Cryptocurrency investing can be a great way to diversify investments, but figuring out which cryptocurrency is suitable and which is not can be a challenge. In order to make an informed investment decision, it is important to know how to analyze cryptocurrencies.
The central theses
- Investing in cryptocurrency requires an understanding of its pros and cons due to its volatility.
- When choosing a crypto, investors should understand who is building the project and what their vision is.
- Knowing the basics of investing and how cryptocurrencies work can give you a better idea.
1. Read the white paper
Most crypto projects provide a white paper that helps define the goals and technical details of the cryptocurrency. While some whitepapers contain jargon that casual investors won’t understand, it’s important to read the whitepaper to learn more about a project’s vision.
The white paper should clearly define the goals of the project, how their technology will achieve those goals, and how the cryptocurrency will work. Most white papers define a problem that will be solved with the advent of currency itself, and that problem and its solution should be crystal clear to investors.
A red flag for any crypto project would be a white paper full of general promises with no details.
2. Research the team
Cryptocurrencies are usually created by a team of founders and software developers who help solve a problem. To better understand how a project might work, you should research the professional experience of the team executing the project.
This may include reviewing their LinkedIn profile to learn more about a technical or executive’s professional background, as well as previous projects the team members have started. Also, the “About” page on any cryptocurrency website should clearly articulate who is helping to build the project and what their expertise entails.
A red flag would be a team of anonymous founders or developers who don’t publicly reveal their identities, or an inexperienced team that hasn’t built or scaled projects in the past. An exception to this rule would be the anonymous founder of Bitcoin, Satoshi Nakamoto.
3. Learn about leadership
Most crypto projects have a well-defined leadership team that oversees the company’s vision, execution, finances, and marketing. Learning more about who leads a cryptocurrency team can provide insight into a project’s likelihood of success.
Here are a few questions to ask yourself when investigating running a crypto company:
- Do they have a history of successful leadership positions?
- Are they reputable/well-known executives?
- Do you have a history in the crypto industry? Is it good or bad?
- Are they public or anonymous?
While some projects with anonymous founders have been successful, such as B. Bored Ape Yacht Club, there are others who committed fraud and destroyed a project, such as B.Wonderland. Find out about the leadership team before investing in any cryptocurrency.
4. Get to know the community
Cryptocurrency is a community-driven technology that typically requires a strong, supportive community to thrive. Researching the community for a specific cryptocurrency can help you gauge whether a project will be successful or if it’s just hype and speculation.
Joining the Discord or Telegram community channel can help you learn more about the community of a particular cryptocurrency and get answers to your questions about the project itself. If there is a large community that is well organized and frequently promotes the project, it could be a sign of a growing cryptocurrency. If there is little engagement and no substantive discussion on community platforms, this is a red flag.
5. Understand the technology
Cryptocurrencies are a new breed of technology designed to improve financial services and solve financial problems. Crypto projects are based on blockchain technology, but there are many innovations and deviations in how they work.
Understanding how technology is being used to solve customer problems and how innovation is helping to increase adoption will provide insight into a cryptocurrency’s potential growth. While some of the technical aspects might be too complicated to understand, the cryptocurrency white paper or website should be able to explain the solution in easy-to-understand language.
6. Understand the vision
Cryptocurrencies should have a clear vision of what goals they want to achieve, with a set roadmap of how to get there. This should be readily available in the crypto whitepaper as well as on the company’s website. A crypt project’s vision should include enough detail for investors to understand what problems they are solving, as well as the potential user base for their solution.
When a corporate website features simple axioms like “cryptocurrency is the future” but fails to define or articulate a clear vision for how cryptocurrency solves a specific user problem, that’s a red flag.
7. Check the roadmap
A cryptocurrency’s corporate roadmap is a timeline of events showing the expected progress of the project. Typically presented in the form of a line graph, the roadmap should have clear and concise milestones, broken down quarterly, all moving the project towards a predefined set of goals.
The roadmap may be available in the whitepaper, although most crypto project timelines are constantly changing and are listed on the company’s website. If there is no defined roadmap or the milestones are too generic, this is a red flag.
8. Reputation of Research
There are tens of thousands of cryptocurrencies out there, and unfortunately some of them are scams aimed at making the founders (and early investors) rich. Researching the team’s reputation and running a cryptocurrency can help investors understand whether the crypto project is legitimate or not.
There are several places where you can learn more about a cryptocurrency project’s reputation, from Reddit forums to Discord channels and social media accounts. Poll these online communities to get a sense of the industry reputation of the project’s key leaders and the perception of this project. If there are many negative responses to questions about a key leader or the project as a whole, this could be a red flag.
Reputation is also established by researching who supports a project. If well-known investors and institutional support are already on board, the project may have a greater chance of success.
9. Learn tokenomics
The term “tokenomics” refers to the distribution, circulation and overall supply of a particular cryptocurrency. This is important as it affects the overall price of a cryptocurrency over time. Similar to shares of a publicly traded company, the price of a given cryptocurrency reflects supply and demand. The more shares there are, the more demand there must be to raise the price.
Here are three important data points to check before investing in any cryptocurrency:
- Circumferential supply. This is the offering of a cryptocurrency currently on the market and on which current prices are based.
- total supply. This is the total supply of a given cryptocurrency after all tokens have been unlocked and distributed.
- Maximum supply. Many cryptocurrencies allow new tokens to be minted, and the maximum supply is the maximum amount of tokens that will ever be minted.
All three of these statistics can greatly affect the price of a given cryptocurrency, so understanding supply is very important for cryptocurrency investors.
Crypto projects are also notorious for an uneven distribution of tokens, meaning that the token supply is small at launch and then increases significantly over time. This can lead to a significant drop in price as the new tokens flood the market. Reviewing the token unlock schedule can help investors understand how and to whom the tokens will be distributed.
10. Check the price data
Crypto prices are known to swing wildly up and down, but there are many factors that cause this. Token supply, marketing efforts, project milestones, and many other factors can greatly affect the price of a particular cryptocurrency.
Reviewing a cryptocurrency’s price history can help investors see how interest in the project has evolved over time. It can also indicate whether a particular crypto project is growing or dying. When a cryptocurrency has had a huge price surge but never recovered in the coming months and years, it can be a red flag for investors. The same applies to market capitalization and trading volume. If the market cap keeps dropping the longer the cryptocurrency exists and if there is no trading volume, the project may be a bad investment.
What are cryptocurrencies?
Cryptocurrencies are digital currencies that are not controlled or backed by a central authority like banks. Instead, transactions and ownership data are stored via a distributed ledger technology like a blockchain.
Is Investing in Crypto Safe?
Investing in cryptocurrency is a speculative investment, and while investing in crypto is not necessarily considered a “safe investment,” it can be a viable option for portfolio diversification. Cryptocurrency can be a smaller part of a larger investment portfolio, labeled as a risky asset with greater volatility than most investments.
What are the most popular cryptocurrencies?
There are many popular cryptocurrencies on the market, but the easiest way to gauge the popularity of a particular cryptocurrency is by market cap. This is the measurement of the total value of the cryptocurrency based on the current price and the total outstanding tokens in circulation. Here are some popular cryptocurrencies, ranked by market cap as of September 2022:
- Bitcoin (BTC)
- Ethereum (ETH)
- Tether (USDT)
- USD coin (USDC)
- BNB (BNB)
- Binance USD (BUSD)
- Cardano (ADA)
- XRP (XRP)
- Solana (SOL)
- Polkadot (DOT)