“What coin should I buy? How to invest in currency? What cryptocurrency is the best investment?” In the crypto market, these are very frequently asked questions. While there aren’t magic tricks for easy gains or get passive returns on your capital (those who propose this are scammers), there are anyway some key points that can help you.
Just a brief consideration, before starting: evaluating criptocurrencies investments is very hard. We don’t have the accountability and reports that we can find for traditional financial instruments. Cryptocurrency market is not very transparent and fundamental analysis is very hard. For these reasons we have decided to write seven easy points that will allow you to make wise crypto investment choices.
1) Is this cryptocurrency useful?
For first, while evaluating a project, ask yourself a simple question: is the criptocurrency/token in which I am investing needed for this project? If the project grows, will the token too grow?Let’s pick up two examples of this concept: Ripple (XRP) and Steemit. Ripple is a very interesting project, but XRP token is useless by itself: it is only a mandatory reserve for every ripple user account. Ripple project can move a lot of asset class, both traditional assets and cryptocurrencies. So XRP token is not necessary by design. Maybe the project will grow and the token won’t. When we talk about a cryptocurrency investment, in facts, we think about its tecnology and the project behind. But these two things can be independent. On the other hand, steemit is a publishing platform for bloggers that allows you to gain some tokens called steemit. Steem tokens are needed to acquire more influence and gain more. So, if Steemit will grow, the price of steem will probabily follow.
2) Evaluate the project, try to study its possible market.
For example, the cloud computing market is growing really fast: a project focused on this can be a really great project. On the other hand, a project that wants to buid freezers at the northem pole is useless and so there is no reason to invest. In order to evaluate this level of interest, it can be helpful to look for similar trends in stock markets. If there is a certain trend in traditional markets, it is possible that there are similar opportunities in crypto market too.
3) Study competitors and compare different projects.
Try to understand best and worst aspects of every project. If you have some skill in a sector, for example because you are a professional, look for projects that are related to that sector. Picking up different project can also allow to diversify between similar cryptocurrencies of the same sector. By this way, you maintain your profit potential, but the risk of sudden fall of your portfolio decreases: you are investing on multiple coins, not only one.
Also, ask yourselves if blockchain is really needed in a certain sector. Very often, “blockchain” is used only for attracting investors. On average blockchain is a very effective tecnology to guarantee secure and decentralized projects. “Proprietary” centralized blockchains are (usually) nothing more than a marketing idea: for many centralized applications, traditional tecnology are better than blockchain!
4) Carefully monitor the developement team.
Cryptocurrency market is growing fast and those who remain behind in developement will lose the game. Check for team members, and don’t invest in projects that aren’t transparent about their team: Usually an anonymous team is a team that doesn’t exist (except for particullary decentralized projects). Non-existent or few reliable team should be a warning: there may be an high risk of exit scam (team takes your investment and disappear) Don’t be attracted by advisors and sponsors: in most cases they arent’t involved, they are shown only for attracting investors like you. For checking developement progresses, you need to find the project’s whitepaper (the initial document that summarizes the objective of the project for early investors) and the roadmap (some sort of developement plan). Usually whitepapers and roadmaps are more ambitious than reality, so use the meme below as an appropriate guideline.
5) Pay attention to the distribution of tokens!
This is particullary important in case of ICO. Who holds the greatest part of the token? Are they locked, or can they be suddenly dumped by team members and investors? For example, a great part of XRP token are in the hands of the enterprise, and will be realeased with time: this is a great problem for XRP price.
In this sense, evaluate also if there are temporaneous factor that are blocking the offer artificially raising the price. For example, it can happen that a coin has a great part of its supply locked on an Exchange that doesn’t allow to sell: once selling becames possible, the price experiences a sudden drop.
Of course, this problem is more relevant if a certain cryptocurrency has a small market and can’t absorb a lot of supply. In this case, a few sellers are sufficient to crash the market.
6) Think to the blockchain!
many cryptocurrencies are based on their own blockchains. What is the validation mechanism for transactions? It is reliable mechanism or very experimental? Even more important, remember that depending on how miners are rewarded there may be a certain inflation rate to consider when you invest.
This problem is absent in the case of tokens, that run on the blockchain of other cryptocurrencies: in this case validation is performed on the blockchain of the “mother-cryptocurrency”. Usually the token has no inflation. Another pro of the token is that the mother cryptocurrency is usually a large cryptocurrency (e.g. Ethereum). Therefore its blockchain is more secure, and you can use the mother cryptocurrency wallets for the token. Of course, however, a token could be slightly less flexible and the blockchain of the cryptocurrency on which it runs could be clogged by other tokens, creating many problems for use. A situation that often occurred for ethereum, on which hundreds of applications have been built. Also, considera that invest in a token means that you are also betting on the efficiency of the “mother blockchain”.
7) When to invest in cryptocurrency?
More important, remember: pay real attention if you’re thinking to buy a coin that experienced a strong uptrend. Many cryptocurrencies can surge even by 300% in a few days, creating a lot of hype. Then, price dumps and those who bought high suffer huge losses. This point can be expanded as follows: 7 bis) Pay attention to your psychology! Our mind can be very tricky when it comes to investing. We have written an extra guide to provide you more informations about this incredibly important point
Applying these 7 rules, you can avoid many obvious mistakes: for first, check the project; then, if you want, look at price graph. Don’t invest because price goes up and you fear of missing out the profit (FOMO): remember to carefully evaluate every investment!