Investing in cryptocurrency has become a way to diversify investment portfolios. However, it can be challenging to distinguish between options and ventures. To make informed investment decisions it is crucial to analyze cryptocurrencies in much the same way traditional stocks are scrutinized.
This step-by-step guide will talk you through how to effectively analyze cryptos to ensure you make the best selection possible for both you and your wallet.
Examine the White Paper
The first step before investing in any crypto is to review the white paper, the foundational document that outlines the objectives and technical intricacies of a blockchain project. A legitimate white paper uses language that data scientists, programmers, and developers can understand. For instance, Solana provides explanations of its blockchain functionality and the purpose of its token. On the other hand, projects like Cybertruck may have flashy-looking websites but very often lack technical depth – often indicating their speculative nature.
The legitimacy of a paper depends on its ability to clearly explain the problem that the project aims to solve and how the proposed blockchain and token address these challenges. It should be fully transparent for investors by guiding them through the project’s objectives, methodologies, and functionalities.
For example, Bitcoin’s white paper clearly states its intention and use as: “a purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution.” And this is indeed true, for example, when it comes to specialized online casinos where Bitcoin is accepted for payments, without the need to go through your bank. It’s not limited to these niche uses though; more and more globally-respected companies are realizing the benefits of accepting Bitcoin as a form of payment, including Microsoft, KFC, and Overstock. It’s a growing trend that highlights the increasing adoption and acceptance of cryptocurrencies in the digital world.
In short, any cryptocurrency worth its salt will be equipped with a high-quality white paper that clearly defines the project’s goals, the plan to achieve them, and, ultimately, how the cryptocurrency will function. Those that don’t, should ideally be steered clear from.
Understand The Driving Force
Once you’ve carefully examined a crypto’s white paper, it’s time to assess the team behind the development of a cryptocurrency. Analyzing the backgrounds and past endeavors of the founders and developers often reveals interesting insights that will help encourage or dissuade a potential investor. And, while it should go without saying, it’s definitely worth reinforcing: it’s important to be extremely cautious of projects led by individuals or teams without a proven track record of launching and scaling projects successfully.
When assessing leadership, it is crucial to scrutinize the team for project execution, financial management, and even marketing. Take a look at their history of leadership, their industry reputation, and their overall involvement in the global cryptocurrency sphere. While some anonymous founders have achieved success, be wary if there is a lack of leadership or an avoidance of topics, as this could indicate an illegitimate venture.
Learn About The Community
In the world of cryptocurrency, community support plays a big role. In fact, cryptos largely need a supportive community to thrive, so engaging with the community through platforms like Discord or Telegram can help gauge its vibrancy and organization. An organized and active community that engages in discussions about issues and improvements indicates a project with growth potential. However, if conversations primarily revolve around hype and speculation it’s important to exercise caution.
Get A Basic Understanding Of The Technology
To truly understand your potential crypto investment, it’s essential to have a bit of an understanding of the underlying technology involved i.e. blockchains. While diving headfirst into programming is not necessary, at least a partial knowledge of these helps to empower investors in their decision.
Define The Cryptocurrency Objectives
Every cryptocurrency should clearly articulate its vision and roadmap which can be accessed through papers and official websites. A defined vision outlines the problems that the project aims to solve and identifies its user base. Beware of statements proclaiming cryptocurrency as the future without providing details on how it plans to address these issues.
Map Progress Over Time
A roadmap is a key indicator of a crypto’s progress over time. A comprehensive timeline with milestones demonstrates a well-thought-out plan for achieving goals. Conversely, the absence of a defined roadmap or unclear milestones raises concerns about the legitimacy of a project. If the raodmap is too generic, overambitious or not clearly defined, consider it a red flag.
Get Acquainted With Tokenomics
Tokenomics refers to the distribution, circulation and total supply of a cryptocurrency. And it requires examination in order to understand factors such as circulating supply, total supply, and maximum supply, as these greatly influence price dynamics within cryptocurrencies. An uneven token distribution or large portions allocated to founders are, generally speaking, a warning sign to not proceed.
Interpret Market Fluctuations
Market fluctuations in prices are inevitable when it comes to crypto. Although investor sentiments and market dynamics can contribute to some level of volatility, it’s important to examine any deviations from established trends. When prices are influenced more by hype than demand, it could indicate a potential downturn on the horizon.
