When considering a cryptocurrency investment, many newbies plunge in with little or no knowledge of what they are investing in. This is a major error made by newcomers to cryptocurrency who are mostly driven by hype and price action – a terrible way to invest!
In this article, we discuss six things that an investor should be mindful of when investing in a particular or pool of cryptocurrencies.
Use case of the cryptocurrency project
Cryptocurrency projects are like any other business or start-up company. Good businesses solve big problems and fulfil needs. Investors are advised to read the white papers, which is like a prospectus that gives fundamental details of the project, before investing. This process can be boring but as an investor, it is your responsibility to understand every detail about the asset you may be investing in completely. Is the project solving a problem? Is it a security token? is it a utility token? All these questions are answered when investors read the white papers.
Know the team behind the cryptocurrency project
The success of a cryptocurrency project largely depends on the founders behind the project. When picking a cryptocurrency to invest in, it’s important to evaluate the team behind the project, their mission, their plan to accomplish that mission and their overall enthusiasm. You also have to look at the past accomplishments of the founders as a check of their credibility. Focus on prospects with real value and stay away from questionable projects with shady founders.
Coin total and circulating supply
The total supply of a coin represents the maximum number of coins that can be mined or can enter the market while the circulating supply represents the current number of coins in the market that is tradable. Since most coins are mined or a percentage of them are held by the founders, there is usually a difference between the two figures. These figures become important when evaluating the value of a crypto project. Because of the basic principle of demand and supply, the supply of coins has a large influence on the price of the coin. This analysis comes in handy when projecting the price of the coin. The total supply of Bitcoin is 21 million coins. This is one of the factors that drive its value up. Lower supply means higher demand and thus translates to an increase in price.
Cryptocurrencies by nature are highly volatile. This is due to speculation, hype, pump and dump schemes and a lack of regulatory oversight. Looking at a cryptocurrency’s price history can tell you where the coin might be heading to. Generally, cheaper coins with lower market capitalization are more susceptible to pump and dump activities. A coin’s price may also correlate to other coin prices, stock market moves or world events. For example, when Bitcoin’s price increases rapidly, most altcoins tend to follow bitcoin. This is because of the market dominance held by bitcoin which more or less means that Bitcoin generally determines the direction of the market.
Exchanges the coin is being traded on
Another important factor to consider is the number of exchanges the coin is currently being traded on. Is the coin available on major exchanges or only the smaller exchanges? Announcements about coins being added to major exchange platforms like Binance or Coinbase can affect the price significantly. It also gives the coin more credibility when it is being traded on a major platform like Coinbase.
Strong projects have high developer activity. If the activity is low or down trending, that is cause for concern. These activities which include the number of updates it has received, how many watchers there are, how many forks have been created and the total stars are all great metrics to gauge the project’s activity. Also with every start-up, there can be issues with services being offered. A good project will regularly strive to crop all problems associated with the program. The questions an investor should ask is if issues are being identified and if bugs are being fixed.
Before choosing a cryptocurrency asset to invest in, be sure that you understand the points discussed in this article to avoid pitfalls that can lead to the loss of your funds.