How to Evaluate a Cryptocurrency Based on Its Fundamentals
In January 2021, there were roughly 4154 cryptocurrencies in existence. Just 12 months later, that number had doubled to 8,688. With more coins launching each day, there is no end in sight to this rapid expansion.
Amidst all this chaos, reports of scam coins and “pump and dump” schemes have also increased exponentially. An abundance of caution is recommended when contemplating any investment in lesser-known cryptocurrencies.
Cryptocurrency enthusiasts have a penchant for catchy and quirky acronyms. One, in particular, is crucial from an investor’s perspective — DYOR. It stands for “Do Your Own Research (before investing in any crypto).” Look at the following fundamentals before buying any new crypto in 2022:
Analyze the Market Performance
Popular cryptocurrency aggregators like CoinMarketCap and Coingecko are useful to get a quick overview of the current status of a particular crypto project. You can also browse these platforms to discover promising new cryptos. Pay particular attention to the following metrics:
Market Cap
A higher market cap indicates greater visibility and investor interest in the project. The quantum of risk is also relatively lower among high-value cryptos. This metric is commonly used to rank and compare major cryptocurrencies. A crypto in the top 100 has far more credibility and momentum than one ranked 1000 or lower.
Price History
To gain a good understanding of the volatility of a particular crypto, take a deep dive into its daily/weekly/monthly, and yearly price history. This is especially critical if you prefer short-term trading over holding your coins for the long haul.
Liquidity
Cryptos with high liquidity are easier to buy and sell. A low/dwindling trading volume can be construed as a potential red flag — indicating a project that has failed to gain traction or demonstrate long-term viability.
Supply
Coins with lower total and circulating supply can have higher value due to scarcity. Bitcoin is an excellent example with just 21 million total supply. On the other hand, projects with much higher supply tend to have drastically lower pricing.
Learn More about the Project
Performance metrics only tell a partial tale. Many rookie investors make the mistake of making a purchase decision based on price movements alone. But for a better long-term perspective, it is crucial to investigate the actual project itself, and the people involved in it.
Key Personnel
Who are the main individuals involved in the project as leaders and developers? Do they have any relevant experience in the blockchain industry? Have they worked on any other major projects before? Look for projects that involve professionals with established credentials and experience.
Vision
To be sustainable, a cryptocurrency should have a specific reason for existence — ie, solving a real-world problem. If there is no clear objective/goal for a project, its odds of success are limited in a highly saturated market. Look for projects with a compelling vision and a well-defined development trajectory.
White Paper
All credible project developers release a detailed whitepaper to outline the technical aspects of the cryptocurrency, its proposed governance protocols, future roadmap, and more. The absence of a white paper is a major red flag, as are low-quality write-ups riddled with errors.
Partners/Investors
Promising new crypto projects often receive financial backing from major investment firms and billionaire investors. Many established projects also have strategic partnerships with big companies. Both are excellent signs of reliability and credibility for new investors.
Explore the Community
The final step in DYOR is due diligence across digital spaces. Check the project’s Twitter account to see the number of followers and retweets. High engagement in social media is a positive sign. Dead crypto projects will usually have inactive social media profiles.
The impact that platforms like Reddit can have on cryptocurrencies cannot be ignored. If a crypto has a large and active community on Reddit, it is a positive sign. User comments can be used to gain further insights into the project and opinions about its long-term prospects.
Discord groups and Telegram chats can also offer deeper insights into the current state of a particular crypto. Many scammers use these platforms to aggressively “push” a particular crypto and generate hype. Avoid such coins, especially if they are obscure and lowly ranked.
Conclusion
This is a general approach to analyzing the fundamentals of cryptocurrencies. Depending on the type of crypto and its market niche, you may have to tweak your review process. But as a basic framework, the evaluation process described here should help you steer clear of fake coins and scams.
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