With the growth of the cryptocurrency market, more and more people are making a lot of money and seeing astronomical valuations in their investments. But there are thousands of different virtual currencies, how do you know which one you should buy?
That is the question that we will try to answer in this article. Obviously, there is no magic formula, what exists are sensible procedures that, when properly followed, can result in great results. Note: if you want to follow news related to cryptocurrencies.
We will list below some aspects that you should analyze in a cryptocurrency to measure its potential:
1) Understand the project proposal
Cryptocurrencies represent a new technology, so each currency can be seen as a project. In other words, what problem is this project proposing to solve? We already know that Bitcoin aims to solve the problem of financial transactions, allowing each user to be his own bank, without depending on intermediaries, is a huge innovation.
The world does not need another Bitcoin, after all it already has one. Many cryptocurrencies are nothing but a copy of Bitcoin by another name. Does this add value? Is there any possibility of Bitcoin being replaced by this new currency? Probably not, after all it does not make sense to exchange a known and successful project, with thousands of full nodes around the world generating robustness for the network, for another identical currency that does not have all this infrastructure.
Therefore, it is essential to understand exactly what is the differentiator of the cryptocurrency that you are analyzing, if there are advantages, innovative concepts, and not only that, but if these concepts make sense and have the potential to be used massively in the future.
To find out about the project’s proposal, visit the coin’s website, watch the instructional videos, take a look (even if it’s superficial) in the coin’s white paper. If you don’t know English, use Google Translate. If you are having a hard time understanding the currency proposal, it is probably because the currency is not good, after all, you did not know how to clearly show your potential investors what your proposal is and what makes it different.
At the end of this article you will see some coins that we have analyzed, observe the analysis that we have made and take the opportunity to learn about these projects.
Also try to find out if there are competitors, that is, other cryptocurrencies that propose to do something similar. A good way to do this is to put on Google or Youtube: “Litecoin vs”, so there would probably be videos comparing the Litecoin currency (in this example) with a similar one. Detail: the fact that there are videos in this direction does not necessarily mean that the currency has competitors, it will only help you to research and analyze whether the currency is indeed innovative, unique, or not.
2) Find out who is the team that is developing the cryptocurrency
Look on the website for the currency team, that is, who are the people behind the project. Generally, cryptocurrencies show not only people’s names, but also their profiles, academic titles, experiences, etc. This is very important!
A Good project needs a good team. It is useless for a project to appear to have an innovative, ultra-complex idea, if the development team does not seem to be qualified for such development. In fact, there are many frauds in this market, so be wary of very utopian promises, see if the team seems capable of delivering what it promises.
Likewise, even if a currency does not seem to offer such revolutionary characteristics, if it has a strong team, consider it, as there may be something very important that great minds are working on and that deserves to be accompanied.
But how do you know if the team is strong? Unfortunately we have no way of measuring people’s Intelligence or Skills, so the best metric we can use is to check academic backgrounds (doctors, PHDs, or professionals with a strong academic background are an excellent sign, because in a branch of technological innovations like this, researchers are essential, giving credibility to the project), experiences in the field of programming, cryptography or computing in general are also relevant (how long this professional has worked in the field, in which companies he has worked, what positions he held, etc.).
Generally, currencies also have Advisors, who are project advisers. Important people as advisers are a good sign, but really try to find out what the involvement of these advisors is, if they are really involved in the project or if they are just watching from a distance. Don’t forget that a counselor is different from a team.
3) See if the cryptocurrency has partnerships with companies or universities
It is not an essential prerequisite to say that the project is good, but if the project has partnerships with universities or large companies, this is a great sign! Cryptocurrencies need strong research and development teams (partnerships with universities collaborate a lot in this regard) and the public to use the technology (which can be facilitated through partnerships with companies).
Therefore, any partnership in this sense is a very positive point to be considered.
4) Discover details about the community
Every currency has a community. See how many people are involved in the project on GitHub, if there are channels for interaction with the public, forums, etc. This factor is usually as important as the quality of the team, and can be decisive depending on the project. For example, if you are not sure about the quality of the team, but there is a large community involved in the project, it is a great sign. Bitcoin, for example, is a project created by a large community.
Another detail is trying to capture the community’s feeling about the project, whether it is optimistic or whether people are apprehensive. As the community is usually well updated and keeps a close eye on the news, its perception is very useful about the current status and future projections.
5) Consider the currency market cap
Market cap is the financial volume associated with the currency. On the Coinmarketcap website you can discover this easily, including comparing it with other cryptocurrencies.
Large market caps mean that the currency is quite popular, having many investors. This is a positive sign on the one hand, after all it shows that more people are believing in the project. On the other hand, it is a negative sign, as it may represent that the currency has little room to grow and appreciate more.
As we are at an early stage of the cryptocurrency market, a high market cap today does not mean that the currency is already at its peak, after all the entire market for virtual currencies can still grow a lot, in which case, the best projects will appreciate even more . So the fact that it has a high market cap does not mean that there is no potential. Bitcoin, for example, is the cryptocurrency with the largest market cap, and even so it shows very high growth at times. Take this into account.
However, it is evident that currencies with low market cap have more potential for return, after all reaching a market value of 1 billion dollars in market cap is not so difficult for a project with great potential. So if a currency is promising and has a market cap of 100 million dollars, if it reaches 1 billion this will represent a 10x increase in your investment.
Therefore, the investment of dreams is one in which you find good signs in all the 4 points we have shown above, but the currency still has a low market cap. Obviously, these cases are rare and represent the greatest potential.
Do not be fooled by investing in coins just because they are “cheap”. Always remember that the market is not silly, if a currency is cheap it must be because it has little value and you can lose all your capital. Invest in fundamentals first, then consider the potential. Even because potential is relative, it is possible that a currency that is in 3rd place overall in market cap (that is, apparently it is already highly valued) will grow even more and surpass Bitcoin itself. Who will define this are the fundamentals. So always put that first.
What not to do in the analysis
As this market is new, there is a lot of confusion about basic concepts. One is to consider whether a good one is cheap or expensive by looking at its price and comparing it with Bitcoin. This does not make any sense, as each currency has a different supply (total issue)! For example, Bitcoin has a maximum total of 21 million coins in circulation. Cardano, on the other hand, owns 45 billion. This means that if we take the same financial volume (market cap) and divide it by the total number of currencies, we will have very different prices. But that also does not mean that one project will value more than another because of the supply.
This is another very common mistake: thinking that the maximum amount of coins in circulation (maximum supply) is relevant. As long as it is not less than a few million or greater than trillion, this will not have a positive or negative impact on the project (outside these limits it can be bad as a unit of account in day-to-day use). What actually causes the price to rise or fall is the change in financial volume. Think about it, the price going up from $ 5.00 to $ 10.00 or from $ 20,000.00 to $ 40,000.00 is the same thing (both appreciated 100% for the investor). In this scenario, it means that the financial volume of the project has doubled. If the financial volume was $ 100 million and became $ 200 million, it doesn’t matter if the account is dividing those amounts by one supply or another, what matters is how much it varied. This video explains the concept very well for those who have doubts.
Note: this website is not intended to serve as a financial advisor, we only express and share our personal opinions. Always study and invest only in what you understand. Invest in knowledge first. And be very careful, reject plans and promises of financial returns, because the market is unfortunately full of bad people trying to take advantage of the less educated.