- Things to look at:
- The Value Proposition
- The Technology
- The Developers
- The Community
- Who are the Competitors?
- Is it Legitimate?
There are over 1,000 cryptocurrencies that you can choose from when building a crypto asset portfolio. To help you with your investment decisions, you will learn how to evaluate a cryptocurrency in this guide.
The Value Proposition
Perhaps most importantly, when it comes to investing in a cryptocurrency is the value proposition that the coin has to offer.
Bitcoin (BTC), for example, allows anyone in the world with an Internet connection to “be their own bank” by providing a digital peer-to-peer payment network that does not require the use of any intermediaries to store, send and receive financial payments. Furthermore, bitcoin provides a censorship-resistant store of wealth due to its decentralized nature and has digital scarcity due to its limited supply, turning it into a value gold-like digital asset.
The anonymous cryptocurrency monero (XMR), for example, provides the same censorship-resistant store of wealth and seamless cross-border payment features as bitcoin but has the added feature of allowing users to make anonymous financial transactions. Hence, the key value proposition of monero is financial privacy and transaction anonymity.
Newly issued ICO (Initial Coin Offering) tokens will often have a particular utility within a blockchain network such as being used as a transactional currency or as a reward token for performing specific tasks or contributing to the network.
Therefore, if you are looking at a cryptocurrency or a digital token you are considering investing it, you need to ask yourself: “What is the value proposition or the utility of this coin?” and “Could this also be achieved using an existing coin?”
If a coin is simply a clone of bitcoin with a small spin on it, which has been obviously only been created for its developers to make money, then you need to stay away as these coins end up becoming worthless sooner than later.
If you discover a coin with a high potential for real-world use, then you could have stumbled across a winner that could potentially generate a high return on investment for you as a holders.
The technology of a cryptocurrency is as important as its value proposition as without sound cryptography a blockchain-based digital currency cannot function.
If a coin has exceptionally advanced cryptography that has been thoroughly trialed and tested, such as Zcash for example, that would be a good sign for the future of the digital currency.
Alternatively, if the coin is simply a clone of bitcoin, the technology might be sound but then there might be the question of the coin’s value proposition.
If you are finding that there have been several severe technical issues surrounding a digital currency when conducting your research, that could be a sign that the developer team is not up to the challenge and you should probably avoid this particular cryptocurrency.
Another important factor for the success of a cryptocurrency is the developer team working on it. If a cryptocurrency has a team of experienced developers with a track record of executing blockchain projects that is an excellent sign for the future of a cryptocurrency.
However, if the development team is inexperienced, completely unknown or there is infighting among the team members, this can easily lead to the failure of a cryptocurrency project, which would be reflected in the coin’s market value.
Hence, it is best to look for cryptocurrencies with a reputable developer team behind it.
A cryptocurrency will find it difficult to thrive without a community. A coin’s community members will act as cheerleaders for the cryptocurrency, promoting it on social media and pushing for merchant adoption - in the case of spending currencies - as well as other real-world implementations of the coin.
Without a strong community, it is hard for a digital currency to succeed. Bitcoin and Ethereum have the two largest communities, which makes it unsurprising that these two digital currencies are the two biggest by market capitalization.
Who are the Competitors?
When looking at a coin you are thinking of investing in, it is also important to look at its peers. What other coins are there that have similar functionalities?
For example, there are several digital currencies now that are targeting the esports sector. FirstBlood (1ST), Unikoin Gold (UKG), and HeroCoin (PLAY) would be examples. When looking at which esports-focused coin to invest in, you should look how each coin compares against its competitors to find out which one or which ones are most likely to succeed and become the go-to crypto for esports.
The same principles would also apply when looking at privacy-focused digital currencies such as Dash (DASH), monero (XMR), Zcash (ZEC), and PIVX (PIVX), for example. When analyzing which of these to invest in you should also compare them against each other.
Which one offers the most privacy? Which one has the best tech? Which one has the most community-backing? These are all questions you need to ask yourself when doing a competitor analysis for the coin you want to invest in.
Is it Legitimate?
Finally, you also need to ask yourself whether this coin is actually legitimate or whether it is an outright scam or simply part of a pump and dump scheme. The likes of OneCoin and The Billion Coin have shown us that there are fictitious “cryptocurrencies” that are being sold to unknowing “investors” that are completely worthless while several smaller cryptocurrencies have been created purely for pump and dump schemes to help a select few to get rich while those who invest after the pump are often left with heavy losses.
If you are planning to invest in a wide range of cryptocurrencies, especially lesser known coins with smaller market capitalizations, then it is important that you conduct thorough research on those digital currencies before you place that buy order on the exchange. While the crypto asset market as a whole has been rallying, there have been some clear winner and losers. Hence, “do you own research” (DYOR) is very good advice for any crypto investor.