in the industry.
- There should be a clear vision of the token’s intended role within the project’s ecosystem.
- The white paper elaborating on the project’s objectives and strategies should be downloadable.
- There should be links to their other social media accounts.
Step 2: Dive into the White Paper
The white paper is the foundation of any cryptocurrency project. The white paper holds the project’s goals, utility, plans, strategies, vision, and tokenomics. Most white papers usually include the following:
- The problem it seeks to solve
- A roadmap outlining the project’s expected future stages of growth and development
- The details of the coin’s utility
- It should answer questions like:
How will the tokens work?
How many will be available?
How will the tokens be allocated?
- Details of how the token minting, burning, and transactions will be
- The team’s vision and their methods and plans to achieve it
- Details of the consensus mechanism used in the project
- The unique features that set the coin apart from its competitors
Some white papers are technical in nature. However, a read-through might be necessary to understand the project’s details and evaluate its attainability. This will help estimate the adoption of a coin.
Step 3: Evaluate Social Media and News Media Presence
Social media platforms and news mentions are indicators of a cryptocurrency’s community engagement and traction. Consider the following aspects when evaluating a coin’s social media and media mentions:
- The kind of discussions on Discord, Twitter, and the narrative among folks on Reddit are often strong parameters to gauge the legitimacy of a project.
- The ratio between followers and engagement
- The number of mentions in the news
- The responsiveness and participation of community moderators
- The presence or absence of value-adding information
- A positive presence and engaging interactions on social media and in the news can indicate a strong potential for investment interest. Conversely, negative sentiment warrants further investigation.
Step 4: Analyze the Project Team and Partnerships
A cryptocurrency’s success often depends on the expertise and dedication of its founding team. While some cryptocurrencies have anonymous founders or team members, they usually have web pages dedicated to their online identity. Reading about the founders can give a fair idea of their ability to lead the project to completion. Other factors to consider include:
- The prior experience of team members within the broader blockchain community, tech, and relevant industries.
- The significance and influence of team members within the cryptocurrency landscape and in finance
- The number of times a founding team member has been quoted as an industry expert
- Involvement of the team members in successful projects
- Finally, scrutinizing the project’s partnerships, especially with reputable brands, can help predict the credibility of the founding team.
Step 5: Examine Market Metrics
To estimate a cryptocurrency’s potential, it’s important to see the market metrics and do a technical analysis. This step is crucial to evaluating a cryptocurrency and will help provide insights into its performance and the stability of the coin’s prices. Resources like the Mudrex Coin Pages, CoinMarketCap, DeFiLlama, and CoinGecko can help analyze metrics like:
⦁ Market capitalization: A higher market cap indicates relative stability and general trust in a project. This can be used to rank the relative size of a cryptocurrency. The top 50 constitute more than 80% of the entire crypto market cap and are thus considered safer than those below them.
⦁ Liquidity: A cryptocurrency with high liquidity allows for fair pricing. Higher liquidity ensures high trading volume, which indicates market participants’ willingness to buy and sell the cryptocurrency.
⦁ Supply Metrics: Knowing about a coin’s supply metrics can help predict its future prices. For example, compared to coins with unlimited supply, coins with limited supply are inherently deflationary and may reach a higher price since they are scarce.
⦁ Token Ratings: Evaluate the ratings of a coin or a token on platforms like TokenInsight & Mudrex. These token ratings will give you an overview of the risks and prospects associated with a coin or project. You can also see the popularity of specific tokens before making a decision.
However, evaluating and picking a coin after researching its market metrics is time-consuming. You can choose to research the crypto market’s various themes and follow index-based investing. Many platforms offer thematic crypto baskets created and managed by experts. For example, Mudrex’s Coin Sets let you invest in specific themes of the crypto market instead of individual coins. You may even choose to set up a SIP for automated regular investments into the Coin Set of your choice.
Step 6: Study Price History
Evaluating the price trends of a cryptocurrency can yield insights into its volatility, trends, and overall trajectory. This can help predict the potential for price growth in the future. While the market is inherently volatile, some coins display erratic price movements, which may suggest pump-and-dump schemes. This is a visible red flag.
Step 7: Determine the utility and potential for widespread adoption.
It is crucial to evaluate a cryptocurrency’s utility within the blockchain ecosystem and the problem it solves. By investing in projects that offer value to users, you stand a better chance of earning returns from widespread adoption. Coins with widespread adoption generally do better than coins with sparse utility.
Some examples of coins with real-world use cases include
- Ethereum, which empowers almost 90% of smart contracts,
- Ripple, which allows instant cross-border remittances
- and Solarcoin, which incentivizes generating and using solar energy.
These are seven steps to evaluate a cryptocurrency before investing in them. Comprehensive research can help you identify promising projects and execute investments aligned with your financial objectives. However, tapping into this requires a structured, disciplined approach. Evaluating and picking a coin after researching its market metrics is time-consuming. You can choose to research the crypto market’s various themes and follow index-based investing. With Mudrex’s Coin Sets, you can invest in specific themes of the crypto market instead of individual coins. You can even enhance your investing journey by setting up a SIP for automated regular investments into the Coin Set of your choice.
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