Investors' Guide to Evaluating Cryptocurrencies

Last year, crypto-curious investors revolutionized the cryptocurrency market.

Many investors started with bitcoin and ethereum. They have the most potential and the longest track records. What about ambitious investors?

The more you invest in cryptocurrency and altcoins, the riskier your investments will be. Price and other crucial variables can help investors decide which cryptocurrencies have the most investment potential. Along with price, market value, and trading volume, investors should evaluate qualitative variables including a cryptocurrency's creator, use cases, white paper (if it has one), and more.

Kiana Danial, author of "Cryptocurrency Investing for Dummies" and creator of Invest Diva, recommends looking at fundamental research before price action.

We've talked to dozens of professionals about how to invest in crypto sensibly and safely, whether in bitcoin or a new token established yesterday. They apply to all cryptocurrency investments, especially riskier altcoins:

Invest less than 5% of your portfolio in crypto.

Only invest what you're comfortable losing.

Before investing in crypto, build an emergency fund, pay off high-interest debt, and secure a standard retirement plan.

Bitcoin and ethereum are the most popular cryptocurrencies. Here's how to analyze any cryptocurrency's long-term potential, whether you're just starting started or looking beyond bitcoin and ethereum.

Cryptography basics

If you're investing in crypto long-term, you should know what you're getting into before looking at technical aspects that affect market value.

Danial advises focusing on the project, the problem it solves, and its value.

Experts propose looking at various qualitative variables while examining possible crypto investments:

Website, social media

Experts recommend a high-level project overview. Check the crypto project's website and social media channels to learn about its social activity, team, and community. The project website should be easy to access, functional, and publish its white paper and roadmap.

Group

The team's credibility and experience can make or break a project. Undisclosed team is a red flag (bitcoin is the exception). You should also consider the team's crypto market experience and other projects. You'll want to know if this is their first project or if they've developed successful crypto initiatives before. Examine the project's executives. Working with recognized CEOs or established firms is a plus.

White Paper/Roadmap

As an investor, the project's white paper and road map are key to evaluate a coin's long-term value. A solid crypto project has a robust white paper and roadmap. A white paper is a document released by a crypto project that provides technical details about its concept to assist you assess if it has value. A road map helps set expectations for how a crypto project expects to grow and adapt with its success and adoption.

Danial studied the white paper to comprehend the value.

In a road map, you want to see a project timeline. If a project lacks a white paper and roadmap, its success and usefulness should be questioned.

Capitalists

If the initiative has investors, identify them. Well-known investment firms or big investors investing in a project is a good sign. They've done their homework and believe in the project's future.

Neighborhood

The project's community can make or ruin several cryptocurrencies. The size and excitement of the community affect the initial and ongoing success of a project, but you should be cautious when evaluating a coin or token.

Sometimes, enthusiasm can disguise a project's actual utility or worth, so you shouldn't buy in a coin or token based on hype alone. Instead, you should familiarize yourself with all the elements above before putting too much trust in its community.

“It can be really tough to figure out what's what and who's who, especially when a lot of people are really pounding it,” Doug Boneparth, president of Bone Fide Wealth in New York, told NextAdvisor.

Your purpose is to determine if the asset is overvalued or undervalued. These factors will help you choose investment coins. Once you understand the basics, you may use technical indicators and analytics to make investment decisions.

Crypto pricing data for beginners

After the initial general vetting, it's time to focus on the crypto's technical components.

Danial looks at charts to see if he should buy more and when. "After matching my risk tolerance and financial goals, I invest."

Technical analysis in crypto is difficult than in stocks, but there are essential signs and parameters you may use to make investment decisions.

Daily, weekly, monthly, and yearly trading history can give you a high-level picture of the project's pricing and performance. You may want to investigate price trends. A continuous increase over time indicates a crypto's long-term potential.

GDP

Experts propose monitoring a cryptocurrency's market capitalisation. Crypto market capitalization is computed by multiplying the coin's price by its circulation.

According to Danial, a bigger market cap doesn't automatically mean a safer investment in crypto. “Don't invest in something with a tiny market cap since it's probably new and risky,” she warns.

Market capitalization shows an asset's growth potential. Lower market caps tend to expand more than larger ones.

Avik Roy, managing partner at Roy Capital Advisors and author of "Bitcoin and the U.S. Fiscal Reckoning," believes crypto market cap is mixed. "Market cap alone, especially for thinly-traded crypto assets, isn't a good indicator of value. But for bitcoin and ethereum, the most commonly traded, accepted, and valuable assets, market cap is a reasonable indicator and agreed benchmark.

As crypto prices fluctuate, so does market capitalization. This fluctuation, plus the possibility of a market crash, is why experts advise only investing what you can afford to lose.

Volume

Check the trade volume. Low trade volume indicates how readily a crypto asset may be acquired or sold. The more cryptocurrency transactions, the more liquid a coin or token's market.

If a medium or large-cap project has little trading volume, it may have been abandoned, lack a real-world use-case, or have other major issues. While trading volume can assist a crypto investor decide whether to purchase or sell, experts believe it shouldn't be as important for long-term investors depending on value growth over time rather than short-term profits.

Roy thinks bitcoin trading activity is harder to measure than in stocks. The Nasdaq records every trade, so you know how many shares were traded that day. Bitcoin and ether are different. Crypto is the world's least-regulated market.

He warns about spoofing in crypto markets. People or institutions make bogus buy and sell orders to fake supply and demand. Some bitcoin exchanges are accused of falsifying volume numbers to attract more customers. This is easy in the bitcoin field because to its immaturity, weak rules, and market manipulation.

Supply, Circulating, and Max

Examine a crypto project's circulating supply, total supply, and max supply. Total supply is the amount of coins or tokens created. Circulating supply is the number in circulation. Burned or destroyed coins and tokens aren't counted. Max supply is all future coins. Max supply is fixed or limitless depending on the coin.

Bitcoin's monetary policy, and crypto in general, is the most critical thing to comprehend. What are the token's current and future supply rules? asks Roy. "Investors in conventional markets value supply predictability."

Bitcoin is a suitable reference point, with 21 million in total supply and 19 million in circulation. Bitcoin is scarce compared to ethereum, which has a limitless total supply and over 120 million in circulation. Experts say investors favor rare assets more than abundant ones, but that's harder to quantify in crypto because developers sometimes construct the ecosystems so a coin or token is never truly endless. Ethereum has a limitless quantity, although annual issuance is capped at 18 million Ether.

Circulating supply and total supply might be unreliable like trading volume. Many lost or stolen coins and tokens are regarded "in circulation." Bitcoin investors have misplaced around 20% of all existing tokens, and unlike conventional cash, it's doubtful they'll be returned to circulation. In circumstances with a bigger supply, a large influx in circulating supplies can drop the price.

While these measures are useful for crypto investors, it's vital to remember that the market is new and volatile. The crypto market is different from the stock market, thus its rules and measurements don't always apply.