Cryptocurrencies have continued to gain traction. Almost everyone you come across, knows a thing or two about them.
But with the increased popularity of cryptocurrencies, comes a major pitfall: few know what investing in cryptocurrencies entails. This has led to numerous loses as a result of scams, especially the very common “rug pulls”.
It’s no surprise, that the rise in the knowledge of cryptocurrencies in 2021, correlated with the high scam rates, according to a report by chainalysis. 7000 people lost over $80 million to crypto scams, according to FTC.
The so-called “crypto gurus” make matters worse.
Their flashy cars, screenshots of massive gains, expensive holidays and the likes, scream investing in cryptocurrencies is easy money. Everyone – especially millennials – seek to emulate their success, but few take the time to do their own research. And crypto investing, just like other investments, needs due diligence and in-depth research, into specific metrics.
But what are the metrics to look out for, before deciding to invest in a digital asset?
Well, I’ve covered them in this article. As a bonus, you’ll also get ways to get the information you’ll need, to research each point.
But before that, we need to get this out of the way…
Is crypto a good investment?
This question is quite common. Even legislators and financial bigwigs, are still baffled at the answer to this question.
I mean, getting billions by simply holding something which cannot be felt or seen, seems impossible, right?
Cryptos are good investment vehicles.
However, there’s a caveat: they are fraught with danger. It’s possible to make massive gains and also possible to lose everything in a second.
But with sufficient knowledge and due diligence, making massive gains from cryptocurrencies is a possibility. The returns on investment, is higher when compared to traditional financial instruments like stocks, bond, and the likes.
Let’s get a rundown of reasons to invest in cryptocurrencies.
Digital currencies are the future: the potentials that inundate cryptocurrencies – and their underlying technology – makes them perfect for the future.
Reliable store of value: fiat currencies tend to decrease in value overtime, owing to inflation, government policies, and the likes. On the other hand, cryptocurrencies have a fixed supply determined by an algorithm solely. They are safe from the effects of hyperinflation, disasters, and wars.
Safety of investment: there’s a mantra in crypto investing: Not your keys, Not your coins. As long as no one possesses your cryptographic private keys, they can never access your cryptocurrencies. Contrasting with this, fiat currencies can be stolen, lost, etc.
Cryptocurrency investing versus trading
Although they appear similar, cryptocurrency investing and trading are different. It’s important to know the difference between the two, and align to the one that fits into your objectives.
Period for investment:
Typically, traders are buy and hold for the short term, and sell whenever the market aligns with their prediction. They time their entrance into the market, and seek to profit off the high-stake volatile movements, typical of crypto markets.
On the other hand, investors buy and hold for the long haul, which could be years.
Investors, or HODLers (as they’re often called in crypto circles), don’t bother about short-term-whipsawed movements. They’re in for the long haul.
Trading frequency: As expected, crypto investors rarely trade since they’re holding for the long term, with an expectation of a rise in the value of the coin. On the other hand, crypto traders trade frequently, and are constantly monitoring market movements, to profit from its volatility.
Risk appetite: crypto trading is highly lucrative. But it comes with a red pill: it’s highly risky.
You could make millions in seconds, and also lose everything in one swoop. Hence, traders are risk-takers and have a large risk appetite than investors.
Although investing is less lucrative, it comes with fewer risks.
Source for trade analysis: there are two methods of crypto analysis: fundamental analysis and technical analysis. For fundamental analysis, a coin’s value is evaluated based on its intrinsic value of the coin, and its potential to rise in the future.
On the other hand, technical analysis relies on charting tools, price indicators, and historical price movements, to predict the future price of an asset.
Since they rely on the long term value of a coin, investors depend on fundamental analysis. They rely on metrics – which I’ll discuss later – to predict the value of a coin in the future.
In contrast, traders rely on technical analysis. They pay close attention to price movements, which are enhanced with charting tools, trading indicators, and the likes. An experienced trader, develops a strategy overtime.
How to choose a cryptocurrency to invest in
It’s time to devour the elephant in the room: how can you choose – correctly – the coin to invest in?
Mind you, picking correctly does not necessarily equate to accurately predicting that a coin would moon in the future, to a T. It simply means making an educated guess, after you’ve diligently researched on the various metrics I’m about to discuss.
The repercussions for a false prediction, are severe. But the rewards, for predicting rightly, could be a breakthrough. And that’s where fundamental analysis comes in.
So, which metrics should you use to make your decision?
Community following
A strong community following, is a vital indicator of a cryptocurrency with promise.
Why? It means that there are many people out there, who strongly believe in the project.
Not only that: it could translate to more HODLers of the coin, which contributes its value. The network effect, tells us that when many people are invested in a coin, the value equally increases.
Such communities are also great places to clarify technical details of the coins. People constantly ask questions which are always answered by others users, or founders of the project.
You can find these communities on subreddits, YouTube channels, Twitter, and in a few cases, Telegram.
Important note, however: community following isn’t a be-all-and-end-all metric for cryptocurrency valuation.
For all you know, some active community members are either paid to drum up the popularity or they could have a stake in the coin. In the latter, they have a lot to gain if the coin grows in value.
Utility
The value of cryptocurrencies, obey the fundamental laws of demand and supply: when the demand exceed supply, the value skyrockets.
And crypto-enthusiasts, naturally flow towards any cryptocurrency with a real-world application, especially if it’s of the disruptive kind.
Any developer can write out a few lines of code which could translate to a cryptocurrency. But when there’s no utility, such cryptocurrency would tank in the long run.
I mean, we see examples of such scenarios every day. A great example, is the squid coin.
It was simply developed to ride on the popularity of the squid game, and gained traction in the middle of last year. However, the developers pulled a fast one on investors: they suddenly disappeared. And investors monies disappeared with them too.
A great way to know the use cases of a cryptocurrency, is to carefully inspect its white paper. Social media posts provide insights too.
But, mind you, the utility alone, is not enough.
What if it’s solving a problem, but helping few people? Well, that cues in my next point.
Strong market for the solution it offers
The utility, it offers, must have a market.
Coins with the greatest value, offer market-disruptive solutions, to problems faced by a large population. A good illustration of this, is Ethereum.
Before the advent of Ethereum, there were no cryptocurrency projects incorporating smart contracts. This is the major factor behind its huge potential and current value.
The managing team
Every cryptocurrency project, lists their management team on their websites. And just as every business’s success is dependent on the workers, so also is the success of a coin dependent on the team.
After you’ve collated the names of the team members, do a background check on them. Surf through Google, community forums and the likes. Pay close attention to their track record, previous work history, and integrity.
Another way to get the details you’re looking for, is to search for the token on Coinmarketcap. For instance, here is a link to the management team for Ethereum.
Aside from the managing team, early backers or advisors play a huge role too.
Historical price data
Previous price levels, give an insight into the long-term valuation of a cryptocurrencies.
A coin that’s fared poorly in the past, is less likely to increase in value in the future than a coin that has been increasing progressively in the past.
To get a clearer picture, charting software programs, such as trading view, can be used.
But you should be careful: a coin that performs poorly in the past, can change drastically and perform better in the future. This could be due to a change in its token economics, better management, and so on.
Hence, it’s better to not look at historical price data independently, but look at the events fuelling the rise in value, and pay close attention to current news around the coin.
Vision and the plan for it’s execution
Since you’ll be holding the coin for a while, the plan the management team has for the future is critical.
Their white paper, community forums, and webinar sessions gives you an idea of the vision they have for the project.
But that’s not all:
Grand visions, in themselves, are not enough. There must be a plan for executing said vision.
The plan should include when they’ll be launching, plans for upgrades, when the coin would hit its maximum supply (if it has one), and the likes.
A grand vision, paired with a well-laid-out plan for execution, sings huge gains for the future.
Market competition
A coin, that’s offering a solution in an already saturated market, may have trouble beating off the competition.
But those with solutions that are yet to be explored, have a larger potential to increase in value in the future.
In closing:
Investing in cryptocurrencies, if done right, can bring in massive gains in the future.
But as the crypto mantra says, DYOR (Do Your Own Research). Parse each coin you wish to invest in, through the metrics mentioned above, and put your money, only if it passes each one.
The goal is to only invest, only after you’ve developed a waterproof thesis as to why it would increase in value overtime.