How to Evaluate a Cryptocurrency
So you’re interested to buy crypto or trading cryptocurrency. While Bitcoin seems to be the buzzword, the numerous options in the market could leave you confused as to which crypto is the right pick for you. Read on to learn how you can evaluate a cryptocurrency and make the right choice.
Step 1: Check the market listing
The initial step is to check out the project on a cryptocurrency aggregator website. These websites are often packed with detailed information and give you a useful overview of the project that includes history or trade, ranking of the crypto, and project brief along with links to the project’s main website, and social media handles.
Project Ranking:
The ranking of a project is important as it allows you to quickly analyse where the project stands in comparison to the various other cryptocurrencies in the market. It’s safe to say that at present, there are more than 10,000 cryptocurrencies in the market that are being traded widely. The project ranking would depend on the crypto’s market capitalization which would give you a fair understanding of where the project is at.
While this would largely rely on your style of investment and trades, it could very well be that you’re keen to explore only the top 100 ranked projects given the fact that they’re low-risk. If you’re feeling adventurous and are curious about the underdogs in the market, you could consider looking at projects that rank at 1,000 and more. But the projects which stand in the 5,000s or more are known to be risky and thus are best to avoid.
Market Cap
Crypto market cap is typically used to determine a project’s overall ranking. The ongoing price of the token is multiplied by the total number of coins/tokens in circulation. Typically, if the crypto market cap has a high value, it is considered to be less volatile and is comparatively a safer investment option.
Price History:
It is a good practice to keep track of the crypto’s every day, weekly, monthly, and yearly patterns of trading so you have an overview of how the price has moved or responded to market changes. It would also bring to light any issues worth noticing while giving you a chance to see how the project has performed so far.
Trading Volume & Liquidity
The trading volume is an important metric in all sorts of financial markets. It assesses the quantity of the assets that are purchased and sold during a certain period. The ease with which a crypto asset is sold or purchased is measured by liquidity. It is necessary to take it into account, especially with low-volume projects that do not allow the luxury of buying or selling when you like.
Circulating Supply vs Total Supply
The total supply of a cryptocurrency can be different from the circulating supply as we know from Bitcoin whose supply is limited to 21 million. Circulating supply is the total number of coins in the market that are actually being traded while the total supply refers to the overall number of tokens that could potentially be traded in the market. Out of the 21 million Bitcoins, roughly 19 million are already in circulation.
The Price
You may be tempted to trade projects that are less than even a penny but make sure you have taken the total supply and the circulating supply into account. For instance, Bitcoin’s finite supply of 21 million is significantly lower than most of the cryptocurrencies. If you put XRP against this, the total supply is 100 billion while it’s been traded for less than $1.
One should exercise caution when trading cryptocurrencies that have gigantic supplies as they generally tend to have low market prices. Read more about Blockchain Technology: Everything You Need to Know
Step 2: Check out their website
Never ever forget to check the project’s official website. It is very crucial for your trading journey. Once you’re convinced about the project after scanning through an aggregator’s online platform, this is an important step. In the present times, developing and maintaining a fully functional website is fairly easy as well as cost-effective at the same time. The website must provide proper information about the project, the team running it, and the plan ahead as well as mention if there are any investors.
A bad website with errors, copy mistakes, and ambiguity about the team members is a red flag. You should avoid that project to save yourself and your funds from risks.
The Team
As newer projects continue to enter the market, the team, as well as the people involved in the development stage, turn out to be its most important assets. Team’s credibility and the experience they hold are likely to have a huge impact on the future of the project.
The Road Map
A wise investor would always assess the roadmap of a project. Having a good roadmap, with details and future milestones ideally associated with a date is a sign of a project that is headed towards success.
Investors
Is the project backed by investors? Who are these investors? How credible are they? These important questions have to be answered.
It is a brilliant sign to have a project backed by a reputed institution or company. Generally, these companies already have their expertise in a particular niche and thus, if they’ve put their money on a project, it is very likely that they’ve done a great deal of research to understand and have faith in the project.
Step 3: Social media
If up to the first two steps you will feel confident about the project, scan their social media profiles next.
Step 4: The community
A community is a very important part of any project and in this day and age, online communities are essential for almost every field. Having a community that supports a project could catapult its position as it did in the case of Dogecoin or Shiba Inu coin.
Step 5: Go through the white paper
A crypto project creates a white paper which is a document that gives out technical information about the project to its investors. This includes the key concept as well as the project roadmap for the future. This white paper could allow investors to deep dive into the project’s functions. Even though a good amount of white papers are technical in nature, the data is essential in gauging the capabilities and qualities of the project as well as the team behind it. The absence of a white paper is a red flag and it is a poorly drafted one, laced with grammatical errors, you’re better off away from the project.
