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Crypto is a highly volatile and speculative asset. As a result, for years, it was not accepted in the financial world. But now, more and more investors are recognizing its use and value.
Overall, crypto investing and acceptance looks like it is here to stay. It continues to gain popularity as an alternative investment.
There are over 5,000 cryptocurrencies and counting. The honest truth is not all of them will last. Some of them are complete scams which adds to the already high risk of investing in crypto.
New alternative coins with a lot of hype might end up going to zero. That is why it’s crucial to sufficiently research any prospective crypto before investing.
How Do You Know if a Crypto Token Is Worth Investing In?
Cryptocurrency is not like stocks or any other asset. Therefore, doing your due diligence or performing fundamental analysis on a crypto token is quite different.
Currently, there is not a standard method or process to identify an undervalued coin. However, with these 5 ways of analyzing cryptocurrency, you’ll avoid scams and find better investment opportunities.
1. Read the Whitepaper
A whitepaper is crafted by the founders of a crypto token. In essence, it’s the informational and technical backbone of the coin. The whitepaper explains the use cases of the crypto, technology, goals, legitimacy, and more.
The Bitcoin whitepaper was written by Satoshi Nakamoto in 2008 and set the stage for other crypto developers.
Reading the whitepaper is one of the most critical steps in analyzing a cryptocurrency. It can tell you a lot about the project and make it easier to identify scams.
When reading a whitepaper, take into account that the developers are stating a biased case why you should own their token.
It is almost like a sales pitch, so reading the whitepaper alone might convince you it’s a good investment. However, you should do more research before investing.
2. Evaluate the Team and Management
You’ll need to look into the team and management behind the crypto. Are they reputable? Do they have the right qualifications, track record, and vision?
You want to make sure the team is devoted and knows what they’re doing.
The worst case is they’re just trying to get rich instead of creating a viable cryptocurrency that solves a problem.
The best case is they’re intelligent and highly passionate about making a life-changing coin for the financial world.
Take off your rose-colored glasses and really scrutinize the top management/developers. If they’re on to something great, they’ll usually have big investors or institutions behind them.
3. Look into Current and Future Projects
What projects are they working on, have completed, and plan to work on in the future?
Cryptocurrency is ever-changing in the (De-Fi) decentralized finance realm. So, you want to make sure their projects are creating value and have a lot of support.
When a coin is new, there is usually a lot of ambitious goals. First, ask yourself if the projects are feasible and realistic. Then, you should check out their social media and see if they’re providing consistent updates.
The teams’ ventures should be able to increase the worth down the road. You are essentially funding these projects by buying the coin.
4. Study the Financial Metrics
The financial measurements of a cryptocurrency may have some similarities to stocks or other assets. However, evaluating most of them is different in a lot of ways.
Instead of comparing to a stock market index, it’s common to compare an altcoin to Bitcoin because it is the leading crypto. When Bitcoin rises or falls it usually takes the entire market with it.
Here are the most important financial metrics to analyze before investing in a cryptocurrency.
The market cap of a crypto token represents the total theoretical value. Think of it as the cost to buy every single circulating coin.
But the market cap can be deceptive. For example, someone can create a token at $5 with a million coins giving it a $25 million market capitalization.
Now is the crypto actually worth $25 million? Not necessarily because it can be a useless token.
Regardless, small-cap tokens are viewed to have more growth potential vs. established large caps. Large-cap tokens are relatively more stable and recognized.
The maximum supply of a crypto is the total amount of coins that will be created. Once the entire pool is produced, no more coins will be mined or generated.
Not all coins have a maximum supply. Some can be mined endlessly. Whether a coin has a supply cap or not depends on the use case of the crypto.
Bitcoin has a maximum supply and is viewed more like digital gold. Therefore, theoretically, the less bitcoin in circulation, the more valuable it is.
Ethereum doesn’t have a max supply because it’s more of a utility token, and the value lies in its use case.
Events like coin burns, forgotten wallets, and more can reduce the total supply.
Volume and Liquidity
Volume is an extremely vital part of determining supply and demand. Low-volume tokens have less liquidity. Liquidity measures the difficulty of buying and selling an asset.
Without sufficient liquidity, it can be problematic to find buyers and sellers, which makes it hard to enter or exit a position.
Higher levels of volume can indicate more demand and popularity, which is a good sign of market interest.
5. Study the Technicals
Performing technical analysis of a cryptocurrency can help you find a good entry and possible price target.
Technical analysis is commonly used by short-term traders but should not be ignored by long-term investors either.
The chart can tell you a lot about a crypto. Parabolic moves straight up are typical and usually a bad place to buy. But, without looking at the technicals, you can unknowingly buy at a short-term or long-term peak.
Start by determining levels of support and resistance. This will allow you to get in a lower price and exit at a higher one.
Cryptocurrency is still very new. The stock market has been around for hundreds of years, and people are still hesitant about investing.
So, the amount of people adopting cryptocurrency is low in comparison, but it’s growing. There are several crypto brokerages available that make it easy to get started.
Beginners tend to panic buy and panic sell because of the huge moves in crypto markets. Take your time and do as much research as possible before purchasing any cryptocurrency.
If you’ve done your homework, you will remove most of the emotion and have more conviction when investing.