When it comes to investing, investors get caught in the hype about an asset class, often making investment decisions based on pure speculation rather than fundamental analysis.
With an asset class as volatile as cryptocurrencies, experts advise that looking into the price and other key metrics like market cap and trading volume can help you make smarter investment decisions – especially if you plan to hold cryptos for a long time.
It’s possible to get lucky investing in an altcoin based on hype and make a fortune once it blows up in value; it’s a far risky chance to take with your hard-earned money. Below we’ll look at what to research before investing in crypto.
Knowing the Blockchain Crypto Market: Prepping Before the Research
“Don’t invest in what you don’t understand.” – Warren Buffet.
Like every other investment opportunity, social, economic, and even political market forces affect the market behind cryptocurrencies. The most fundamental questions to ask yourself before making a cryptocurrency investment are:
- “Do I know what cryptocurrencies are?”
- “Do I understand the cryptocurrency market?”
- “Why do I want to invest in cryptocurrencies?”
Are you interested simply because cryptocurrencies are trending, or are there more compelling reasons?
If the answers to these questions are not satisfactory, consider investing in alternative vehicles you understand better with lesser risks and greater stability. Setting clear goals as to why you want to explore the crypto space would set you apart from 90% of new investors coming into the digital currencies space.
If you decide to forge ahead with cryptocurrencies, you must understand how the digital currency world works by taking the time to learn about different currencies.
Understanding blockchain technology and the basic terminologies used in cryptocurrency communities is equally important. There are books and digital content that explain these concepts in simple terms for lay people. Grasping cryptocurrencies and blockchain technology will better equip you to determine what specific cryptocurrency or cryptocurrencies are worthwhile investments for you.
Furthermore, join online communities of crypto investors and enthusiasts to help accelerate your knowledge of trends and buzz within the crypto world.
Get into the general crypto community by following crypto content on Twitter, Reddit, and other online forums. Once you’ve chosen the tokens to invest in, try gaining access to online communities specific to them. Usually, you can do this before buying the said cryptos (or after) as most cryptocurrency projects maintain Telegram and/or Discord groups open to the public.
That said, how exactly do you go about researching your chosen cryptocurrency or any crypto investment offering before financial commitment to it?
For clarity, we divided your focal research checklist into Fundamental and Technical checks.
What to Research Before Investing in Crypto: Fundamental Checks
Here you’re asking basic questions about the digital currency and checking market forces around it. The goal is to avoid crypto scams by ensuring the project is legit and familiarising. Here are things to check.
The Cryptocurrency’s Utility
Unless you want to speculate on shitcoin or meme coins, your first step to investing in a cryptocurrency should be to grasp what the crypto does. Not all cryptocurrencies have actual utility. However, only cryptos with utilities should be considered for investments, especially if those utilities serve many people. Here’s what you can do to better understand it:
- Read the whitepaper
- Research on the internet
The Whitepaper
The whitepaper of a cryptocurrency usually explains its use cases and technology. While you may not understand the technical aspect of things, pay attention to the utilities and note down any questions you may have. Have a moderator from the crypto community explain these grey areas to you later.
Get a clear picture of the problems the project plans to solve and the feasibility of its solutions. Whitepapers or the crypto’s website may detail the project’s roadmap for investors. Study this and ascertain how well the project had accomplished set goals in the past (if they are months into the roadmap already).
If you’re evaluating a smart contract cryptocurrency, pay attention to things like the crypto’s speed, scalability, and security. If it’s a decentralized finance (DeFi) project, you might want to assess the amount of credit on the platform and transaction volume.
As a caution, if a cryptocurrency doesn’t have a project white paper, do not invest.
Research on the web
People may have dropped honest reviews about the crypto online. You’d never know until you search. The more you find sites and commentators that speak in favor of the project, the more you would come to trust it.
However, there is a lot of misinformation and sponsored content promoting different cryptocurrencies. Your motive with web research is to get a reliable picture of the authenticity of the cryptocurrency.
Check if the Project is Active
The internet has a wealth of content from many failed, abandoned or scam crypto projects. You may find a cryptocurrency offering online only to find out it no longer exists. Active cryptocurrencies would have the following:
- An active social media with regular postings, especially on Twitter.
- An up-to-date website with perhaps recent blog posts or news. Even if the media content is old or non-existence, check the date of the website at the footer to ensure it’s updated to the current year.
- Active community: Usually, social media activity would give away the presence of community activities. However, you can try sourcing for and joining the crypto’s Telegram, Reddit, or Discord groups to check for real-time community communication.
- Trading volume: Trading volume on crypto exchanges shows that people actively trade the crypto you want to buy. We’ll discuss this in detail later. Crypto with low trading volume does not mean it’s not active, as market volatility can contribute to low trading volume. However, be wary of crypto with zero trading volume over a long period.
- Developer activity: Active crypto projects would have release development updates or post activities on Github about what they are building. It could be a red flag if there hasn’t been recent developer activity.
Check for the Founders
It shouldn’t be difficult to discover the team behind a cryptocurrency if the project is serious. The website could offer links to the team members’ social media profiles (usually on Twitter and LinkedIn) that you can look up. Go beyond just their Twitter profiles to their conversations online, photos, videos, talks, and whatever to check if these are people you can trust with your money.
Other nice things to look out for are the strategic partners or notable investors working with the team. However, some new good crypto projects may not have this at the start. However, you’ll need to tread carefully if the team is anonymous, only shares first names and Twitter profiles, or has bad ratings online.
Understand the Tokenomics
The term “tokenomics” is formed by pairing up words token and economics. Tokenomics refers to the economic characteristics of a crypto token that affects its supply and demand. These include token issuance, attributes, distribution, staking, token burns, trading volume, market cap, and more.
Now you may be wondering what a crypto token is. First, it is NOT a cryptocurrency but a virtual currency or denomination (face value) of a cryptocurrency. A crypto token is a tradable asset based on its blockchain platform that allows the holder to use it for investment purposes. For example, ERC-20 is a popular token of the cryptocurrency, Ether (ETH).
Tokenomics are designed to incentivize the buying and holding a crypto token, influencing the demand and supply of the underlying crypto. Since these factors play a pivotal role in a project’s success, understanding cryptocurrency’s tokenomics is critical when deciding whether or not to buy a crypto asset.
Some questions you should ask regarding the tokenomics of a cryptocurrency are:
- How does the project issue new tokens?
- How will they be distributed?
- How many tokens will be issued in total? Is there a limit? – Cryptos with relatively smaller token supply (perhaps a few hundred million) are generally considered better investments than coins with trillions in token supply or, worse, unlimited. Unlimited supply may dilute the market and devalue your investment.
- How is token supply contracted (usually to strengthen token market value)? – A crypto with good tokenomics would detail supply contraction measures such as token buybacks and burns.
- What proportion of the coins or tokens will be held by the project’s founders? – Be wary of projects where the founders or a small group hold an overly big percentage of the token. If a few whales control most of the coins, they will have an outsized influence on the token price and market performance.
The tokenomics of a particular crypto token is usually detailed in the project’s whitepaper. Studying this section will give insights into how the core team drives the token’s demand and supply. It also helps you make rational predictions of its future performance.
Check What Exchanges it is Listed on
Exchanges are where cryptocurrencies are traded between an organization and buyers (for centralized exchange) or peer-to-peer (for decentralized exchanges). Of the 17,000+ cryptocurrencies available on the market, only a handful are listed on top exchanges.
Even though being listed on an exchange does not guarantee a project would succeed, it indicates a solid project. The more exchanges a cryptocurrency is listed on, the better for investors. Usually, newer investors tend to buy cryptocurrencies through well-known centralized or decentralized exchanges. The most important thing is to ensure you can buy the crypto through your exchange of choice.
Research the Competitors
Some cryptocurrencies are entirely in their own space, which can be a competitive advantage. But it’s always important to see if rival digital currencies are solving the same problems as the coin you chose.
Comparing how your crypto measures to competitors would help you discover competitive advantages or disadvantages and give you a view of how the sector might perform in the long run.
Now, let’s see the technical research you can perform.
What to Research Before Investing in Crypto: Technical Review
Once you’ve done your fundamental vetting of potential crypto investment, it’s time to focus on the technical aspects of the crypto you want to buy. The charts are your friend here, and the goal is to understand price and market performance to determine the optimal price to buy the asset.
Here are key technical indicators and metrics to inform your investment decisions:
Market Capitalization
Market cap is a metric that measures the worth of a cryptocurrency beyond the price. It is usually a better indicator of how much a cryptocurrency is worth because high-priced crypto doesn’t necessarily mean it’s more valued in the market than a lesser-priced one.
For example, Ripple XRP, priced at less than a dollar, has a $15 billion+ market cap, nearly $12 billion more than Litecoin’s $3 billion+ market cap, currently priced at $48.
Market cap is calculated by multiplying the number of coins in circulation by the price. A larger market cap shows a coin is more established, more stable, trusted by many users, and perhaps is a safer investment. While cryptocurrencies with lower market caps may present a higher risk, they have more room for growth percentage-wise than those with established market caps.
Although you should always refer to fundamental checks as discussed above before deciding on crypto with a big market cap. Memecoins are notorious for acquiring large market caps even though they may have no tangible utility.
Due to the high volatility of crypto prices, market capitalization is constantly changing. This fluctuating element of crypto is why investing only what you can afford to lose is crucial. You can use platforms like CoinMarketCap to research the market cap of crypto you want to buy.
Trading History
The first point of technical analysis is to look at the cryptocurrency’s daily, weekly, monthly, and yearly trading history on exchanges. This will give you an overview of the price performance over a period and perhaps indicate future trends.
While past performance doesn’t guarantee future outcomes, a steady increase in trading activity over a longer period is a positive sign of a crypto’s long-term potential. When the price is at an All-Time-High (ATH), it’s probably wise to wait for a retraction before you buy or target to buy when the price hits previous resistance levels, as your chart displays.
Trading Volume
Trading volume is the amount of trading activity on a given crypto asset over a period. Past, longer timeframe trading activities create an asset’s trading history. The trading volume, on the other hand, shows how frequently the asset is changing hands over relatively short periods or in real-time.
By looking at the frequency of purchase and sale of a coin, you can ascertain its popularity and value and use that to evaluate the investment potential of the digital currency.
A cryptocurrency’s public trading volume is calculated based on aggregated data from trading done on the asset on all the exchanges combined within a 24-hour timeframe.
Trading volumes on exchanges can point out which exchange offers the best opportunity to investors in your chosen crypto. This is because the more overall volume an exchange has, the easier it will be for investors to trade their chosen coin.
If you cannot check out all the exchanges your crypto is listed on, simply focus on its traded volume on the specific exchange you intend to buy from.
It’s important to note that a cryptocurrency may be traded privately, Over-the-Counter (OTC) in significant volumes. As such, the publicly traded volume may not be the whole picture. Usually, the higher the volume of cryptocurrency transactions, the more liquid the market for that particular coin or token will be. Tread carefully with projects with medium or large market caps but very low or zero trading volumes. This may indicate serious problems with the project or that it has been abandoned or lacks a use case.
Trading volume is especially useful if you’re looking to hold a cryptocurrency for a short time. For long-term investment decisions, it shouldn’t play a significant role in the decision-making process, as you should focus more on value growth over time rather than trading for short-term profits.
Token Supply Metrics
We briefly discussed the importance of looking at a crypto’s token supply when discussing tokenomics above regarding demand. In researching a token’s supply alone, investors zero in on a crypto token’s supply dynamics or design to better evaluate the asset.
There are three kinds of token supply:
- Circulating supply is the number of coins or tokens currently circulating in the market.
- Total supply gives way to the total number of coins or tokens created over the lifetime of an asset, and
- Max supply refers to all the coins that will ever come into existence. Depending on the coin, the max supply can be fixed or infinite.
The goal is to relate a crypto’s circulating and total supply to the max supply. Depending on the blockchain, these three supply metrics can give you an idea of a token’s scarcity, liquidity, and timeline.
For example, Bitcoin has a max supply of 21 million, with about 19 million in circulation. These metrics show a buyer the scarcity of Bitcoin at a glance. To a Bitcoin miner, it indicates the level of difficulty it would take to mine new coins.
Even though investors tend to place a higher value on cryptocurrencies with a fixed supply, it doesn’t mean some assets with unlimited supply are worthless. Developers sometimes design the crypto ecosystems in the way that a particular coin is actually never truly infinite. Ethereum, for example, technically has an unlimited supply but caps the issuance of new Ether at 18 million annually.
What is the Best Time to Invest?
Perhaps the ‘make or mare’ of a crypto investment is the timing. No matter how thorough your fundamental and technical checks are, if you buy a coin at a time when market moves are against your investment objectives, you may likely experience a loss – whether it’s for a brief period before the market swings in your favor or permanently.
If you’re buying into a new cryptocurrency, the best ‘buying’ time is shortly before the coin explodes in popularity and value. For established cryptocurrency, experienced investors generally buy at a price point where the price has resisted market forces multiple times.
Buying opportunities may come from market forces driving down the price of established or promising crypto. If you trust the future performance of such digital currency enough (based on solid research), you may want to scoop up some units at this point.
Recap – Marking the Checklist
The purpose of making any investment is to earn potential yields. Cryptocurrencies, though dramatically volatile, are not excluded. All that’s required is the willingness to familiarize yourself with the crypto space, grasp your chosen asset’s fundamental and technical aspects and make a timely investment.
To recap, here are what to checklist off your book when researching a cryptocurrency to invest into:
- Familiarize yourself with the crypto market by learning the space and joining crypto communities
Do fundamental checks:
- Understand the cryptocurrency’s use case(s)
- Check if the project is still active
- Know who the founders are
- Understand the project’s tokenomics
- Check what exchanges the coin is listed on
- Research the project competitors; why is your chosen coin better?
Perform technical research (with professional help if necessary)
- Evaluate the crypto’s market cap
- Check its trading History
- Ensure it has good trading Volume
- Check the crypto token supply; does it provide value?
Lastly, time your investment to maximize potential gains.
