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How to Evaluate Any Cryptocurrency’s Investment Potential

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NextAdvisor

Thu, Apr 28, 2022

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Crypto-curious investors have changed the face of the cryptocurrency market over the past year.

With any cryptocurrency, experts say price and a handful of other key metrics can help investors make smarter decisions about what has high investing potential, and what’s more likely to flop.

And along with quantitative factors like price, market cap, and trading volume, investors should also consider more qualitative factors like who created a given cryptocurrency, use cases, what’s in its white paper (if it has one), and more.

They are true of all cryptocurrency investments, and especially so for riskier and newer altcoins: Keep crypto investments to 5% or less of your portfolio Only invest in crypto what you’d be OK losing Make sure you have an emergency fund, have paid off high-interest debt, and secured a traditional retirement plan before investing in crypto Start with bitcoin and ethereum, the most popular and mainstream cryptos Whether you’re just getting started, or interested in going beyond bitcoin and ethereum, here’s a rundown of how you can evaluate any cryptocurrency’s long-term potential: If you’re investing in crypto for the long haul, you should have a fundamental understanding of what you’re getting into before deeply looking at the technical factors that affect a cryptocurrency’s market value.

“Focus more on the project itself, on the problem it’s solving, and on where it is actually deriving its value,” says Danial.

When analyzing potential crypto investments, there are several qualitative factors experts recommend looking at when you’re doing your own research and deciding whether to invest in a potential coin: Experts say it’s important to consider an initial high-level overview of the project.

You’ll also want to look at the team’s prior experience in the crypto market and other projects they’ve worked on.

As an investor, a critical component of assessing a coin or token’s long-term value is the project’s white paper and road map.

It’s a good sign if the project has already been invested in by well-known investment firms or big time investors.

Sometimes, hype can exceed and even mask a project’s actual utility or value, which is why you shouldn’t invest in a coin or token solely based on hype and should take the time to become familiar with all the factors above before putting too much stock in its community.

Once you’ve done the initial general vetting of a potential crypto investment, it’s time to focus on more of the technical aspects of the crypto you want to invest in.

“This is after I have selected an asset that matches my risk tolerance and my financial goals.” Experts say technical analysis is a little trickier in crypto compared to the stock market, but there are some key indicators and metrics you can use to help inform your investment decisions: Start by taking a look at the daily, weekly, monthly, and yearly trading history, so you can get a high-level overview of the price and performance of the project.

Crypto market capitalization is calculated by multiplying the price of the cryptocurrency with the number of coins in circulation.

In general, the higher the value of the market cap the safer the investment, though that’s not always the case with crypto, according to Danial.

“You don’t want to go and invest in something that has a really low market cap, because it’s probably super new and is high risk,” she says.

“In the crypto universe, market cap is of mixed value,” says Avik Roy , managing partner at Roy Capital Advisors and author of “Bitcoin and the U.S. Fiscal Reckoning.” “Market cap by itself, particularly for thinly-traded crypto tokens, is not a very good marker of a token’s value.

But in the case of bitcoin and ethereum, which are the most widely traded, most widely accepted, most valuable assets, the market cap is a reasonable indicator and certainly one common benchmark year.” It’s also important to remember that because crypto prices fluctuate so dramatically, market capitalization is constantly changing.

While trading volume can help a crypto investor in their decision to either buy or sell, experts say it shouldn’t play as big of a role in the decision-making process for long-term investors who are betting on value growth over time rather than the ability to trade for a profit in the short-term.

“Trading volume is a little bit more difficult to measure in crypto relative to the stock market,” says Roy.

It is also important to look at a crypto project’s circulating supply and total supply in relation to max supply.

Circulating supply is the number of coins or tokens that are circulating the market, while the total supply is the total number of coins or tokens that have been created.

“From an investment standpoint, one thing that investors in the conventional markets care about a lot is predictability of supply.” Bitcoin offers a good reference point — for bitcoin, there are only 21 million in total supply while there are about 19 million currently in circulation.

Experts say investors tend to place a higher value on investments that are scarce than on investments that are abundant, though that’s trickier to define in crypto as developers sometimes design the crypto ecosystems in the way that a particular coin or token is actually never truly unlimited.

While these metrics are all good to keep in the back of your pocket as a crypto investor, it’s very important to recognize that cryptocurrency is new and highly volatile — and the market is still developing.

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