Cryptocurrency is here to stay. But with the extreme swings in price and collapse of trusted crypto projects, how does the average investor know which crypto to choose, and which to run away from?
Some crypto provide practical, technical solutions to problems, while others are hyped up by a passionate community. Still others promise a fast path to riches based on complicated investing schemes. And some are simply copycats of what is popular that week.
So, which crypto should you choose?
We’ll break down the details of how to quickly research information about your favorite crypto, as well as how to understand the pricing structure of crypto to help you make an informed decision. By the end of this article, you will be able to understand how to separate the makers from the fakers and invest with confidence.
You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
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Note: Investing in crypto is speculative and comes with the risk of loss, including total loss of invested funds.
How to Choose the Right Cryptocurrency
There are two main components involved in researching a cryptocurrency to invest in: the project fundamentals and the pricing details. Let’s break down each of these components to further understand what makes a solid crypto investment.
Fundamentals of the Cryptocurrency
The team. The leadership. The technology. Any good crypto project will have clarity around what they are trying to achieve and the market that they want to enter. Just like a good business plan, crypto projects should have a compelling message that resonates with enough people to build a community, and gives investors confidence that the market they are going after can be disrupted.
Here are the fundamentals you need to understand about any crypto project worth investing in:
Any good crypto project will have a team that handles all aspects of the business. This typically includes a founder (or founders), leadership team, development team, and various other roles to help ensure the success of the project.
Most crypto projects have an “About” page on their website, listing the team that is currently working on the project. Although some projects have seen success with anonymous teams, most quality crypto projects list names and photos of each team member, along with their role details and background information. If there are very few details about the team publicly available, or the team is anonymous, this is a red flag for investors.
Although having a good core team is important, ultimately the direction of a crypto project requires strong leadership. Learning more about a crypto project’s founder(s) and leadership team will give you insight as to whether they can execute on what is promised.
A solid leadership team will have the experience necessary to launch and scale the cryptocurrency projects, as well as market the platform to reach more people. At a minimum, the leadership team should consist of a CEO, CTO, CFO, and CMO, covering the technology, financial, and marketing aspects of the business.
Although smaller projects may require an executive wearing more than one professional “hat” as it grows, building a leadership team that can help guide the project for growth and success is vitally important, especially for early investors.
A lot of crypto success is about building a passionate community of fans and investors who pour a ton of effort into spreading the word about the project. If you think of the leadership and team as the people who will execute the vision, you can think of the community as an extension of the marketing team that can help communicate the vision to a massive audience.
When researching a project, you can join the project Telegram channel or Discord and look for a highly active community of users. If there is very little activity, or the chat consists of mostly spam bots and “hype” posts that don’t produce helpful discussion, this is a red flag that the project does not have a strong community behind it.
While the details of the technology behind a crypto project may overwhelm non-technical users, it’s important to understand the implications of how it works. If the crypto project cannot convey exactly how this technology works and why it is important, then the project may not be able to grow and reach a larger audience. The white paper may describe the technology in detail, but there should be a “explain it like I’m 5” version on the company website as well.
Bottom line: Crypto projects are essentially software companies that are creating new technology to solve a specific problem.
The White Paper
Cryptocurrency was invented with the launch of a white paper on Bitcoin in 2008 by the pseudonymous “Satoshi Nakamoto.” Most crypto projects have continued this tradition since, publishing a detailed framework for the project, including a vision for what the founders are trying to accomplish.
Many of these white papers may contain a lot of technical jargon, especially ones that are more complex in nature and that are aimed at developers. Because decentralization is at the heart of cryptocurrency, these white papers serve as a community reference document. The white paper may also act as an elevator pitch of sorts for the project, with the aim of getting investors and developers on board to help launch the project.
Although these white papers might go over the head of average investors, it is important to understand the foundation of a project and the founding principles on which the project is built. White papers that are full of hype and sparse on details are a red flag for investors who are looking to invest toward the long-term success of a project.
The vision of any crypto project is the long-term plan for disrupting a specific market or for giving the world a new way to operate using crypto technology. The vision is typically easy to find, as most good crypto projects plaster it all over the homepage of their website.
The vision needs to offer the following to be a viable project to consider investing in:
- Easy-to-understand objective
- Details on how to reach that objective
- A roadmap timeline with various milestones
The vision should be easy to communicate to others as well. A good test of any legitimate crypto project is for you to try explaining it to another person. If you can easily summarize the vision and you understand how the team plans on getting there, then the project has a solid vision.
Again, when there is a bunch of hype with no clear path to achieve the vision of a crypto project, this is a red flag that the project may not have what it takes to succeed.
The Road Map
A crypto project road map is similar to a business roadmap for any product. The crypto team builds a timeline of past, current, and future milestones that the team executes on to achieve the project’s vision. This roadmap is designed to build credibility with their community and investors, and give internal teams goals to aim for when managing the project.
The roadmap is generally available to the public on the company’s website, usually represented by a flow diagram of quarterly milestones. Studying a project’s roadmap can give you insight into the progress of a project and help track the progress toward goals, such as the launch of the testnet or mainnet of a product.
Credibility & Reputation
Trust is hard to gain and easily broken. When working in the crypto industry, building credibility requires following through on the promises given in the roadmap and vision of a project. Credibility can also be earned by gaining the backing of trusted investors or influencers in the industry.
The projects with the best reputation are typically well-funded by crypto investment firms, such as Coinbase Ventures or Alameda Research, and have a great relationship with crypto publications. This reputation can also help to build hype around a project’s milestones and bring on more investors, boosting the price and value of a project.
Again, an over-hyped project with no real backers but a frenzy of social media activity and marketing is a red flag for prospective investors. You want to look for projects that have accomplished a few milestones on their roadmap and have the attention of institutional-level investment firms.
Although finding a top-notch crypto project with good fundamentals can help the chances of investing in a successful cryptocurrency, there’s more to consider than just the project itself. How the cryptocurrency is priced, the number of tokens in circulation, along with market capitalization and trading volume should all factor into an investment decision.
The market capitalization (“market cap”) of a cryptocurrency is a simple math formula, as follows:
Current Price x Total Circulating Tokens = Market Cap
Similar to financial markets, understanding the market cap can help investors understand the overall valuation of a project. The higher the market cap of a cryptocurrency, the more faith the market has in its success and, typically, the more investors there are in the project.
This is important because investors who wish to sell the cryptocurrency at some point will need a buyer on the other end. A high market cap means there is sufficient liquidity for investors to sell without worrying about the price changing too quickly.
On the other hand, buying a crypto with an already enormous market cap may mean the possibility of a 10x (or more) gain may be harder to come by.
Overall, the market capitalization of a cryptocurrency helps you understand how much faith there is in a project.
The trading history of a cryptocurrency can help show clues as to how the price has ended up where it is today and where it may be going. By using a tool like CoinMarketCap to analyze the price and trading history of a cryptocurrency, you can see the bigger picture about how the market sentiment in a project has changed over time.
For example, during Bitcoin’s various “bull runs” over the past decade, there are periods of high-volume trading and massive price increases. But at some point, sentiment shifts and the Bitcoin price has tumbled massively — we are seeing this again in 2022.
Understanding the history of a cryptocurrency’s trading can give insight into overall market cycles, as well as the adoption of a cryptocurrency over time.
The trading volume of a given cryptocurrency is the value of the total amount of crypto that has been exchanged over a period of time. The higher the trading volume, the more interest there is in a cryptocurrency, although this does not mean that prices will rise in the future. Sometimes the trading volume is high due to lots of selling, which will cause the price to drop.
You can find the trading volume of a given cryptocurrency on places like TradingView, which show the price charts that include volume data. You can also view and compare volume totals on popular crypto exchanges like Coinbase.
Overall, trading volume is an indication of market interest in a cryptocurrency, but it does not always indicate that it is a good investment.
Circulating, Total, & Max Supply
Also known as “tokenomics” in the crypto industry, understanding the circulating and max supply of a cryptocurrency can help you judge whether the price is fair for a given project. Here’s a quick definition of each:
- Circulating Supply. This is the total amount of cryptocurrency that has been released publicly and is available to trade in the open market.
- Total Supply. This is the total number of coins that have been created for a project, minus any that have been “burned” (deleted) from the blockchain.
- Max Supply. This is the maximum supply of coins that will ever be released over the lifetime of a given project.
Some projects start out by only releasing a small percentage of tokens that can be exchanged in the open market, only to flood the market later and destroy the price. Others offer staggered “token unlock” schedules that slowly release more coins into circulation. Because the price of crypto is based on the circulating supply, these additional “token releases” can cause the price to go down.
Learning about the token release schedule for a project is a huge help in understanding the long-term price implications, as well as the potential for the project to create new coins, which can greatly affect the price.
Choosing a cryptocurrency to invest in may feel like gambling at times, as the prices of even the most “stable” coins can fluctuate as much as 80% or more. And while crypto is still considered a speculative investment, there are ways to find decent projects with good future investment potential.
Unfortunately, there are also many projects that have imploded over the past decade, including a recent high-profile one that wiped off over $50 billion of valuation for investors (cough…$LUNA…cough). There are others that have disappeared with investor funds, and still others that intentionally lead investors astray, and never deliver on the promises of their vision and roadmap.
At this point in time, as an unregulated asset class with a massive amount of volatility, investment advisors recommend only speculating in crypto with the understanding that all investment funds can be lost. But educating yourself on the ins-and-outs of crypto projects can help you become a more informed investor.