Buying cryptos for the first time is not easy. There are several hoops you need to go through, but the process can be made easier if you follow several rules:
Whether a seasoned investor or a person interested in getting their toe into the crypto world the rules of the road on this journey are the same.
Bitcoin, the first and still king of cryptos, led the way to a proliferation of other tokens (altcoins) to now where there are over 19,000 in existence. So, it is very important that you spend the time to learn how to evaluate the worth and potential future value of the crypto you are thinking of buying.
The Crypto’s Website
If the crypto you are interested in doesn’t have a website, STOP. Do not go any further. If a website exists then ensure that the site is up to date, lists all team members, details the token’s objective, and has a white paper.
The white paper is very important in evaluating crypto. It details the strategy behind the project and lays out a road map for reaching that plan – referred to as the tokenomics of the coin. How the token will be distributed among investors, and its supply limit. It also includes information regarding the minting of new tokens.
You don’t need to understand every technical point detailed in the white paper, but it will provide you with knowledge of the team behind the project and what their goals are, and how they intend to achieve them. If there is no white paper on the website. STOP. Do not go any further.
Peruse Social Media
Visit the social accounts of the crypto you are interested in. They should have a Twitter or Reddit account (or both), and a Discord channel. Make sure these accounts are being actively managed and how many followers they have. Are the account moderators answering questions, promoting the crypto, and engaging their account visitors?
Perform a general search of social accounts for any mentions and comments regarding the crypto you are interested in. If there are a lot of positive comments, chances are others are investing in that crypto. On the other hand, if the talk is mostly negative that should be a major warning sign.
Who Comprises the Management Team?
The success of the crypto depends on the management team. Find out who are the founders and key team members – use the white paper and website to find out this information. Research the team for reputation and prior knowledge of blockchains, and if the team has a history of other successful projects.
Also, look to see if the project has any partners. If the partner is a well-known entity this is a very positive sign and legitimizes the project.
What are Its Market Metrics?
It’s a good idea to check the crypto’s metrics. What is its market capitalization? Normally, the higher the capitalization (price times the total number of tokens in circulation) the better. Those coins in the top 100 in terms of capitalization are safer bets than those lower in the rankings.
What is the trading volume? Good volume means many investors are interested in trading in this token. Low trading volumes signify less investor/trader interest in the token which can lead to high price volatility and poor liquidity.
What are the token’s supply metrics? Max supply is the maximum number of tokens that will ever be minted. Some cryptos have on cap on supply, ie. Bitcoin, while others, ie. Ethereum has no max number. The number of tokens in circulation indicates how many are currently being traded or held in a wallet.
For beginner investors in crypto, the purchase of stablecoins may be best. These coins, such as Circle’s USDC coin are pegged 1-to-1 to the US$ and are fully collateralized. These coins can be staked to earn interest.
The crypto marketplace is very volatile. Large fluctuations are normal, so you want to look for trends. A gradual increase in price is good. Understanding the long- and short-term price history is a valuable tool for judging the value of the crypto. Steer clear of tokens that have huge spikes in price followed by sharp declines – this could indicate a pump-and-dump situation – a scam whereby a token’s price is inflated due to false hype and/or press and then immediately sold – this is referred to as a ‘rug-pull’.
Does the Crypto Have Utility?
Look for tokens that offer utility as well as value. Bitcoin is, and will, act as a currency used for payments and as a store of value. Ethereum, on the other hand, is used in creating smart contracts, NFTs, and business applications Therefore, the Ethereum token’s value should retain its value over time.
Another use for cryptos can be for a specific utility. For example, the Basic Attention Token (BAT) is a utility token used by advertisers to pay for ads on the Brave browser whereby users who choose to see ads can join a program that pays them for their attention in BAT.
Obviously, with over 19,000 cryptos in existence, many have no value and are just created as jokes or meme tokens created by social media influencers or celebrities. The takeaway is that whichever crypto you decide to purchase make sure you do due diligence before putting up your dollars.
By: Jim Lavorato