How to evaluate a good crypto investment
An investment in knowledge pays the best interest. Especially in crypto.
Knowing how to spot a good cryptocurrency project when it appears is the key to being a successful investor in this new & rapidly evolving space. But with thousands of cryptocurrencies to choose from, it can be hard to separate the gems from the duds.
This guide will give you a simple but comprehensive way to evaluate what a good crypto investment looks like.
Key Takeaways
- ALWAYS do your own research (DYOR) & understand what you’re investing in.
- Consider a variety of factors beyond just price & market cap to get a holistic picture.
- Don’t believe everything you read. Many projects talk a big game & there is no shortage of hype in this industry.
Here are the most important things to consider when analysing a potential crypto investment.
The Utility & Use-case
The first order of business. Ask yourself: What is the purpose of this cryptocurrency? Does it solve a real problem or greatly improve on an existing technology? If the answer isn’t a resounding ‘YES’, don’t even bother.
A project’s likelihood of success is directly related to whether or not its technology/use-case is something that people actually want or need. Be sure to look into the ‘tokenomics’, which is essentially the economy based around the token. The token should be useful enough within the ecosystem to create sufficient demand in the long term.
Let’s take Bitcoin for example. Bitcoin emerged as the first digital currency that did not require a bank. It gave people the ability to store and send money completely autonomously, without having to go through a financial institution. This spoke directly to people’s desire to have less dependence on financial institutions. There was a real demand which Bitcoin addressed, which is why despite short term volatility, Bitcoin’s price has been climbing year after year.
The Community
No community, no future. If a cryptocurrency is legit, then it will likely have a group of people it serves and thus a solid community around it. The community (miners, developers, supporters and potential users) add value to a coin by adopting its use-case and increasing its overall legitimacy and popularity.
The size and enthusiasm of the following behind a project is a huge part of a cryptocurrency’s success. This usually indicates how well the ideas and the functions behind the cryptocurrency are being accepted and how far it can spread.
Look out for cryptocurrencies with strong, active communities as it is a good sign that there is genuine interest and belief in the cryptocurrency. Reddit is a great place to start researching the community and discussion around the coin, but fan bases on Twitter, Facebook, or Telegram are also helpful. A solid group of diehard supporters (who know what they’re talking about) is a very promising sign.
If you want to learn more about how to do your own research in crypto, click here.
The Team (developers, advisors, partners)
The credibility and the experience of the team behind a project is crucial. Given the lack of financial data and history of many projects, assessing the core leadership team, the developers and the partners, investors and advisors will play a big role in your decision to invest.
The larger, more serious cryptocurrencies will undoubtedly have some well-known names on their team, but beware: Fake cryptocurrencies often list celebrities and other prominent individuals in the crypto space as members of their team, when they really have nothing to do with it. Do a bit of digging and be sceptical about grand claims.
Not all crypto projects start on a level playing field. If your local barista were to launch a cryptocurrency tomorrow, and Google also launched one on the same day, there’s a good chance Google’s would gain more attention and be more… robust. Look for a project whose team is reputable and has had past successes and a real track record in the industry before investing.
Market Cap
Market cap (market capitalisation) is a very useful indicator of the stability and growth potential of a cryptocurrency. It is calculated by multiplying the current price of a coin with the total number of coins in circulation. In general, the higher the market cap (in comparison to other coins), the safer the investment.
Whether you’re a pro or are still just finding your feet, market cap is one of the best indicators for evaluating a cryptocurrency at a glance. Evaluating a coin based on market cap rather than the price of the coin is a good tip for beginners, as it paints a more detailed picture of what a cryptocurrency is actually worth (price alone is actually a pretty useless metric).
Ideally, your investment portfolio would contain a variety of coins with different market caps (large-cap, mid-cap, small-cap), with the majority of your assets being dedicated to more stable, large-cap investments (particularly Bitcoin & Ethereum). This is also known as diversifying your portfolio, which can help minimise your overall risk and give you the best of both worlds – stability and high potential for short term growth.
Check out our other articles for a full breakdown on crypto market cap and portfolio diversification.
The Website & White Paper
Visiting a project’s official website is a must. Not only should the website be well put together and functional, but it should openly share information about the people behind the project. Poor websites, spelling errors and a lack of transparency around the team are all red flags of a shoddy investment or just an outright pump & dump scheme.
Additionally, a coin’s ‘white paper’ will give a comprehensive explanation of the project. While white papers can be quite technical for the average investor (which they should be if they are legit), their main purpose is to highlight the coin’s utility, future prospects and underlying technology, which all good projects will do so thoroughly.
The Competition
If there is another similar project that is better or more established, there is little room for your prospective cryptocurrency to succeed. While several projects can all have success, even if they all provide similar functions, there is usually going to be a handful of industry leaders for any given utility, solution or sector in the ecosystem. For example, Aave leads the way in DeFi/borrowing & lending services, while Filecoin is the top dog in the cloud storage sector.
While there are many projects with good technology, being the first-to-market is a big advantage, and you should consider a crypto’s team, track record and history as many talk a big game with no actual product. When investing in a project, assess the utility it brings to the ecosystem and see if there is truly a need for it and if it has what it takes to usurp its competitors.
Note: While picking the crypto projects most likely to be leaders in their specific industry is a good strategy for long-term gains, many projects competing for a place in the market will see some serious pumpage during a bull run and there are profits to be made outside just the most well-established projects in each sector.
The Road Map & Vision
Unless you’re a swing/day trader, you want to make sure a coin will be around for the foreseeable future. A good project will have a strong vision and a well-defined road map. Without a clear vision, mission and a plan for the future, the project may not be able to compete with other similar projects. While short-term gains can be attractive, the best investments will be around for a long time and will continue to grow your portfolio as they develop and grow.
When assessing a coin’s road map, things to look out for include:
- Clear timelines for the development of the coin. If there’s no clear timeline, this could show a lack of commitment from the development team.
- When are they planning to release major updates? Are there any scheduled announcements on the horizon?
- What is total amount of coins that will ever be produced? How many are currently in circulation? What will that mean for the price of a single coin?
Trading Volume & Liquidity
These numerical factors are only things you’d look at after all the previous items on the list check out. They are undoubtedly important but if you’re investing in one of the more well-known and established cryptos you don’t need to go deep into them.
- Liquidity is a measure of how easily an asset can be bought or sold. This is important to be able to buy/cash out at a good price when you want to.
- Trading volume can help you determine how much a crypto is being traded and the liquidity of the market (the more volume the better). Visit Coin Market Cap or Coin Gecko for this info.
- While market cap is a good way to measure the popularity of a coin over the long term, if you are looking to analyse a coin in the short term, trading volume is the metric to use.
- By checking the total 24-hour trading volume that a cryptocurrency has, you will get an idea if there is something substantial behind a recent dip or pump.
For example, a price drop with considerable 24hr volume behind it might mean a coin is in for an extended period of being in the dumps. If significant price movements are not backed by much volume, this would indicate that only a handful of people are backing the current price trend, and therefore it may be short-lived. Big spikes in prices when trading volume is low can be an indicator of price manipulation by people with a lot of capital.
Trading volume is also helpful when a coin has a decent market capitalisation but a low trading volume. This low trading volume may indicate a dead project, no real-world use-case, a lack of liquidity or a lack of active supporters.
Circulating Supply vs Total Supply
Another numerical factor to consider is the circulating supply vs the total supply.
For instance, while Ripple’s circulating supply might be say, 40 million, its total supply is 100 billion, meaning there’s A LOT of Ripple still to be released. Unlike Bitcoin, of which there is a fairly small number of coins (21 million in total),
Ripple’s higher supply means that the price of a single coin could be lessened in value over time if the supply increases and the demand remains the same. This is because the total market cap of Ripple will be distributed to the billions of additional coins that will be released in the future, stopping the price of one coin (a single Ripple) from getting anywhere near the dizzy heights of a single Bitcoin.
This is also a good chance to look into how the coins/tokens have been distributed. If the majority of the supply is concentrated in the hands of few people, you should approach with caution as the project could suddenly crash if those people decide to sell all at once.
Final Words
If you’ve assessed all the points listed in this article, and the project ticks all the boxes, you may well have a very lucrative investment on your hands. Extra points if you are early to the party!
Don’t be afraid to see what popular crypto Youtubers, Twitter accounts and reputable people are saying about a particular project. Ask questions in community forums and discuss with friends, other investors & anyone else who will talk to you. Having some people to speak to who know their stuff is invaluable, and the more opinions you get about an up-and-coming project the better.
If you want to learn more about how to do your own research in crypto, click here.
While every investor wants to discover ‘the next Bitcoin or Ethereum’, getting in super early is not as important as choosing a project that will be around for years to come. It is still very early in the crypto-story and there are still countless cryptocurrencies with incredible potential for growth.
We hope you’ve found this helpful. Good luck!
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