The Top 5 Things to Consider When Buying Cryptocurrency
While the crypto markets have been in a bear trend the last several months, interest in cryptocurrency is still high. Every day, new investors are taking the leap into crypto assets. As the market continues to stabilize, investments in cryptocurrency will only increase.
When investing in digital assets like cryptocurrencies, it is important to follow a strict strategy and focus on understanding the key drivers to a coin’s value.
Crypto vs Stocks
While many equate cryptocurrencies to stocks or bonds, they really are different kinds of animals.
Most seasoned investors know how to evaluate a stock based on standard metrics like the price to earnings ratio, debt to equity or beta. But these types of metrics don’t exist in the crypto world.
So what do crypto traders look at when choosing an investment? The top 5 things are:
- The business proposition. What need does it fill? Is it disrupting an industry or solving a problem?
- Total & circulating supply. The max supply of coins that can be mined and the total amount that have been mined thus far.
- Price history. How long has the coin been available on exchanges and what has the price done?
- Developer activity. Does the coin have an active developer community behind it?
- Community activity. Does the coin have a passionate and active community of supporters?
Before considering an investment in crypto, it is crucial that one has a good understanding of what they’re investing in. This is the #1 error made by newcomers to crypto.
Most crypto investors know very little if anything about the technology behind it. They’re simply speculating on price action and hype, which is a terrible way to invest.
Learn the Basics
Learn about the blockchain first. This is the underlying technology behind every crypto project.
After gaining an understanding of how the blockchain works, look for a good guide on cryptocurrency. A Google search will turn up several great resources.
Is the coin a security token or a utility token? There’s a huge difference between the two. Is the coin mined using Proof-of-Work or Proof-of-Stake? This is another important factor to consider.
After learning everything possible about the inner workings of the blockchain and the function of cryptocurrency, it’s time to look at the investment criteria.
1. The Business Proposition
Crypto projects are like any other business or startup. Good businesses solve big problems and fill needs. The same goes for crypto startups. Are they solving a problem?
When investing for the long term, it’s important to evaluate the team behind the project, their mission, their plan to accomplish that mission and their overall enthusiasm. Focus on prospects with real value and stay away from questionable projects with shady founders.
This is also a good time to look at the function of the cryptocurrency they’re selling. Is it a security token? This means anyone that owns a coin also owns a piece of the company, much like a stock. Or is it a utility token? These types of tokens are redeemed for services on the blockchain.
Considering the project’s business proposition will prevent investors from succumbing to hype or “fomo”.
2. Total & Circulating Supply
Total supply of a coin represents the maximum amount of coins that can be mined or enter the market, while circulating supply represents the current amount of coins in the market. Since most coins are mined, or a percentage of them are held by the founders, there is usually a difference between the two figures.
These figures become important when evaluating the value of a crypto project. Due to the basic principle of supply and demand, the supply of coins has a large influence on the price of the coin. For instance, Ripple’s current value metrics are:
- Price – $.46
- Total supply – 100 billion coins
- Market cap – $46 billion.
Many would argue that such a high supply of coins prevents Ripple from increasing much more in value. A $.10 increase would increase the projects value by $10 billion, which seems unrealistic.
Bitcoin’s total supply is only 21 million coins. This is one of the factors that drives its value up. Lower supply means higher demand.
3. Price History
Cryptocurrencies are highly volatile. This is due to speculation, hype, pump and dump schemes and a lack of regulatory oversight. Looking at a coin’s price history tells a story.
Generally, the cheaper coins with lower market caps are more susceptible to pump and dump schemes. Investors that recognize this can avoid unnecessary losses.
A coin’s price may also correlate to other coin prices, stock market moves or world events. For example, when Bitcoin’s price increases rapidly, most altcoins drop in price. This is due to the fact that Bitcoin is the primary coin used to trade other altcoins. An increase in the buying of Bitcoin leads to an increase in the selling of altcoins. This drives Bitcoin’s price up and altcoins down.
Another important factor to consider is the number of exchanges the coin is currently being traded on. Is the coin available on most major exchanges or only the smaller exchanges? Announcements about coins being added to major exchange platforms like Binance can affect the price significantly.
Just like stocks, understanding why a coin’s price moves up and down is key to evaluating its long-term value.
4. Developer Activity
Strong projects have high developer activity. If the activity is low or down trending, that is cause for concern. The easiest way to measure this is by viewing the project on GitHub.
All work done on GitHub is public, and so are the activity metrics of that project. The number of updates it has received, how many watchers there are, how many forks have been created and the total stars are great metrics to gauge the project’s activity.
Are issues being identified and bugs being fixed? Are more contributors joining the project? If developer activity is going up rapidly, that’s a great sign of a strong project.
5. Community Activity
A project with a strong community is just as important as high developer activity. The larger and more involved the community is, the more valuable the coin should be.
One of the easiest ways to gauge the community size is to check out the coin’s twitter page. How many followers does the project have? How much activity is occurring in the account?
Reddit is another good place to check. Reddit has become ground zero for crypto related news, announcements and general conversation about coins. Are there a lot of subreddits related to the project? Are they highly active?
Evaluating cryptocurrencies takes time and effort to do right. It is a brand-new industry and its rapid growth has created many opportunities but also many dangers for investors.
By considering the five items covered in this article when choosing coins, investors can reap significant gains. There are many more metrics that can be evaluated but the key principle to remember is: Buy into value, not hype.