How do you decide which coin to buy without just taking a gambling or blindly following the hype? What criteria should you look for? How can you evaluate coins if you are new to crypto?
Whether you’re looking for quick returns, or searching for coins to hold long-term, this beginner’s guide will help you to understand which criteria to tick off, and how to choose the best crypto to invest in.
1. Exchange Listings
Check if the coin that has your interest is listed on a reputable cryptocurrency exchange. Prominent crypto exchanges apply strict policies, so only those coins which meet their high standards get to enjoy the exposure to millions of active users.
If the coin is not listed on any reputable crypto exchange, it’s better to do some research and find some reasons why that might be.
Price is important, but should not be the main factor in making the ultimate decision. Trending coins might be overpriced, because of the hype as well being a “flavor of the month.” On the other hand, cheap coins might be sleeping giants with limitless future potential.
The unregulated crypto space is a playground for pump and dump schemes. This is a manipulative technique where the project “pumps” the asset’s price by creating a buying frenzy, which is usually based on false rumours, and then “dumps” it leading to a price crash.
Avoid coins that display sudden price peaks and massive drops. If you have suspicions that something is a pump-and-dump coin, either dig deeper or trust your instinct and drop it.
Trading volume shows how active a certain market is. It indicates the total value of coins traded over a certain period of time, usually a 24 hour timeframe on crypto exchanges.
High volume typically represents high demand for cryptocurrency. This means the market is liquid, and there are enough buyers and sellers alike to fulfill the orders.
Even if demand drives the price up, or down in the case of panic selling, it still occurs in a much smoother way than in a low-volume market. Low demand, and by relation, volume, indicates a difficulty to buy or sell assets for competitive prices.
Each crypto project has a different maximum supply which shows the total number of coins that will ever be issued. Such info is published on crypto data aggregators like CoinMarketCap and is easily available to check.
Supply affects a coin’s value. Naturally this means that coins with a finite supply are scarce. According to the law of supply and demand, if there is high demand but low supply, the higher the price will be. On the other side of the coin, the value of unlimited assets is likely to decrease.
5. Market Capitalization
Cryptocurrencies are ranked by the size of their market capitalization. Market cap shows the total value of coins that have already been mined. It is calculated by multiplying the total amount of a certain coin that is in circulation with its current price.
Market cap is an important piece of criteria to consider as it helps to identify the strength of a specific currency. The different capitalization coins enjoy varies their growth potential, risk levels, and return rates. Therefore, a higher price does not necessarily mean that the coin is worth more.
6. Technology Basics
Fundamentals are primary, basic metrics that help to evaluate the potential of a coin.
Spare some time to understand what blockchain is, what cryptocurrency is, how it works and how it could be valuable, even if only at a basic level. The broader the knowledge you have, the more it helps you to make more informed decisions.
7. Use Cases
What is the goal of the coin? What is it trying to change or improve? Is it solving real problems?
A crypto’s whitepaper usually answers these questions and explains how a given coin plans to solve a certain problem.
There are lots of scam coins though. Keep away from projects whose utility does not make sense, or is too complicated to explain even in a whitepaper, as these are typically red flags.
8. The Team
The personalities behind a crypto project are highly important. A strong, reputable team that has experience and know-how might be an even more solid factor than the innovative idea itself. An asset desperately needed in the space, but led by an inexperienced team may not achieve its potential for example.
9. The Roadmap
Evaluate the project’s current state of development and what its plans for the future are. What short and long term goals have been set out? What will they achieve, and when?
A roadmap will tell you if the crypto project has a realistic business strategy, and how capable it is of delivering said promises.
10. The Competitive Landscape
Try to understand the general overview of the market, and where this crypto project operates within it. Does it have a lot of competitors? What makes it stronger or weaker than them? Are there external factors that could have a critical impact on the project or its market category?
Knowing the context around an asset is important, and certainly helps one to make rational decisions.
The crypto space is home to nearly 6,000 coins, and new ones spring up each day.
Keep a lookout for new, promising possibilities. Niche projects, pioneers in a certain category, might have huge potential and getting involved early could pay off well in the future. Diversify your crypto portfolio.
Finally, check the community around a certain project. Does it have a large base of followers on social media platforms and forums? How active is the community? What are the main messages that followers and critics are sharing? Do they see potential in the coin?
The success of any cryptocurrency project strongly depends on its community and a loyal fan base. Strong support indicates genuine interest and trust, so communities are like ambassadors of the project, and even serve to help the project evolve.
On The Flipside
- The cryptocurrency market is volatile. It may generate higher returns, but by the same token, could generate lower losses. Do not invest more than you can afford to lose.
- There are always dozens of newly emerging coins that promise investors a fortune, and end in heartbreak. Do not make emotional, spontaneous decisions, and always do your research first.
- Track and monitor your investment progress, and only then expand your portfolio.